Co-authored with Ted A. Gehring.
Except for very limited statutory exceptions (which do not apply to most employer/employee disputes), California courts will not enforce non-compete agreements, or any restrictive covenant by which anyone is restrained from engaging in a lawful profession, trade or business. Cal. Bus. & Prof. Code § 16600. Since § 16600 embodies a strong California public policy, California law is clear that a party cannot circumvent the § 16600 restrictions with a choice of law provision that designates a more non-compete friendly jurisdiction as the applicable law. The Application Group, Inc. v. The Hunter Group, (1998) 61 Cal.App.4th 881, 888-89.
It appears, however, based on rulings by two federal district courts last year that employers might get some traction in this area by including a choice of venue or forum selection provision in their employment contracts and – through that provision – have the case transferred to a jurisdiction that will be more likely to enforce a restrictive covenant.
In M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15 (1972) (“Bremen”), the United States Supreme Court addressed forum selection clauses and held that a forum selection clause is unenforceable if: (1) it was the product of fraud, undue influence or overwhelming bargaining power; (2) the forum is so gravely difficult and inconvenient that the party challenging the clause will for all practical purposes be deprived of its day in court; or (3) the clause would contravene a strong public policy of the forum in which the suit is brought. Bremen, 407 U.S. at 15. A strong showing must be made to set aside the forum selection clause. Id. The California Supreme Court has set similar standards. Smith, Valentino & Smith, Inc. v. Superior Court, (1976) 17 Cal.3d 491, 496, (“We conclude that the forum selection clauses are valid and may be given effect, in the court’s discretion and in the absence of a showing that enforcement of such a clause would be unreasonable.”).
In both Hartstein v. Rembrandt IP Solutions, LLC, No. 12-2270 (N.D. Cal. July 30, 2012) and Hegwer v. American Hearing Aid Associates, No. C 11-04942 (N. D. Cal. Feb. 24, 2012), the Plaintiffs were former employees who had signed employment agreements containing restrictive covenants and which also contained, in part, forum selection clauses designating Pennsylvania as the appropriate forum. Both cases were filed in state court and removed to federal court. The Defendants filed motions to transfer or dismiss premised on the forum selection clause.
The Plaintiffs in each case argued, in part, that the motions should be denied because the more restrictive covenant friendly Pennsylvania courts would be more likely to enforce the non-compete which would, in turn, contravene a strong California public policy. Bremen, 407 U.S. at 15. Both federal district courts, however, focused on the reasonableness of the forum selection clause itself, rather than the reasonableness of the clauses’ effect. Both found that the possibility that a Pennsylvania court might enforce the non-compete was not a sufficient basis to invalidate the forum selection clause.
As such, employers that are based in jurisdictions more friendly to restrictive covenants (which would likely be any other state in the country), should consider including forum selection clauses designating the state of their corporate headquarters as the appropriate forum. Although these cases will no doubt be decided on a case by case basis depending on the particular factual circumstances, a forum selection clause will, in many instances, provide, at a minimum, more leverage for the employer in actual or threatened restrictive covenant litigation commenced in California.