Non-Compete Clause Agreement Attorneys in San Francisco

Posted in Non-Compete/Trade Secrets on November 15, 2019

As we have written before about the enforceability of noncompetition agreements in California, an employer may not prohibit a California employee from competing with the employer after his employment ends. Agreements that prevent an employee from going to work for the employer’s competitor, or from soliciting the employer’s customers, are generally void and unenforceable under California Business and Professions Code Section 16600.

While this has been California law for decades, employers have increasingly sought to circumvent California noncompete law (as well as other sorts of California law protections) by imposing so-called “choice of law clauses” on California employees. A choice of law clause is a term of an employment contract which says that the employment relationship will be governed by the law of a certain state. So, for example, a worker who resides in San Francisco and works for an employer in Oakland, California might be required to sign an offer letter providing that (1) his employment in Oakland will be governed by Alabama law; and (2) he cannot compete against the employer for 12 months following termination of employment (a restriction that may be permissible under Alabama law). Surprisingly, courts have often enforced such choice of law clauses, unless the public policy of the home state (i.e., California in our present discussion) prohibits enforcement. If you have questions about non-compete clauses, please contact one of our Non-Compete Clause Agreement Attorneys in San Francisco by calling (415) 421-1800.

Non-Compete Clause Laws in California and How they May Affect Employees Who Move to Another Firm

Some employers have hit employees with a double whammy by also imposing so-called “choice of forum” clauses that require an employee to have his dispute heard outside California. So, for example, a California employee who is not paid his wages for work performed in California might be required to bring any lawsuit or arbitration to recover those wages in New York, rather than California.

To help even the playing field, the California legislature passed a law making it unlawful for an employer to impose non-California choice of law and choice of forum clauses on California employees. California Labor Code Section 925 provides that an employer shall not require an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would either: (1) require the employee to adjudicate outside of California a claim arising in California; or (2) deprive the employee of the substantive protection of California law with respect to a controversy arising in California. Section 925 goes on to state that any such unlawful choice of law or choice of forum clause can be voided by the employee, in which case the dispute must be heard in California under California law. The law applies equally to cases brought in court or arbitration.

Labor Code Section 925 is designed to ensure that California employees do not lose the protections of California employment law, and that they are not forced to bring their cases thousands of miles away in a jurisdiction with little or no connection to the dispute.

To date, there have been several federal district court decisions applying Section 925. See, e.g., Karl v. Zimmer Biomet Holdings, Inc., 2019 WL 2775567 (N.D. Cal. July 2, 2019). And just this past July, the Ninth Circuit issued a ruling which, although not directly addressing Section 925, underscores the power of the statute. Gemini Techs., Inc. v. Smith & Wesson Corp., 2019 U.S. App. LEXIS 22058 (9th Cir. July 24, 2019), involved an Idaho state law (Idaho Code § 29-110(1)) which renders void as against public policy any contract clause restricting a party’s ability to enforce its rights in an Idaho venue (whether court or arbitration). Id. at *5. The district court below had refused to give any weight to the Idaho statute, on the grounds that the statute could not constitute an “exceptional circumstance” precluding enforcement of the forum selection clause. The Ninth Circuit reversed, holding that the forum selection clause was void under Idaho Code 29-110 (1). In doing so, the Court expressly took “the opportunity to clarify that satisfaction of Bremen’s public policy factor continues to suffice to render a forum selection clause unenforceable.” Id. at *12. In other words, a statute like Section 925—which reflects a public policy favoring adjudication of local disputes under local law in a local forum—is a sufficient basis for refusing to enforce a contractual forum selection clause.

These decisions are unlikely to be the last word on the subject. Future cases may address the interplay between Labor Code Section 925 and the Federal Arbitration Act, as well as the deference out-of-state courts should give to Section 925 where a suit is filed in a foreign jurisdiction to enforce a noncompete agreement against a California employee. Meanwhile, California employees who have signed (or are being asked to sign) a potentially unlawful noncompete agreement, choice of law clause, or choice of forum clause should get advice from experienced California counsel.