When it comes to non-compete agreements, one of the most important provisions to consider is what is referred to as a "choice of law" provision. This is because a non-compete agreement's choice of law provision will often determine whether a non-compete will be enforceable and to what extent.
Choice of Law and Noncompete Agreements
If a non-compete agreement dispute occurs, a choice of law provision determines the law to be applied to resolve the dispute. Such provisions are especially important where companies have employees dispersed across different states. This is because each state varies when it comes to enforcing non-compete agreements. For example, an employer seeking to enforce a non-compete agreement in Michigan will generally fair better than trying to enforce that same non-compete agreement under California law.
A recent non-compete dispute discussed by Richard Tuschman illustrates this point. Specifically, in a non-compete lawsuit filed by Synthes USA Sales, LLC against its former employee and his new employer, an issue arose as to whether Pennsylvania or California law applied to a non-compete agreement.
The defendant and former employee lived and worked in California, but his non-compete agreement had a choice of law provision that read: ”This agreement will be governed by Pennsylvania law applicable to contracts entered into and performed in Pennsylvania.
The trial court took the view that the non-compete's choice of law provision applied only to contracts actually performed in Pennsylvania. Under this view, the court determined California law applied and under that law, post-employment non-compete agreements are generally not enforceable except in limited circumstances, e.g., in the context of the sale of a business or to prevent the disclosure of trade secrets.
On appeal, however, the appellate court reversed the trial court's decision and concluded that Pennsylvania law should apply. This ruling was a huge "win" for the former employer because in contrast to California's unfavorable non-compete law, non-compete agreements under Pennsylvania law may be enforceable if the restrictions are reasonably necessary for the protection of the employer and are reasonably limited in duration and geographic area.
Michigan Law and Noncompete Agreements
Similar to Pennsylvania non-compete law, an employer and employee are free to enter into a non-compete agreement to protect the employer’s “reasonable competitive business interests” and to prevent post employment competition by the employee, as long as the agreement is reasonable in duration, geographical scope, and the type of activity restrained. For a more detailed discussion on whether a non-compete agreement is reasonable see My former employer can't prevent me from working, right? Dissecting the Enforceability of a Non-compete Agreement.
As a non-compete attorney, and also similar to the Pennsylvania case discussed above, I know first-hand the critical role a choice of law provision plays in non-compete litigation. Specifically, I had a case where a former employer sued its former computer engineers and their new employer for alleged violations of a non-compete agreement and trade secret misappropriation. One of the central legal battles came down to the choice of law provision, which called for the application of California law. However, the former employer essentially argued against applying the contractual choice of law provision because California law was not favorable to its position. Trying to make this argument, however, turned the litigation into something analogous to Alice in Wonderland where up is down and down is up. At the end of the day the application of California law significantly undercut the former employer's claims.
The Take-Away for Employers
A non-compete agreement is a critical sword when it comes to protecting a company's competitive interests. See Enforceable Non-compete Agreement Key to $2 Million Judgment Against Former Employee. But a poorly written non-compete agreement can also shield former employees from potential liability when it comes to non-compete disputes or, as was the situation in the trial court's decision in the Synthes USA Sales litigation, give a court a reason to limit the scope of a non-compete agreement in favor of an employee. Accordingly, employers do not want to be penny wise, but a and pound foolish when it comes to non-compete agreements.
And for employers with operations throughout the United States, it is absolutely critical to have a national non-compete strategy in response for differing state law treatment of non-compete agreements.
Jason Shinn is a Michigan non-compete attorney. Since 2001, he has worked with employers to draft enforceable non-compete agreements and to implement national non-compete programs. He has also represented companies, sales-representatives, executives, and other employees in litigating non-compete disputes in Michigan, Ohio, and federal courts, including obtaining or defending against preliminary injunctions. For more information about Michigan non-compete law, contact Mr. Shinn.