A recent Delaware court case invalidating an employer’s non-compete agreement provides a cautionary reminder for companies with operations and employees in multiple states.
Specifically, in Ascension Ins. Holdings, LLC v. Underwood (Delaware, Jan. 28, 2015) the company, Ascension was incorporated in Delaware, but headquartered in California. California was also where the employee, Roberts Underwood worked.
Their employment agreement contained a provision referred to as a “choice of law” provision. A choice of law provision specifies which state’s law will apply if (when) there is a dispute arising under the agreement. (For more information on how choice of law provisions affect non-compete disputes see Enforcing Non-compete Agreements – What Law Will Apply?). In the Ascension case, the choice of law called for Delaware law to apply.
Similar to Michigan, Delaware law generally enforces employee non-competition agreements if certain conditions are met (i.e., reasonable in scope and duration and if the restrictions advance a legitimate business interest of the employer). However, California law generally does not enforce non-compete restrictions, unless the restrictions are made in connection with the sale of the business.
The Delaware court in resolving which state’s law would decide the issue noted that the parties’ relationship was based in California and the applicable contracts were negotiated and entered into in California. Further, the territory in which the defendant employee was to be restricted was in California. In light of those facts, the court rejected the plaintiff employer’s argument that Delaware’s preference for enforcing contractual obligations in the form of non-compete restrictions should trump California’s interest in not enforcing such restrictions.
Accordingly, the Delaware court concluded that “allowing parties to circumvent state policy-based contractual prohibitions through the promiscuous use of [choice-of-law] provisions would eliminate the right of the default state to have control over the enforcability of contracts concerning its citizens.” For these reasons, the court denied the employer’s request to enjoin the defendant former employee from working.
Companies are often organized in one state, with their headquarters or base of operations in another state with operations in other states. Such situations can set up a scenario like that above where the question of whether a non-compete agreement entered into by an employee will be enforceable in the state where the employee is working.
For this reason, it is important to understand the various state laws that may come into play when it comes to non-compete restrictions. With this knowledge, employers will be better able to compare whether one state or the other is more favorable with respect to enforcing restrictive non-compete restrictions and take appropriate steps to establish connections with the state chosen to govern the non-compete restriction.
For more information about non-compete restrictions, including whether your non-compete is enforceable, contact attorney Jason Shinn. Mr. Shinn routinely works with employers or sales representatives, executives, and other individuals in non-compete disputes.