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Can they defeat the Non-Compete?

Reasonable non-compete agreements are enforceable in most states.  However, there are a few states, such as California, which do not enforce non-compete agreements in California contracts aside from specific exceptions codified under California Business and Professions Code Section 16600 et seq.

California Employees and the Non-Compete

Often times, employers with California employees will require employees to sign non-compete agreements in which the agreement is to be interpreted under the law of another state (“choice of law”) and adjudicated in the courts of that other states (“choice of forum”).

Employees have avoided the enforceability of these types of agreements by the use of forum shopping techniques.  For example, under the federal precedent known as “first to file”, an employee could avoid the enforceability of the non-compete agreement by filing in a California court, asking the California court to find the agreement unenforceable.  Assuming the employee files before the employer, the employer’s case in another state will be dismissed for reasons of judicial efficiency.  Consequentially, the de facto result of filing first in California is that California law would be followed, a thereby the non-compete agreement would be unenforceable.

Case Law Development Creates Changing Expectations

However, this practice has recently been called into question by the ruling in Meras Engineering, Inc. v. CH20, Inc.  (2013).  The facts of the case are as follows: Two California resident employees worked for a company called CH20, which was incorporated in and with a principal place of business in Washington state.  The employees’ contracts contained non-compete provisions and as well as a forum selection clauses and choice of law clause which provided that Washington law would govern and that jurisdiction and venue would be in Washington state.

The two employees proceeded to leave CH20 and being work for the competitor company of Meras.  On the same day they began this employment with Meras, the two employees along with Meras filed in Northern District of California to have the non-compete provision found unenforceable under California law.  Soon thereafter, CH20 also filed suit against the employees and Meras in Washington state court claiming that the employment agreement and non-compete provision therein was subject to Washington state law.  The case was removed to federal court and the employees and Meras then moved for partial summary judgment, arguing that the applicable California law rendered the non-compete agreement unenforceable.  Meras by itself then filed a motion to stay the California proceeding pending the outcome of the Washington case.  To the disappointment of Meras, the California case was dismissed with prejudice, with the court citing that the contractual forum selection clause would be enforceable, making the contract subject to Washington law.

California Public Policy

Therefore, although the employees and Meras argued that the enforceability of the forum-selection clause would violate California public policy, the California court ultimately disagreed.  The California plaintiffs’ argument was that because the Washington court had ruled that Washington law applied, the Washington court would likely find the non-compete agreement to be enforceable.  Therefore, if the California case were to be dismissed, the California plaintiffs would essentially have no chance of prevailing.  The Court did not find this argument persuasive and concluded that finding a forum selection clause unenforceable merely because its enforcement would result of the application laws that would be unfavorable to the plaintiffs did not amount to result which would be against California public policy.

Take Away

California courts will not take into account the substantive effects of enforcing a non-compete agreement when deciding whether or not the forum selection clause in a non-compete agreement is contrary to California public policy.

The finding in the Meras case should put employers on notice to carefully consider and formulate forum selection clauses in employment contracts.  Employers and employees should necessarily surmise that California courts will never enforce out of state non-compete agreements.

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