Reasonable non-compete agreements are enforceable in most states. However, there are a few states, like California, which make non-compete agreements completely void and unenforceable aside from some very specific exceptions (see California Business and Professions Code Section 16600 et seq.).
Contracting Outside California Law
Out-of-state employers with employees in California may attempt to require employees to sign non-compete agreements that specify such agreements are to be interpreted under the law of state other than California and in case there is a dispute between the employee and employer, be litigated in the courts of that other state. These choice of law and venue provisions are generally enforceable but exceptions are often made where the application of such law may be contrary to public policy of either state.
Employees have attempted to avoid the enforceability of these types of agreements by the use of forum shopping techniques. For example, an employee that is first to file” in a non-compete dispute in a California court may be more likely to be able to ask the court to apply California law as opposed to the employer filing first in a state that is more tolerable to non-compete provisions.
Employer Enforcing Non-Competes from Washington
However, this practice of forum shopping 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 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.
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.