Monday, December 20, 2010

Peeling the Layers of the Non-Compete Onion: It's Enough to Make You Cry!

Introduction: Oh, that it would be so simple as to render an opinion on a non-compete provision for a California California employee, contracting with a California employer, for services rendered in California, for California customers. Such an effort to restrict an employee’s pursuit of trade would be clearly unenforceable. See California Business & Professions Code Sec tion 16200, et seq; D’Sa v. Playhut (2000) 85 Cal.App.4th 927 at 931 and Advanced Bionics v. Medtronic (2002) 29 Cal.4th 697.

But “what if . . . “ For example, what if the employer is out of state, what if the employer inserts a foreign choice of law provision in its employment contract; what if the employment agreement selects a non-California exclusive venue for filing; what if the employee is “reasonably restricted” under the laws of that foreign jurisdiction; what if the employment agreement specifically excludes its restrictions from application to California employment—that is, it restricts only the solicitation of customers located outside of California? What if the employee is served in California, along with her current employer, with an out of state temporary restraining order or preliminary injunction restraining the employee from working within California to contact, solicit or serve out of state customers? What if a foreign state jurisdiction has issued a restraining order or injunction that limits a California employee from pursuing his livelihood in California by contacting customers and businesses located within California?

How will California courts respond to these various real world scenarios?

Analysis: Here are the answers to the “what ifs”:

California courts will not enforce a foreign jurisdiction’s judicial restraining order to restrict a California employee from pursuing his trade in California by working for California businesses or soliciting California customers. Powell v. Biosense Webster, Inc. (2009) 179 Cal.App.4th 564. Why? Because California has broad ranging, fundamental, and nearly absolute public policy according employees the right to pursue their livelihoods without contractual restraint. Stated differently:

a) Private “choice of law” principles will not operate to trump California law on a matter of fundamental public policy. California courts will neither apply nor enforce another court’s laws to deprive a California employee working within California of his right to pursue his livelihood in California.

b) “Comity”, that is the constitutional principle of giving full faith and credit to the laws and judicial processes of another state, will not operate to require California Courts to follow and enforce the laws and orders of another state to restrain a California employee from pursuing his California based employment.

A non-compete agreement choosing non-California law, and choosing a venue outside of California will operate to restrict the employee’s pursuit of his trade outside of California. Biosense Webster, Inc. v. Superior Court (2006) 135 Cal.App.4th 827. Although no California Court has, to my knowledge, ruled on this precise question, I believe the reasoning of the Biosense v. Superior Court, supra, would lead to a conclusion that California does not have a overriding interest in allowing its employees unfettered access to the markets of other states, in violation of those individual states’ own “non-compete” laws. Stated differently, the constitutional principle of “comity” protected by the decision in Advanced Bionics v. Medtronic (2002) 29 Cal.4th 697 will operate to require a California Court to honor the orders of other state courts restraining California employees from competitive activities within the foreign state. See also, TSMC North America, et al. v. Semiconductor Manufacturing International Corp. (2008) 161 Cal.App.4th 581. [an antitrust action seeking a restraining order to prevent legal proceedings in the Peoples Republic of China.]

1. Under an unusual twist, if a California employee agrees to a application of another state’s law to restrict that employee’s free pursuit of livelihood outside of California, under California “choice of law” principles (a multi-factor test ), a California Court, in my opinion, would be required to apply that foreign jurisdiction’s laws, but only as to employment activities outside of California, and then, only as to the particular state whose laws were deemed to have been chosen by the parties. Of course, the more likely and practical procedure by the former employer seeking the restraint would be to apply for the restraining order directly in the foreign jurisdiction. Advanced Bionics v. Medtronic (2002) 29 Cal.4th 697.

2. If a California employee is served with a restraining order in California, but issued by an out of state court, and if the order is broad reaching to include even employment opportunities within California, the California court is not required to enforce the order. Why? The principle of “comity” is not applicable because of the “exceptional circumstance” that California has a compelling interest in protecting the livelihoods of its own citizens expressed in Business and Professions Code Section 16200. D’Sa v. Playhut (2000) 85 Cal.App.4th 927 at 931.

3. The recourse of the employee and new employer is to obtain a restraining order and eventually an injunction against the former employer [or the foreign court jurisdiction itself] from obtaining or seeking to enforce out of state court orders that operate to restrain a California employee from pursuing his employment within his or her resident state of California.

Conclusion: The reality of interstate commerce, indeed, international commerce, renders “non-compete” agreements a complex issue when these agreements restrain competition across political borders. Thorny issues of choice of law, comity, venue, and “reasonable restraint” can enter into the analysis. California courts cannot simply issue orders operating to impose California law on business conducted within those foreign jurisdictions. Likewise, those foreign jurisdictions cannot enjoin California employees to restrict those employees’ livelihoods within California. The result, in my opinion, is a “patchwork” set of court orders, at least for California residents, that operate to protect the California employee in pursuing his livelihood without restraint in California, but which will also operate to allow other states to issue and enforce orders restraining the competitive activities of those same employees in other states. The economic complexity cannot be resolved: when is a business or customer a “California business” or “California customer”? Like corporations engaged in interstate or international commerce, customers and businesses do not confine themselves to individual state borders. Will the test be the place of incorporation for the targeted customer? Will it be the targeted customers “headquarters” address? Will it be the location and concentration of the bulk of its business? Will it be the place where the customer will receive, use, or distribute the products or services of the new employer? I believe the tension of non-compete agreements existing in an era of free trade across political boundaries will continue to result in repeated conflicts among the jurisdictions. The best resolution, I believe, is to advance the purposes of both free trade and free competition for human talent by allowing each state to protect its citizens from restrictive covenants to the fullest extent they may desire.


CA Business and Professions Code Sec. 16200 et seq.

The Application Group, Inc. v. The Hunter Group, Inc. (1998) 61 Cal.App.4th 881.

Powell v. Biosense Webster, Inc. (2009) 179 Cal.App.4th 564.

Biosense Webster, Inc. v. Superior Court (2006) 135 Cal.App.4th 827.

Advanced Bionics Corp. v. Medtronic, Inc. (2002) 29 Cal.4th 697.

TSMC North America, et al. v. Semiconductor Manufacturing International Corp. (2008) 161 Cal.App.4th 581.

D’Sa v. Playhut (2000) 85 Cal.App.4th 927.

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