July 30, 2017

Recent Developments Regarding Noncompete Agreements

There is no question that noncompete agreements in California employment contracts are generally unenforceable.  Many other states, however, may enforce such agreements if they are “reasonable” in duration and geographic scope.  So, what is a California employer to do if a prospective employee signed a noncompete agreement with a forum selection and choice of law provision for a state which favors noncompete agreements?  Recent developments reinforce that the answer depends on various factors, including the residence of the employee at the time the agreement was signed.

Labor Code Section 925

If the employee signed the agreement after January 1, 2017 and while a resident of California, the answer is clear.  Under Labor Code section 925, the employee will not be required to adjudicate, either in court or arbitration, any claim outside of California or under any law that would deny the employee the protections provided by California law.  In fact, any such offending provisions may be rendered void by the employee.  If rendered void, the matter will be adjudicated in California and California law will govern the dispute.

Two Recent U.S. District Court Decisions – Freeman and Badger

If the employee was a resident of another state at the time he or she signed the agreement, the answer is less clear, as two California District Court decisions applying California law recently came to two very different conclusions.

In Freeman Expositions, Inc. v. Global Experience Specialists, Inc., No. SACV 17-00364, 2017 WL 1488269 (C.D. Cal. Apr. 24, 2017), Landon Shores, then a Nevada resident, was hired by Global Experience Specialists (“GES”).  In connection with his hire, Shores signed a noncompete agreement with GES.  The agreement prevented Shores from competing with GES for twelve months following his separation from the company.  The agreement also contained a forum selection clause, specifying that Nevada courts had exclusive jurisdiction over any dispute arising out of the agreement, as well as a choice of law provision in favor of Nevada law.  In early 2017, Shores resigned from GES, moved to California, and began working for a competitor, Freeman Enterprises, Inc. (“Freeman”), in California.  GES promptly filed a complaint in Nevada state court, seeking to enjoin Shores from: (1) soliciting or doing business with any clients of GES, and (2) performing any work which would be in competition with GES.  Freeman then filed a case against GES in a California state court seeking, among other things, declaratory judgment that the choice of forum and law provisions in the agreement between GES and Shores were not enforceable.  After the case was successfully removed, Freeman moved for summary judgment on this cause of action.

In granting Freeman’s motion for summary judgment, the court noted that “[e]nforcing the forum selection clause would contravene California’s strong public policy against noncompete agreements” because “[e]nforcement of the forum selection clause w[ould] result in enforcement of the noncompete clause.”  The court then ruled that the forum selection clause would not be enforced because “California has a materially greater interest than Nevada in resolving the issue presented in the case.”  Specifically, California had an interest in Freeman’s ability to hire a California resident to work in California.”[1]

Just a few weeks later, the Eastern District decided Scales v. Badger Daylighting Corp., No. 1:17-CV-00222, 2017 WL 2379933 (E.D. Cal. Jun. 1, 2017) and went a different way on the enforcement of the forum selection clause.  In Badger, Badger Daylighting Corporation (“Badger”), a Nevada corporation with its principal place of business in Indiana, hired Daniel Scales, a California resident, to work out of its Taft, California office.  As part of his employment with Badger, Scales signed a noncompete agreement providing that, for a period of two years following his separation from Badger, he would not, “within the geographical area of the  State(s) of California, Oregon, and Washington, compete in any manner with [Badger].”  The agreement further provided that it would be “governed by and construed in accordance with the laws of the State of Indiana and any disputes arising hereunder shall be brought and heard in the state or federal courts sitting in Marion County, Indiana.”  Two years later, Scales resigned from Badger and accepted a position with a competitor.  Badger filed suit against Scales in an Indiana state court, alleging that Scales had breached the parties’ noncompete agreement.  Scales, along with some other former Badger employees, then filed suit in California, seeking a determination that the noncompete agreement was unenforceable.  After the case was removed to federal court, Badger filed a motion to dismiss for forum non conveniens.

In deciding Badger’s motion, Scales argued (much like Shores in Freeman) that enforcement of the forum selection clause would violate California’s public policy against noncompete clauses, as the court in Indiana would enforce the noncompete.  Unlike Freeman, the court in Badger declined the invitation to focus on the potential effect of enforcing the forum selection clause.  It reasoned that “[f]ocusing on the effect, rather than the reasonableness, of a forum selection clause would require the court to make a determination of the potential outcome of the litigation on the merits in the transferee forum and to consider whether that outcome would conflict with a strong public policy of the transferor forum.”  The court then noted that “attempting to determine what law an Indiana court would apply would be entirely speculative and irrelevant to a determination of whether the forum selection clause of the parties’ Agreement is enforceable.”  Ultimately, the court granted Badger’s motion to dismiss the case, holding that the forum selection clause in the parties’ agreement was valid and that the case should proceed in Indiana.

With Freeman and Badger coming to two different results, the question remains – what are California employers looking to hire out of state employees subject to noncompete agreements to do?  Because the analysis will turn on the specific facts and circumstances of the agreement at issue, employers should consider having counsel review the prospective employee’s noncompete agreement and underlying facts to determine if the agreement is enforceable and under what law.


[1] Freeman is currently on appeal before the Ninth Circuit.