By: James Kachmar
Under California law, non-complete provisions are generally unenforceable. But what happens when the non-compete provision appears in an employment contract that is governed by another state’s law with a forum selection clause limiting any dispute to that particular state? All California courts in the past have refused to enforce a choice of law provision (absent a forum selection clause) that requires a California court to apply the law of a state that may be more favorable to non-competes on grounds that it violates California’s public policy concerning such restrictions. Courts in California, however, have been more tolerant of forum selection clauses that will send a dispute over a non-compete provision to a forum that views them more favorably. This dichotomy was recently on display in the case, Scales v. Badger Daylighting Corp.
Badger, a Nevada corporation with its principle place of business in Indiana, provides hydrovac excavation services. Daniel Scales, who lives in California, was employed by Badger between 2014 and 2016. Upon his gaining employment with Badger, he signed a confidentiality and non-competition agreement that provided certain restrictions on his ability to work for a competitor following the termination of his employment with Badger. It also contained both a choice of law provision (i.e., that the laws of Indiana would apply) and a forum selection clause (i.e., any lawsuit would be filed in Marion County, Indiana).
In 2016, Mr. Scales left his employment with Badger and joined a competitor in the same field. Badger filed a lawsuit for breach of contract in Marion County, Indiana. Shortly thereafter, Mr. Scales and others files a lawsuit in Kern County, California, alleging, among other things, a claim for declaratory relief that the non-compete provision he entered into was unenforceable as being contrary to California public policy. Badger removed the lawsuit to federal court and then filed a motion to dismiss Mr. Scales’ declaratory relief claim on the grounds of forum non conveniens.
The U.S. District Court began its inquiry by determining whether there was a valid forum selection clause at issue in the agreement. It noted that the U.S. Supreme Court has recognized that forum selection clauses “are presumptively valid and should be honored `absent some compelling and countervailing reason’.” Furthermore, the Court would not give any consideration to the fact that Mr. Scales filed in California as the plaintiff’s choice of forum should not be given consideration in the analysis.
Plaintiff argued that the forum selection clause was invalid because it violated California’s public policy as set forth in California Labor Code section 925 and Business and Professions Code section 16600. Section 925 of the Labor Code was recently enacted and makes any agreement by which a California employee is required to agree to an out-of-state choice of law/forum selection clause without the aid of counsel to be voidable. However, this section only applies to contracts entered into after January 1, 2017. Given that Mr. Scales entered into his agreement in 2014, the Court found that he could not take advantage of the recent change in law.
Turning its attention to California’s general prohibition on non-compete provisions in section 16600 of the Business and Professions Code, the Court held that enforcing the forum selection clause would not necessarily contravene the policy set forth by that section. The primary focus was to determine whether the clause was reasonable and not to focus on the ultimate effect of enforcing such a clause. In essence, unless Mr. Scales could show that granting the forum non conveniens motion would “foreclose all of [his] remedies,” the Court would uphold the validity of the forum selection clause.
To determine the validity of the forum selection clause, the Court was required to look at the “public interest” factors. First, the Court was to look at the “localized interests,” i.e., the competing interests between the forum state and the state identified in the forum selection clause. Badger argued that its headquarters were in Indiana and that Indiana had an interest in protecting its corporations from out-of-state competitors. The Court found this significant as well as the fact that Indiana was already handling litigation between the parties concerning Mr. Scales’ non-compete provision.
The next factor the Court was required to look at was familiarity with governing law. Because the agreement also had an Indiana choice of law provision, the Court concluded that an Indiana court would be best positioned to apply its own laws especially since it was already considering litigation between the parties.
The final factor to be considered in the analysis is administrative difficulties. Once again, the Court sided with Badger in its analysis. The Court concluded that the fact that there was already pending litigation in Indiana warranted dismissal under the grounds of forum non conveniens to avoid duplicative or inconsistent results between the two lawsuits. Thus, the Court granted Badger’s motion to dismiss Mr. Scales’ claim challenging the non-compete provision on the grounds of forum non conveniens.
Attorneys representing out-of-state employers in litigation involving the enforceability of a non-compete provision should consider whether there is a valid forum selection clause that will enable the defendant to litigate the dispute in a more favorable forum elsewhere. However, attorneys should be aware that if the contract at issue was entered into after January 1, 2017, it may implicate the provisions of section 925 of the California Labor Code and make such provisions voidable.