Choice of Law in Non-compete Cases

posted by Neil Klingshirn  |  Feb 7, 2010 3:15 PM [EST]  |  applies to Ohio

Non-compete laws vary significantly from state to state. California law favors employees, while Ohio law recognizes and protects most employer interests.  Thus, the law that a court chooses to apply to a non-compete case has significant, if not dispositive, results.

Generally, courts apply their own law to contracts  made or performed in their state.  However, courts must use “choice of law” rules to decide what law to apply to contract cases involving parties or performance in more than one state. Choice of law rules generally require the court to apply the law of the state that has the greater “contacts” to the lawsuit or the greater interest in resolving it.  

If  parties agree on the law to govern their contracts, courts usually apply that law, unless the state whose  law the parties picked has no connection to the lawsuit, or the strong public policy of the court’s own state prohibits it from applying the other state’s law. Similarly, courts enforce the parties' agreement on the location of the court, known as a forum selection clause, unless the agreement was the result of fraud, is unreasonable at the time of litigation or deprives a litigant of his or her day in court.

General rule for Choice of Non-compete Law

Historically, most courts applied the law of the state where the parties performed the contract, since the place of performance bears the most significant relationship to the contract. States that adopt the Restatement of Laws approach, such as New York, Ohio and Texas, however, examine the intention of the parties and decide which state has the most substantial contacts with the agreement and the parties. Substantial contacts include the:

1. place the contract was made,
2. place where the negotiations took place,
3. place where the contract was to be performed,
4. location of the subject matter of the contract, and
5. domicile, residence, place of incorporation, and place of business.

Restatement (second) of Conflict of Law § 188 (1971).  New York groups these contacts and identifies their “center of gravity.”

California and Pennsylvania apply the law of the state with the most significant interest in the issue. S. A. Empresa De Viacao Aerea Rio Grandense v. Boeing Co., 641 F.2d 746 (9th Cir. Cal. 1981); Mixing Equipment Co. v. Philadelphia Gear, Inc., 436 F.2d 1308, 1312 (3d Cir. Pa. 1971). California, however, will not apply the law of a state other than California if:

1. the law of the other state does not bear some substantial relationship to the parties or the contract and
2. the law of the other state violates a strong public policy of California.

Since California Business and Professional Code section 16600 banning employee non-competes is a strong public policy, California courts will usually not apply the law of a state that enforces the non-compete.  In other words, California employers cannot escape California’s ban against non-competes by selecting another states’ laws. For example, a California court applied California non-compete law to a non-compete performed in California, even where the employer was outside of the state, recruited a non-California resident for California employment and agreed with teh employee to apply the law of New York.  Frame v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 20 Cal. App. 3d 668 (Cal. App. 1st Dist. 1971).

California will not, however, prevent a court in another state from enforcing a non-compete involving a California employee.  Even though an important California public policy is at stake, California’s respect for the jurisdiction of other state’s courts prevents it from overriding the operation of their courts.

Florida takes a relatively inflexible approach, applying the law of the state in which the parties executed the contract, unless the contract is for the performance of services. Lafarge Corp. v. Travelers Indem. Co., 927 F. Supp. 1534 (M.D. Fla. 1996).

Choice of Law Clauses.

Most states honor the parties' selection of  the law that governs their agreements. States that adopt Section 187 of the Restatement of Law 2d (1971) 561, Conflict of Laws, such as Ohio, Pennsylvania and Texas, will apply the law chosen by the parties, unless either:

1. the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or
2. application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state.

Schulke Radio Productions, Ltd. v. Midwestern Broadcasting Co., 6 Ohio St. 3d 436, 438-439 (Ohio 1983) (adopting Restatement of Law 2d (1971) 561, Conflict of Laws, Section 187).

Florida courts, like those in California, apply the law chosen by the parties as long as a “reasonable relationship” exists between the state whose law the parties chose and that state’s law does not conflict with Florida law. Unlike California, however, Florida does not now have a strong public policy prohibiting non-competes.

New York follows the "substantial relationship" approach, which honors the parties choice of law unless either:

1. the chosen state has no substantial relationship to the parties or
2. application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state.

However, for the “fundamental policy” exception to apply, the issue must be of such overriding concern to the public policy of another jurisdiction as to override the intent of the parties and the interest of New York in enforcing its own policies.  Estee Lauder Cos. v. Batra, 430 F. Supp. 2d 158 (S.D.N.Y. 2006).

Forum selection clauses.

The United States Supreme Court held in Bremen v. Zapata Off Shore Co. (1972), 407 U.S. 1, 9-12, that a forum selection clause that is fairly bargained for and not the result of fraud will be enforced so long as to do so is reasonable at the time of litigation and does not deprive a litigant of his day in court. Thus, courts enforce the forum selected by the parties unless:

1. the contract was the result of fraud or overreaching;
2. enforcement would violate the strong public policy of the forum state; and
3. enforcement under the particular circumstances of the case would result in litigation in a jurisdiction so unreasonable, difficult and inconvenient that plaintiff would for all practical purposes be deprived of his day in court.

In Green v. Picker Corp. (Ohio, Mar. 29, 1979), Cuyahoga App. No. 38621, the court rejected a forum selection that would “require appellant, whose financial resources are far less than those of Picker Corporation, to bring this action in New York when he worked for the corporation in Ohio, and the parties to the lawsuit, appellant, the corporation, and the five members of the Retirement  Income Plan Committee, are all Ohio residents.”  See also Kennecorp Mortgage Brokers v. Country Club Convalescent Hosp, 66 Ohio St. 3d 173 (Ohio 1993) (absent fraud or overreaching, Ohio courts enforce forum selection clauses in commercial contracts, including non-competes, unless the forum would be so inconvenient to the parties as to deprive them of their day in court or enforcement of the clause would be unreasonable and unjust).

posted by Neil Klingshirn  |  Feb 7, 2010 3:15 PM [EST]  |  applies to Ohio