Let’s start with a hypothetical. You are a California resident, you work in California, and your customers are primarily in California. Your employment contract provides that after you cease working for your employer, you will not work for any competing business of a similar nature to that of your employer for a period of three years. You would like to quit and join a competitor of your employer in California. Can you do that without violating your contract? Is this employment contract legal to begin with?
California is generally known as a “right-to-work” state due to its broad policy against restriction on trade, which is codified in the Business and Professions Code section 16600 et seq. Subject to select exceptions that do not usually come up in the employment context, section 16600 reads: “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” This law gives California its fantastic reputation as a state that espouses lively market competition and a mobile work force available for hire at the drop of a hat. California courts have long applied section 16600 to invalidate contract clauses seeking to prevent employees from working in their profession post-termination.
Does this mean you can peacefully make a transition to a competitor and ignore the draconian three-year post-termination non-compete clause? Unfortunately for California employees the answer appears to depend on whether the employer is an out-of-state company and the contract has an out-of-state forum and choice of law selection clause. Let’s get back to the hypothetical. It was borrowed from the facts of a case decided in the United States District Court, Northern District of California earlier this year, entitled Meras Engineering, Inc. v CH20, Inc., No. C-11-0389 EMC (N.D. Cal. Jan. 14, 2013.) In that case, CH20, a Washington corporation, employed several sales individuals in California. The employees were residents of California, worked for CH20 almost exclusively in California and had no clients in Washington. In addition to the non-compete provisions, CH20’s contracts contained a forum selection provision requiring that any disputes be litigated exclusively in Washington, applying Washington law. In contrast to California, Washington allows non-competes as long as they are reasonable.
The employees resigned from CH20 and joined Meras Engineering, a California corporation and a competitor of CH20. The employees continued to live and work in California. Meras and the employees sued in a California federal court to invalidate the non-compete clauses in the contracts with CH20 under California law. CH20 sued in Washington seeking to enforce the non-compete clauses against the employees. Washington federal court ruled that Washington law must apply to the dispute. California federal court dismissed the California lawsuit, ruling that the forum selection clause determined that Washington is the jurisdiction in which the lawsuit must be resolved. The court warned that a “forum selection clause cannot be conflated with choice-of-law analysis,” stating also that as “a general matter, the selection of a forum does not always dictate the choice of law.”1 The court appeared unimpressed that the suit in Washington was going to proceed under Washington law stating that “[w]hile Washington law does not categorically prohibit non-compete clauses as does California law, it does subject such clauses to a reasonableness test.”2, 3
Right or wrong, where does this leave California employees working for out-of-state companies? When interviewing for a job with a company based elsewhere, read your employment agreements carefully. Be wary of clauses that dictate that disagreements must be litigated elsewhere and limit where you may or may not work after you leave employment. If you are interviewing with or thinking of leaving a foreign (non-California) employer, get legal advice before you act to prevent professional and legal hurdles down the line.
- 3:11-cv-00389-EMC Document 87 Filed 01/14/13 Page 18: 3, 8-9
- 3:11-cv-00389-EMC Document 87 Filed 01/14/13 Page 19: 28, Page 20: 1-2
- This finding echoes an earlier decision by a California federal court in Swenson v T-Mobile USA, Inc., 415 F. Supp. 2d 1101 (S.D. Cal. 2006) where the court found that enforcement of the forum selection clause (also in Washington) does not contravene a strong public policy of California against non-competes.
Veronika Short is an Employee Mobility Attorney and the owner of the Law Office of Veronika Short.