Quirky Question # 159, Non-Competes and Choice of Law Provisions

Question:

Our company’s headquarters is located in Seattle, Washington.  We want to hire someone to start up our company’s new location in another state.  Because of the competitiveness of our industry, we would like our new employee to sign a non-compete agreement applying Washington law.  Although we are familiar with the non-compete laws in Washington, we are unsure what the law is regarding non-compete agreements in the new location.  We are concerned that we will enter into a non-compete agreement with this employee and it will turn out to be unenforceable in the new location.  Is there anything we can do to make the Washington law focused non-compete agreement enforceable outside of Washington state?

Answer:

You are right to be concerned about the enforceability of the non-compete agreement.  As you are probably aware, some states, most notably California, very rarely enforce non-compete agreements.  For example, California has a well-established public policy that a person has a substantial interest in the unrestrained pursuit of their livelihood.  Section 16600 of the California Business and Professions Code expressly states: “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”  Although California has limited statutory exceptions to this rule, such as a non-compete entered into in connection with the sale of a business, these exceptions do not apply to your situation and are outside the scope of your more general question — how to make a non-compete agreement more likely to be enforced if you don’t know the law in the state where the employee will be working?

While our analysis will address Washington law, the general steps recommended may be taken in any jurisdiction that enforces non-compete agreements and where you are familiar with the law.  The first step you must take is to draft the non-compete agreement so that it is enforceable under the law of the jurisdiction where your company’s headquarters is located.  Like all contracts, there must be valid consideration to support the non-compete agreement.  In Washington, courts have found adequate consideration if the employee enters into the non-compete agreement when he/she originally accepts the  job offer.  You will want to advise your new employee of the non-compete agreement at the time of the offer for employment.  If you do not, a court may find the agreement unenforceable, even if the employee signs the agreement before starting work.  If your employee  already has started work, you must offer him/her additional consideration (an increase in wages, a promotion, a bonus, or access to protected information) to support the restrictive covenant.

Even if there is adequate consideration to form a valid contract, courts will look at the agreement to determine whether it is reasonable.  To determine whether a non-compete agreement is reasonable, Washington courts look at whether: (1) the restraint is necessary for the protection of the business or good will of the employer, (2) it imposes on the employee no greater restraint than necessary to protect the employer’s business or good will, and (3) the degree of injury to the public in terms of loss of the employee’s service and skill is not such a loss as to warrant non-enforcement.  In analyzing whether the non-compete is necessary for the protection of the employer, Washington courts have held that an employer has a legitimate interest in protecting its trade secret and other confidential information, but an employer can claim no legitimate interest simply because it wants to stop a former employee from going to a competitor and using the skills and training acquired during employment.  Courts will look at the duration and geographic scope of the agreement to analyze whether the restraint on the employee is greater than necessary.

Assuming you have valid consideration to support your non-compete agreement and it is reasonable under the law of your home jurisdiction, there are steps that you can take to increase the likelihood that the agreement will actually be enforced.  Although this list is non-exhaustive, these ideas all serve the general purpose of establishing a connection between the non-compete agreement and the home forum where you are located.

First, the non-compete agreement should state that it is governed by the laws of your home jurisdiction where non-compete agreements are enforceable (in this case Washington).  The agreement also should contain the employee’s consent to jurisdiction and venue in your home jurisdiction.

Second, consider flying your new employee to your headquarters to sign the agreement.  Taking this step with the employee at your company headquarters will help when trying to establish personal jurisdiction and venue in your home forum where you will likely want to enforce the agreement.

Third, consider putting language into your non-compete agreement where the employee acknowledges that your principal place of business is in your company’s home city and state (in this case Seattle, Washington).

It is important to note that many times enforcement of non-compete agreements become a “race to the courthouse” where, after the employee leaves their current employment, either he/she or his/her new employer file for a declaratory judgment trying to declare the non-compete agreement invalid in their jurisdiction.  Although the steps listed above may help to establish proper jurisdiction and focus a fair amount of the activity surrounding the non-compete agreement around your home jurisdiction, you must still be alert to the possibility of a breach of the non-compete agreement.  Therefore, you must be ready to move quickly.

Thankfully for employers, courts (including those in California), may defer to another jurisdiction’s parallel proceedings on principles of judicial comity.  If the employee does indeed go work for a competitor in another jurisdiction where you are unsure of the law regarding non-compete agreements or where the jurisdiction does not enforce non-compete agreements, you will want to file your breach of contract lawsuit against the employee (possibly along with other causes of action against the new employer) first in your home jurisdiction.  It is very possible that even if the employee or his/her new employer files a subsequent suit trying to declare the non-compete agreement unenforceable, your first-filed lawsuit will take precedence and render the non-compete agreement enforceable.

A helpful illustration of this concept appears in Swenson v. T-Mobile USA, Inc., 415 F. Supp. 2d 1101 (S.D. Cal. 2006).  T-Mobile, a corporation with its principal place of business in Washington, hired Ms. Swenson, a California citizen, as its Chief Operating Officer.  As a condition to employment and during the subsequent course of her employment, Ms. Swenson signed several agreements which included non-compete provisions and consented to jurisdiction and venue in Washington.  After less than two years at T-Mobile, Ms. Swenson left her job to join a start-up cellular company based in California.  T-Mobile subsequently filed a lawsuit and motion for a temporary restraining order in Washington state court to enforce the non-compete agreements.  Two days after T-Mobile filed its complaint, Ms. Swenson filed a declaratory relief action against T-Mobile in California state court, seeking to have her non-compete agreements invalidated.  The Washington court granted T-Mobile’s temporary restraining order and a subsequent preliminary injunction.  After T-Mobile removed the California action to federal court, the California District Court upheld the choice of forum clause contained in the non-compete agreements and held that, even though the Washington court’s application of Washington law may lead to a result against the public policy of California (i.e., may enforce the non-compete agreement), enforcement of the forum selection clause itself does not contravene a strong public policy of California.  The California District Court then dismissed the later-filed lawsuit on the grounds that it was duplicative of the litigation proceeding in the Washington state court system.

In sum, although it is likely impossible to draft a non-compete agreement that will be upheld in every state, the recommendations listed above are easy steps you can take to increase your new employee’s contacts with your home jurisdiction where non-compete agreements can be enforced.  By taking these steps and being ready to move quickly in the possibility of a non-compete breach, you can increase the probability of success in enforcing your non-compete agreement, even when you are unsure of another jurisdiction’s law regarding enforcement of non-compete agreements.