In the world of non-compete litigation, it is well-known that employee non-compete agreements are unenforceable under California law. As a result, when a non-compete dispute has any ties to California, we often witness the proverbial race to the courthouse. In essence, the former employee facing the possible lawsuit will seek to file first by bringing an action for a declaratory judgment in California court. The hope is that if the employer files a subsequent lawsuit in a different venue, the other court will dismiss or stay the action pending the outcome of the California case. In most instances, the goal is to convince the California court to invalidate a contractual forum selection clause and choice of law provision, apply California law and declare the non-compete agreement unenforceable. A recent case out of the Northern District of California shows us how this theory can play out in practice.
The facts are as follows: Rich Bernier and Jay Sughroue are California residents who worked in California for a water treatment company called CH20. CH20 is organized under the laws of Washington and has its principal place of business in Washington. As part of their employment with CH20, Bernier and Sughroue signed employment contracts that contained a non-compete provision. Their respective contracts also contained a forum selection clause and choice of law provision, providing that Washington law would govern and that jurisdiction and venue would be in the state of Washington. On January 26, 2011, both Bernier and Sughroue left CH2O and went to work for a rival water treatment company called Meras Engineering. That same day, Bernier, Sughroue, and Meras filed a lawsuit in the Northern District of California seeking a declaratory judgment holding that their non-compete agreements with CH20 were unenforceable. Bernier, Sughroue and Meras also asserted a number of other claims for unfair competition and tortious interference.
Shortly after the original lawsuit was filed, CH20 filed suit against Bernier and Sughroue in Washington state court seeking to enforce the non-compete agreements. The case was then removed to federal court. A few months later, the plaintiffs in the California action moved for partial summary judgment, arguing that California law applied and that under California law the non-compete agreements were void. Meras then filed a motion to stay the California proceeding pending the outcome of the Washington case. Instead of staying the case, the court dismissed the California case with prejudice, holding that the dispute would have to be resolved in Washington, as required by the contractual forum selection clause.
The court noted that Meras, the new employer, was not a party to the employment contracts at issue (and therefore had not agreed to be bound by the forum selection clause). In spite of this, the court reasoned that it was appropriate to enforce the forum selection clause against Meras because Meras was closely related to the dispute at hand. I find that aspect of the opinion troubling to say the least, particularly given that Meras is a California corporation and Meras is not a party to the Washington case. But the rest of the opinion is perfectly reasonable.
Because the court was sitting in diversity, it applied federal law in determining the enforceability of the forum selection clause at issue. Federal courts recognize three grounds for refusing to enforce a forum selection clause: 1) where the inclusion of the clause in the contract was the result of fraud; (2) if the party seeking to avoid the clause would be effectively deprived of its day in court in the forum specified in the clause; or (3) if enforcement would contravene a strong public policy of the forum in which the suit is brought. The case (obviously) focused on the third exception.
The California plaintiffs – Bernier and Sughroue – argued that enforcement of the forum selection clause would contravene California’s public policy against non-compete agreements. The Washington court had already decided to apply Washington law. As a result, if the case was litigated in Washington, the non-compete agreements would be enforced (contrary to California public policy). The court rejected this argument.
There is precedent in California federal courts (including the Ninth Circuit) for applying the public policy exception where a forum selection clause together with a choice-of-law provision would altogether strip a California resident of California statutory rights. The Ninth Circuit applied that exception in Doe 1 v. AOL LLC, 552 F.3d 1077, 1084 (9th Cir.2009), where the forum selection clause and choice of law provision would have prevented consumers from pursuing a class action and stripped them of certain causes of action. In this case, the court distinguished Doe because (1) Doe required application of Virginia law without regard to conflicts-of-law rules and (2) Doe completely stripped substantive rights.
In contrast, in this case, the Washington court applied a conflicts-of-law analysis and concluded that it was proper to apply Washington law as dictated by the employment contracts. And under Washington law, the parties resisting the forum selection clause would still have rights (i.e. the non-compete agreements would be subject to a test of reasonableness). As the Northern District saw it, there was nothing repugnant to California public policy about letting the case be heard in Washington where a federal court would properly consider the validity of the choice-of-law provision under the Restatement of Conflict of Laws § 187, the same test that applies in California.
The Court refused to engage in a sort of ex post analysis where it would declare the forum selection clause (and choice-of-law provision) unenforceable only after seeing how the Washington court ruled as to choice of law. That makes sense.
Bottom line: The California case was dismissed, and the ex-employees will be forced to litigate the dispute in Washington, under Washington law, where non-compete agreements are enforceable. So much for the old race to the California courthouse for a declaratory judgment striking down a non-compete agreement. The case is Meras Engineering, Inc., et al., v. CH20, Inc., 2013 WL 146341 (N.D. Cal. 2013).
Jonathan Pollard is a trial lawyer and litigator based in Fort Lauderdale, Florida. He focuses his practice on cases involving non-compete disputes, antitrust and business torts. He represents clients in Miami, Fort Lauderdale, Boca Raton, West Palm Beach, Jupiter, Fort Myers, Tampa, and Orlando. If you have a non-compete question or need a referral to a non-compete lawyer in your area, please contact Jonathan’s Fort Lauderdale office at 954-332-2380.