The California Labor Code has proven to be a powerful tool for exiting employees seeking to escape from non-compete covenants. In many cases, California employers have attempted to escape the restrictions placed by this rule by including choice of law provisions that seek to enforce the provision in states where they are more likely to be upheld.
However, this practice became difficult with the passage of Labor Code 925. As of now, a federal court base in Minnesota has found in a summary judgment for several employees that a non-compete covenant that included a choice of law provision could not be enforced.
In this case, the plaintiff, a major transportation and logistics provider based in California, had employed the plaintiffs, who also lived and worked in California, and as a condition of employment had included agreements prohibiting business interference and customer interference. This also provided that the agreement would be governed under Minnesota’s law.
Subsequently, the employees left the company in order to work for a competitor. The employer filed a lawsuit in a Minnesota state court against the employees, alleging breach of contract and tortious interference. The defendants then removed the case to a federal court.
The employer argued that the employees had violated their agreement by soliciting other employees to join their business enterprise. However, the employees argued that due to living and working primarily in California, the state’s provision forbidding restrictive covenants as a condition of employment should apply and moved for summary judgment.
The federal court chose to apply Minnesota’s choice of law regulation, however noted that the state’s law would be contrary to California’s fundamental policy. The court also found that California has a materially greater interest in the determination of the issues in question.
In finding this, the court used the four-factor test created by the Sixth Circuit. This test considers several points, including the bargaining power, the level to which contacts are divided amongst the states, and whether the application of a given law would be repugnant to the state which has enacted anti-waiver legislation.
In the facts of this case, the court found that the contacts, in this case, were heavily divided in favor of California based on where the parties lived and worked. Further, the court found that the parties had significantly different levels of bargaining power and that California’s public policy was significantly opposed to restrictive covenants as a condition of employment. As a result, the court found that California’s law would govern this case and as such, Labor Code 925 would apply.
This case shows that a non-California choice of law provision will typically be rejected in cases where an employee is employed and lives in California. Employers should also be aware that in cases where an employment agreement containing a restrictive covenant predates Labor Code 925, this law will apply if the agreement is ever amended.