California Supreme Court Opens Door to Enforcement of Out-of-State Non-Competes

[December 2002]

In a surprising move, the California Supreme Court in Second Dist., Case No B144465 [Advanced Bionics Corp. v. Medtronic, Inc.] (December 19, 2002), put the brakes on a California court's right to issue an order restraining another state court from enforcing a non-competition agreement. This case will enhance the ability of multistate employers to enforce non-competition agreements with employees that worked outside California, and then move to California and seek to compete.

The Issue

Generally, California courts will not enforce non-competition agreements that either bar an employee from leaving to work for a competitor or bar the former employee from soliciting numerous customers of its prior employer. California courts have strictly enforced this prohibition against non-competition agreements as a matter of public policy. In an effort to avoid these restrictions, employers headquartered outside of California have sought to have their employees sign non-compete agreements with choice of law provisions applying other state laws and with venue selection outside of California. California courts, in turn, have disregarded these provisions that seek to circumvent California law and have even gone so far as to issue orders restraining non-California courts from taking action.

The Race to the Courthouse

In the case of Advanced Bionics, Medtronic, a company headquartered in Minnesota, employed a senior product manager, Mr. Stultz, in Minnesota. Medtronic had Mr. Stultz sign a non-competition agreement in Minnesota that prohibited him for two years after leaving Medtronic from working for any entity in connection with the design or sale of a competitive product. The agreement provided that its validity and enforceability was to be interpreted in accordance with the laws in the state which Mr. Stultz was last employed, which was Minnesota. Mr. Stultz proceeded to leave Minnesota to accept employment in California with Advanced Bionics, a company headquartered in California that made and sold competing products.

Advanced Bionics and Mr. Stultz took the first move, filing a complaint in California Superior Court for an injunction and declaratory relief, claiming that the non-competition agreement and its choice of law provision violated California public policy. The next day they informed Medtronic that they intended to seek a temporary restraining order preventing Medtronic from taking any action in any other court to enforce the non-competition agreement. On the following day, Medtronic filed an action in Minnesota state court alleging claims for breach of contract against Mr. Stultz and tortious interference against Medtronic. Medtronic also sought to have the Minnesota court restrain the California court from taking further action. Ultimately, both the California court and the Minnesota court issued injunctions seeking to bar the other court from taking further action related to the agreement. Medtronic petitioned for a writ to the court of appeals which upheld the California Superior Court's ruling. The court of appeals found that the temporary restraining order was necessary to protect plaintiff's interest; the case would be decided under California law despite the choice-of-law provision. and because California law applies and the California action was filed first, California courts should resolve the dispute.

The California Supreme Court Decision

The California Supreme Court rejected the notion that because the action was filed first in California, then that California court should have any greater rights to issue orders enjoining the parties from seeking relief in another court outside the jurisdiction. Rather, the California Supreme Court held that a California court may enjoin proceedings in another state only in exceptional circumstances, which did not exist here.

Practical Implications for Employers

The California Supreme Court's decision will have immediate impact on employers seeking to enforce a non-competition agreement:

• Entities employing workers outside of California will likely have greater success enforcing non-competition agreements against a worker leaving to accept a position in California if the agreement provides that some other state's law, rather than California law, applies. Although the California courts will likely deem the agreement unenforceable, an employer will at least have the opportunity to obtain a money judgment against the departing employee and the new employer, and have the chance to recover a money judgment even if the former employee cannot be enjoined from working for the competitor in California. A provision calling for a choice of venue outside of California is also advisable making it all the easier for non-California courts to accept jurisdiction over the action.
  
• Entities headquartered outside of California, but employing workers within California, may have a stronger likelihood of enforcing a non-competition agreement in a non-California court against the California employee. Nonetheless, California courts may consider an agreement entered into in California, by a California employee, but applying another state's law, to be a sufficiently "exceptional circumstance" to justify a California court issuing an injunction against parties seeking to enforce a non-competition agreement in another state. Also, an employer that requires its California employees to sign such an agreement could subject itself to separate liability in California courts. The employee could either make a claim for wrongful termination if the employee is fired as a result of refusal to accept the agreement, or the employee could obtain an injunction and attorneys' fees under Business and Professions Code Sec. 17200. Thus, while the employer may be victorious in enforcing its agreement in a non-California court, the victory may be a pyrrhic one.

This decision will likely give little or no relief to employers headquartered in California seeking to enforce non-competition agreements against California employees. Even if the agreement provides that another state's law is to be applied when interpreting or enforcing the agreement and that venue for actions under the agreement must be in a state other than California, courts outside of California are going to be reluctant to enforce those provisions.

Any questions about this Advisory should be directed to:

Stuart W. Miller, San Francisco, (415) 276-6584, stuartmiller@dwt.com
Emilio Gonzalez, Los Angeles, (213) 633-6829, emiliogonzalez@dwt.com

This Employment Law Advisory is a publication of the Employment Law Department of Davis Wright Tremaine LLP. Our purpose in publishing this Advisory is to inform our clients and friends of recent developments in employment law. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations. Copyright © 2002, Davis Wright Tremaine LLP.

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