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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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