Ninth Circuit Rejects Enforcement of New Jersey Choice of Law and Non-Compete Agreement In Employment—The Importance of Being The First To File
In novel and important decision, DePy Synthes Sales v. Howmedica Ostionic’s, Ninth Cir. Case No. 21-55126, on March 14, 2022, the Ninth Circuit Court of Appeals upheld the lower court’s decisions to prevent a former employer from enforcing non-California forum selection clauses and a non-compete against its former California employee.
Waber, the employee at issue, had entered into an employment contract with a medical device company that included a one-year non-compete as well as forum-selection and choice-of-law clauses requiring adjudication of disputes in New Jersey under New Jersey law. Waber left and obtained similar employment with a new employer serving the same geographic area of California. After the former employer threatened legal action, Waber sent the former employer notice that the employment contract was void under California Labor Code § 925 and shortly thereafter sued the former employer for declaratory relief -- to enjoin enforcement of the non-compete and to prevent a claim of interference with contract against the new employer.
California Labor Code § 925 states that California employment agreements are voidable by an employee if the agreement requires the employee to adjudicate disputes outside California or deprive an employee of protection afforded by California law, unless the employee is represented by counsel while negotiating the contract.
The District Court agreed and granted Waber’s requests and refused to transfer the case to New Jersey.
On appeal, the former employer argued that the forum-selection clause was enforceable under established Federal law and the case should have been transferred to New Jersey. While the Ninth Circuit agreed that Federal law would govern the issue of enforceability of a valid contract, the threshold question of whether the contract is valid is governed by State law. The Ninth Circuit concluded that prior Supreme Court decisions did not create a rule of Federal preemption of state laws determining the existence of a contract and held that California’s Labor Code § 925 governed the question as to whether the contract was a valid agreement in the first instance. Moreover, the Ninth Circuit concluded that the district court did not err concluding that California Labor Code § 925 applied rendering the contract void and unenforceable.
The strategic decision to file the lawsuit in California by Waber and his new employer was, likely, outcome critical as a New Jersey court may not have looked to the importance of California laws to determine if the contract was valid or void.
Guidance for California Employers
California employers that hire employees who worked under a prior employer with non-compete agreements and/or non-California forum-selection or governing law clauses should work with an experienced employment attorney at CDF Labor Law about steps to void the existing agreements. Additionally, to have the best chance of success at injunctive relief against any attempts by a previous employer to enforce an otherwise illegal non-compete under the law of another state, California employers should consult with counsel about being the first to file a complaint in a California court or a Federal Court within California.
If you have any questions about non-compete agreements that your employees may have signed with other employers and/or how this decision may affect your business, please contact your favorite CDF attorney.