Is My Out-Of-State Noncompete Agreement Enforceable In California?

February 23, 2015

California has one of the strongest public policies of any state prohibiting the enforcement of restrictive covenants (such as noncompete agreements) by employers against employees. But that does not necessarily mean that California law will apply; if the agreement was made in another state or includes a “choice-of-law” provision requiring that the agreement be construed under the laws of another state, the covenants at issue may be enforceable.

If you’d like to learn more about noncompete agreements in California, please see this Bona Law primer. In short, California law prohibits employers from enforcing restrictive covenants against employees, particularly covenants that take the form of a noncompete agreement. See Cal. Bus. & Prof. Code § 16600.

Update: You can read a detailed discussion about California, non-compete agreements, choice-of-law clauses, and forum-selection clauses at The Antitrust Attorney Blog.

The circumstances that present the strongest case against enforcement of such an agreement involves a noncompete agreement between a California-based employer and a California-based employee. But not all cases are that simple; whether California law applies depends upon the application of “conflict of law” rules.

“Conflict of law” rules allow courts to determine what state’s laws apply when the laws of more than one state might apply to a dispute but would produce different results. For example, a noncompete agreement between a California-based employer and a Nevada-based employee that was signed in Nevada could be construed under Nevada or California law, depending on the circumstances. If Nevada law applies, the restrictive covenant might be enforceable against the employee. If California law applies, it will not be enforceable.

Because of these issues, parties often include choice-of-law provisions telling a court to apply a particular state’s law rather than determine what state’s substantive laws apply under a conflict-of-law analysis. In most cases a court will readily accept a choice-of-law provision and apply it as the parties intended. But that’s not necessarily so in the case of a noncompete agreement.

Like other common law doctrines, conflict-of-law rules vary from state to state. Most states will not enforce a choice-of-law provision that would violate the public policy of a state with a “materially greater interest” in the dispute or where the parties do not have a “substantial relationship” with the chosen state. In other words, a California employer cannot get around California’s prohibition against employee restrictive covenants by requiring his California employee to sign an agreement that includes a Nevada choice-of-law clause.

This is because California courts will not apply the law of another state where that law is “contrary to a fundamental public policy of the State of California.” See, e.g., Application Grp., Inc. v. Hunter Grp., Inc., 61 Cal. App. 4th 881, 902 (1998).

Despite choice-of-law provisions, the effect of an agreement not to compete is far from certain. A restrictive covenant not to compete might be enforced to prevent a former employee from competing with her former employer within the borders of California despite the state’s strong public policy against noncompete agreements if suit is brought outside California. Whether a particular agreement is enforceable depends upon the facts and circumstances of each case. If you have questions about restrictive covenants in employment or need representation in a dispute concerning a noncompete agreement, please contact us.