Supreme Court Decision Provides Guidance for Employers in Stucturing Non-Compete Agreements
Non-compete agreements have long been an important business-planning tool for employers. Companies invest a significant amount of time and resources in building employee and client relationships and do not want to see their investment walk out the door only to begin working for a competing company. Many employers, however, are faced with uncertainty in drafting their non-compete agreements as the law governing non-competes varies from state to state, and companies often have key employees located across the United States.
A common approach some employers use to work around this uncertainty is to include forum selection and choice of law clauses in their non-compete agreements. The idea behind these provisions is for the employer and employee to contractually agree to where disputes over the non-compete will be litigated and what law will govern the non-compete in the event of a future conflict. Although forum selection and choice of law clauses can effective tools if enforced by a court, not all states are willing to enforce these types of provisions. Some states, including Nebraska, will disregard the parties’ contractually agreed-upon choice of law if applying the choice of law clause would violate a fundamental public policy of the state with respect to the enforcement of non-compete agreements. Thus, even contractually agreeing to how a non-compete agreement will be construed has not always provided a clear path to non-compete enforceability. Fortunately for employers, a recent U.S. Supreme Court case has brought new clarity to these issues and will be beneficial to employers in their future non-compete planning.
In the case of Atlantic Marine Construction Co., Inc. v. U.S.D.C. W.D. Tex., 134 S.Ct. 568 (2013), the parties had entered into a subcontract for work in Texas but had agreed that disputes would be resolved in Virginia. After a payment dispute, one of the parties to the subcontract, J-Crew Management, Inc., brought suit for payment in a Texas federal court instead of the agreed-upon Virginia court (J-Crew Management is a Texas corporation). The Supreme Court noted that normally courts consider the convenience of the parties and various private and public interest factors to determine whether a case should be transferred based on the plaintiff filing in a forum other than the one the parties had agreed to. However, when the parties have agreed to a valid forum selection clause, the Supreme Court stated that the plaintiff’s choice of forum merits no weight and that the court must deem all private interest factors as weighing entirely in favor of the preselected forum.
Although not dealing with a non-compete restriction, the Supreme Court’s decision in Atlantic Marine carries significant weight in the non-compete context. Employees trying to shirk their non-compete obligations often attempt to file a preemptive case in a state with employee-favorable laws to have their non-compete agreements declared void and unenforceable. For example, a Nebraska employee who gets hired by a Minnesota company later decides that he or she wants to quit, go to work for a competitor, and not get sued under their non-compete agreement. Knowing that Nebraska law disfavors non-competes and Minnesota law readily enforces them, the employee files what is called a declaratory judgment action in Nebraska and tries to get a Nebraska court to declare the non-compete overly broad and unenforceable. In the past, employees have been able to successfully argue that they have little or no contact with the preselected forum (i.e., Minnesota in this example) and therefore should not be required to litigate there. Under the Supreme Court’s guidance in Atlantic Marine, however, employees who improperly file suit in violation of a valid forum selection clause will be precluded from arguing that the preselected forum is inconvenient and the forum selection clause will be given controlling weight "in all but the most exceptional cases."
It should be noted that Atlantic Marine was decided in federal court and the Supreme Court’s decision discussed forum selection in that context. An employer involved in a case where the parties are in separate states may be able to have an action originally filed in state court removed to federal court where Atlantic Marine would control. For general state court lawsuits, however, the enforcement of a forum selection clause will depend on state law. Most states enforce forum selection clauses as presumptively valid, but may refuse to enforce such a clause if it is unfair or unreasonable under the circumstances to do so.
The Atlantic Marine decision did not create a fool-proof method of non-compete enforceability as courts may still engage in a conflict of laws analysis where an employee argues that the law of a state other than the state selected in a choice of law clause should apply. Nevertheless, courts are more likely to favor applying the law of the state in which the courts are located, especially if that state’s law was agreed upon by the parties in advance.
In light of Atlantic Marine, employers with business operations in multiple states should consider revisiting their non-compete agreements to ensure that they include a mandatory forum selection clause choosing a state with employer-friendly non-compete laws to increase the chances of non-compete enforceability. The attorneys of Koley Jessen’s Employment, Labor, and Benefits Practice Group are experienced in advising clients on all aspects of non-compete agreements and are available to help employers find certainty in this often uncertain area of the law.
by Nathan T. Burkman