California Employees Lose An Important “First To File” Case Involving Non-Compete Agreements
Because of California’s employee-friendly laws on agreements containing restrictive covenants, whenever possible, employers include foreign state choice of law and forum selection provisions. This frequently leads to a proverbial “race to the courthouse” with the first filing party arguing that its case should be heard and the later filed case stayed or dismissed. This artifice – sometimes the difference in hours or minutes — has left the enforceability of such agreements uncertain.
Enter the recent decision of the Appellate Division of the Supreme Court of New York County (the state’s intermediate appellate court) in the matter of Aon Risk Services v. Cusack. In that case, New York court affirmed the grant of a preliminary injunction to Aon, an insurance company, enjoining a former sales employee who had worked for the company in California for 15 years from violating a non-compete agreement that had a New York forum selection clause. The former employee unsuccessfully argued that the action should be stayed or dismissed because he had filed a declaratory judgment action in California about the enforceability of the same agreement a few days earlier. But, the New York court was not buying the argument. It attached no significance to the fact that the former employee had lived in California for 15 years and instead enforced the forum selection clause.
The long term effect of this important decision remains to be seen. On the one hand, California courts will enforce forum selection clauses but they do place significant weight on forum non conveniens arguments – namely that an individual defendant does not have the resources to litigate in a foreign jurisdiction. And, California courts have been very assertive in enforcing the State’s public policy disfavoring non-compete agreements as an unlawful “restraint on trade.” These often conflicting public policies have left an uncertain legal landscape for California employers.
Will courts outside of California follow this lead and take a dim view of California public policy positions? Will California courts continue to favor forum non conveniens arguments advanced by employees in these cases? Will the California courts stand down when other state courts enforce forum selection clauses. We will keep you informed over the next several months of any changes and strategies moving forward. In the interim, employers would be well advised to include foreign forum selection clauses, particularly if there is a nexus to New York, in restrictive covenants wherever possible.