Employers frequently require employees to sign confidentiality and non-competition agreements. In most jurisdictions, these agreements are both lawful and prudent provided that they are carefully drafted.
In my practice, I draft confidentiality and non-competition agreements and litigate claims of breaches of those agreements. In almost every agreement I either draft or review, there is a choice of law provision. If I am drafting or editing the choice of law section, I do not just randomly select any state or a state that might be more favorable to my clients. I pick the state that makes sense legally — such as because that is where the company is located or the employee signing the agreement will be working.
Although this is not an example of a choice of law provision that I drafted, it is fairly typical of ones I review:
“This Agreement is governed by, construed, interpreted and enforced in accordance with the substantive laws of the State of New York without regard to conflict or choice of law rules.”
For legalese, this is actually clear and I am sure many of you are wondering what might be wrong with this provision. The problem with this provision is the last part.
Even if a contract has a provision that says it shall be governed by one state’s laws without regard to conflict or choice of law rules, that does not mean a court will blindly enforce that choice. Often the drafters of these contracts believe that simply because the parties agree to waive any conflict of law rules, that the contract terms will govern. Instead, in many jurisdictions, the court will disregard these provisions and still independently analyze which state’s law applies.
A recent example of this is the DJR Associates LLC v. Hammond, et al. case in the Northern District of Alabama. The Court dedicated a significant amount of time to discussing the choice of law provision before partially disregarding it. I won’t bore you with the details of the court’s reasoning, but do note why this is important for companies.
There are some states that do not allow non-competition agreements at all (I’m talking to you California) and there are other states that will enforce them in only certain limited circumstances. When employers are located in multiple jurisdictions, it is important to know the laws in all of the jurisdictions that could apply in order to try to draft enforceable agreements.
In the DJR case, the court found that part of the agreement was governed by Georgia’s law despite the fact that the agreement stated Alabama’s laws would apply. Georgia and Alabama’s laws differ on the extent to which an employer can prohibit a former employee from soliciting or accepting business from customers. Indeed, Georgia law is far more critical of such provisions than is Alabama. Further, under Georgia law, the court can only “blue-pencil” the agreement to strike the overbroad clause; courts cannot rewrite the provisions to be more narrowly tailored.
Although the Court ultimately found in favor of DJR, it also found that the non-compete provision was void under Georgia law, leaving DJR without an enforceable provision that would prohibit the soliciting of its Georgia customers. Companies should take this as a lesson to have their counsel do an analysis as to which state’s law applies and to draft non-compete agreements accordingly.