Knowing How to Draft a Valid Non-Compete Agreement

Legal DocsNon-compete agreements are generally not enforceable in California. Although, there are 3 main exceptions to this rule: the business owner exception, partner exception, and trade secret exception. There is also a backdoor exception if the parties use a choice of law provision. This article will review the extent to which choice of law provisions may be used to craft valid non-compete agreements.

What is Choice of Law?

In both contracts for services and goods the parties, in some circumstances, can choose the law that governs the agreement in the event of a dispute. These governing law provisions are known as choice of law provisions. This means that contracting parties may decide to have a law other than California law govern their agreement.

Choice of law provisions can take away a California court’s ability to strike down a non-compete. For example in the case of Advanced Bionics v. Medtronic, 29 Cal.4th 697 (2002) the California Supreme Court decided that a lawsuit to enforce a non-compete agreement could not be stopped by a California court while the lawsuit to enforce the non-compete was already underway in Minnesota.

When Can Choice of Law in NonCompetes be Used?

Choice of law provisions are not valid just because you write the law of another state governs your agreement. For a choice of law provision to hold up in court the judge must analyze the provision to determine whether the parties or the transaction has a substantial relationship to the chosen state or whether there is any reasonable basis for the choice of law. If the parties can show that either there is a substantial relationship to the state or some other reasonable basis for the choice of law a court will uphold the choice of law unless upholding the different state’s law will fundamentally conflict with California law.

A recent case demonstrates how courts in California will try to avoid applying non California law. In Arkley v. Aon Risk Services Co. Inc. (C.D. California 2012) a federal court in California refused to apply an Illinois choice of law provision in a non-compete agreement. The court held that the choice of law provision could not be enforced because it was too much in conflict with California’s interest in promoting mobility amongst workers and competition in the marketplace.

The Arkley case makes it very difficult to imagine a scenario where a choice of law provision in anon-compete could be enforced by California, unless like in Advanced Bionics v. Medtronic the underlying lawsuit was filed in a different jurisdiction prior to being filed in California. These cases demonstrate that racing to file first in a friendly jurisdiction will be the best choice in maximizing the ability to make the out of state non-compete effective; that is so long as there is a reasonable basis for using the law besides simply trying to get around California law. If a California court hears the case first it will be much more difficult to assert the choice of law provision that would apply.

Other Considerations in Choice of Law

Remember that many other states have strict requirements in regards to when non-competes can be enforced. For example, although Texas allows non-compete agreements if they do not impose a greater restraint than necessary to protect the business interests at stake; certain non-competes require buy-out provisions. In the case of LasikPlus of Texas, P.C. v. Mattioli, (Tex. Ct. App. Nov. 21, 2013) the court struck down an otherwise valid non-compete agreement because the contract did not include the option for a the physician to pay a reasonable fee to eliminate the non-compete agreement.

Prevent Business Disputes Before they Happen

The Law Offices of Tony T. Liu provides expert legal consulting and contract drafting services to assess and minimize the risks business disputes. To learn more contact the Law Offices of Tony T. Liu at (714) 415-2007.