In Non-Compete Litigation, Choice of Law Provisions Matter — A Lot
A recent decision by a Pennsylvania appellate court illustrates the importance of choice of law provisions for companies that want to enforce their non-compete agreements on a nationwide basis.
A choice of law provision is a contractual term in which the parties specify that any dispute arising under the contract will be determined in accordance with the law of a particular jurisdiction.
The issue in Synthes USA Sales, LLC v. Peter Harrison and Globus Medical, Inc. was whether Pennsylvania or California law applied to a non-compete agreement. Although the defendant/former employee resided and worked in California, his non-compete agreement had a choice of law provision which stated: “This agreement will be governed by Pennsylvania law applicable to contracts entered into and performed in Pennsylvania.”
This choice of law provision seems pretty clear — the contract was to be governed by Pennsylvania law. But apparently the qualifying language “applicable to contracts entered into and performed in Pennsylvania” confused the trial court, which concluded that the choice of law provision applied only to contracts actually performed in Pennsylvania. Applying California law, the trial court denied the plaintiff’s motion for a preliminary injunction. Under California law, post-employment non-compete agreements generally are unenforceable except in the context of the sale of a business or to prevent the former employee from disclosing trade secrets.
The appellate court reversed the trial court’s ruling that California law applied and remanded the case to the trial court to determine whether an injunction was warranted under Pennsylvania law. Under Pennsylvania law, non-compete agreements can be enforceable if the restrictions are reasonably necessary for the protection of the employer and are reasonably limited in duration and geographic area.
The plaintiff now has a fighting chance to enjoin the former employee. Under California law its case was dead.
Non-lawyers may view the differences among states’ laws on non-compete agreements as arcane and confusing, and indeed they are. But these differences are real, and a choice of law provision, properly drafted by counsel after considering the laws of competing jurisdictions, gives an employer a chance to enforce its non-compete agreements on a nationwide basis.