Court Rejects Delaware Choice of Law Provision in Refusing to Enforce Customer Non-Solicitation Covenant Against California Employee
On August 26, 2019, the Delaware Chancery Court invalidated a California employee’s customer and employee non-solicitation covenant on the grounds that it violated California law. In doing so, the Court rejected the plaintiff company’s attempt to override California law by including a Delaware choice of law provision in the underlying agreement.
We initially reported on the case of NuVasive v. Miles, Case No. 2017-0720-SG, on December 10, 2018, after the Chancery Court denied the defendant employee’s original motion for partial summary judgment. NuVasive, a Delaware corporation with headquarters in California, hired Miles as an executive-level employee in California. Upon his hiring, Miles entered into an employment agreement with Nuvasive containing a non-competition covenant as well as both customer and employee non-solicitation covenants. The agreement also included Delaware choice of law and choice of forum provisions.
When Miles resigned and joined a competitor, NuVasive sued in Delaware to enforce the non-competition and non-solicitation covenants. In response, Miles alleged that the restrictive covenants, as well as the choice of law and choice of forum provisions, were unenforceable under California law.
Court Initially Upholds Delaware Choice of Law Provision
In its order dated September 28, 2018, covered in our original article, the Chancery Court examined the validity of the agreement’s Delaware choice of law provision, asking:
- Would another state’s laws apply in the absence of a choice of law provision?
- If so, would enforcing the non-compete covenant violate a fundamental public policy of that other state?
- If so, are the other state’s applicable public policy interests materially greater than the applicable public policy interests of Delaware?
Because Miles resided, worked, and sought to compete in California, the Chancery Court determined that the restrictive covenants would normally be subject to California law in the absence of a choice of law provision. The court further held that enforcement of the non-compete covenant under Delaware law would violate California’s fundamental public policy interests in light of: (1) Section 16600 of the California Business and Professional Code, which strictly prohibits all restraints on competition in the employment context; and (2) Section 925 of the California Labor Code, which prohibits choice of law or choice of forum provisions that circumvent California’s statutory protections or restrict access to a California judicial forum. The court declined at the time to render a judgment about the customer and employee non-solicitation covenant, due to the lack of clarity about whether such covenants also were prohibited under Cal. Bus. & Prof’l Code Section 16600.
As for the third question, the Chancery Court held in the initial order that California’s public policy interests against the enforcement of non-compete covenants did not outweigh Delaware’s own public policy interests favoring freedom of contract. The court based its conclusion on the assumption that Miles negotiated the employment with the assistance of counsel. Although California Labor Code Section 925 generally prohibits parties from contracting around California substantive laws and California judicial forums, it carves out an exception with respect to employees who are represented by their own legal counsel during the contract negotiations. By that carve-out, the court reasoned, the California Legislature recognized “that in the limited subset of cases where the inequality of bargaining strength of the parties to an employment contract is buffered by the employee being represented by independent counsel, and where counsel participated in negotiation of the terms of a choice of law provision, California’s interest in freedom of contract outweighs interest in freedom of employment.”
Court Reverses Course and Rejects Restrictive Covenants under California Law
Notwithstanding the court’s September 28, 2018 order, Miles subsequently submitted sufficient evidence to persuade the court that he had not, in fact, been represented by counsel during the negotiation of the employment agreement. With these facts, on June 7, 2019, the court reversed its earlier decision and held that the non-compete covenant was subject to and invalid under California law.
Although the court invalidated only the non-compete covenant in its June 7, 2019 order, it requested further briefing from the parties as to whether the non-solicitation covenant also was contrary to California public policy. In the August 26, 2019 order, the court answered that question in the affirmative.
In reaching this conclusion, the Chancery Court noted that California courts have classified customer and employee non-solicitation covenants as “restraints” on competition, even if they fall short of prohibiting competition entirely. The Chancery Court pointed to the California Supreme Court decision in Edwards v. Arthur Anderson LLP, 189 P.3d 285, 292 (Cal. 2008), which held that a restriction on one’s ability to perform work for certain clients constitutes an invalid restraint on competition under Cal. Bus. & Prof’l Code Section 16600. More recent decisions have applied similar reasoning to invalidate employee non-solicitation covenants, although the case law regarding employee restrictions is less settled.
The Chancery Court’s decision hinged on its refusal to honor the parties’ contractual choice of law, based on California Labor Code §925. Oddly, however, Miles signed his employment agreement containing the Delaware choice of law and forum provisions in 2016, before the effective date of California Labor Code §925. It is unclear whether such an argument might have impacted the Chancery Court’s decision.
In summary, the Chancery Court held that Miles’ non-compete and non-solicitation covenant were both void under California law, and, therefore, enforcement of the covenants would be contrary to California public policy. Moreover, NuVasive could not invoke the employment agreement’s Delaware choice of law and choice of forum provisions to circumvent California’s ban on such covenants because Miles had not retained an attorney to assist in the negotiation of the agreement. As such, the court dismissed NuVasive’s breach of contract claims.
As this case highlights, employers should be careful when attempting to enter into restrictive covenant agreements with California employees, and should always do so with the assistance of an experienced non-compete attorney. This case also shows that it can be to the employer’s interest to ensure that the other party has legal representation, in certain circumstances.