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Enforcement of International Restrictive Covenants: When Your Non-Compete or Non-Solicitation Agreement is Worldwide

NonCompete3

California is part of a global economy. As such, many California employers seek to limit their employees’ ability to work for competing firms throughout the country–and even around the world–after their employment ends. This is normally attempted through one or more types of restrictive covenants, including non-compete or non-solicitation clauses in an employment agreement.

But how enforceable are such restrictive covenants, particularly when they purport to apply on a global scale? The answer to this question is understandably complicated by the myriad of different laws imposed by individual countries and states. As a 2015 article published by the Society for Human Resource Management explained, “In about 3-4 percent of the world, including places such as Russia and India (as well as California),” restrictive covenants “may be illegal and void.”

In an effort to simplify matters, employers often tie an employment agreement with a restrictive covenant to the law of a particular state or country. But such “choice of law” provisions are not silver bullets. To the contrary, many jurisdictions, again including California, may decline to enforce a choice of law that conflicts with the home state’s public policy.

Section 925 and Choice of Law Provisions in Employment Contracts

Indeed, in 2016, the California legislature added Section 925 to the state’s Labor Code. For all employment contracts signed on or after January 1, 2017, Section 925 effectively eliminates the ability of employers to use choice of law provisions as a means of avoiding California jurisdiction over any dispute involving an employee “who primarily resides and works in California.” In other words, an employer cannot require a California-based employee to agree to any contract that forces them to adjudicate an employment-related dispute under the laws of another state or country.

This is particularly important when it comes to restrictive covenants, because as noted above, the Golden State is far less friendly towards broadly worded non-compete and non-solicitation agreements than many other places. However, it is important to note that Section 925 only applies to employment contracts that are required “as a condition of employment.” It is therefore possible the law might not apply to purely opt-in contracts tied to certain benefits, such as a stock option plan or severance agreement.

The Definition of “Fundamental” Public Policy in California

A recent decision from the California Supreme Court, Pitzer College v. Indian Harbor Insurance Co., provides some additional guidance on how the courts in this state may treat choice of law provisions that potentially conflict with public policy. This particular case involved an insurance policy rather than an employment contract. In determining whether a public policy is considered “fundamental,” and thus overrides a choice of law provision, the Supreme Court said three tests must be met:

  1. the rule in question “cannot be waived”;
  2. the rule “protects against otherwise inequitable results”; and
  3. the rule “promotes the public interest.”

It remains to be seen how this decision might apply to a choice of law provision in an employment agreement with an international restrictive covenant. If you have any questions or concerns about the legality of your own non-compete or non-solicitation agreement, you should speak with a qualified California employment law attorney right away.

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