Why You May Not Get Your Choice of Law in Your Non-Compete Agreement

When drafting non-compete agreements, companies typically add a choice of law provision, choosing the law of the state of their incorporation/formation or their principal place of business, usually whichever has the more business-friendly attitude to non-competes. Under conflict of laws rules, courts generally defer to a validly agreed-to choice of law provision, as long as the chosen state has some relationship to the agreement (e.g. a state of domicile of one of the parties, or the state where the agreement is executed or to be performed). However, even where conflict of laws provisions call for the application of one state’s law, the conflict rules also permit a court to decline to apply one state’s law where the court finds that application of the other state’s law would “offend” the public policy of the forum state. A New York appeals court recently applied this exception to a choice of law provision in a non-compete agreement. The case involved a non-compete between a Florida company and an employee that, in part, prohibited the employee from soliciting clients of the company’s New York offices, and included a choice of law provision selecting Florida law. When the employee left to work for a competitor in violation of the agreement, the employer sued in New York court. The appellate court ultimately upheld the rejection of the choice of Florida law on the basis that Florida law as it related to non-competes was “truly obnoxious” to New York public policy. New York non-compete law considers whether a non-compete is reasonable based on the hardship imposed on the employee; conversely, Florida law considers the legitimate business interests of the company and *cannot* consider the hardship to the employee. The lesson to take away is, when selecting a state for a choice of law provision in a non-compete (or any agreement, for that matter), whether the state where the agreement will be enforced will respect the choice of law or if the chosen law offends the public policy of the forum state. Ideally, a non-compete will be enforced in the same state as designated in the choice of law provision (typically, a choice of forum clause will accompany, and select the same state). However, if the non-compete is designed to protect a business interest in a different locale, then a comparison of the law must be made. If there is no significant conflict in the law, the court will generally not invalidate the choice of law based on public policy. But if there is a stark difference between the chosen law and the likely forum law, the agreement must be tailored to reflect that. Read more: http://www.forbes.com/sites/richardtuschman/2014/02/13/in-non-compete-agreements-a-truly-obnoxious-choice-of-law-provision-may-be-unenforceable/t

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