Recent Developments Regarding Noncompete Agreements
There is no question that noncompete agreements in California employment contracts are generally unenforceable. Many other states, however, may enforce such agreements if they are “reasonable” in duration and geographic scope. So, what is a California employer to do if a prospective employee signed a noncompete agreement with a forum selection and choice of law provision for a state which favors noncompete agreements? Recent developments reinforce that the answer depends on various factors, including the residence of the employee at the time the agreement was signed.
Labor Code Section 925
If the employee signed the agreement after January 1, 2017 and while a resident of California, the answer is clear. Under Labor Code section 925, the employee will not be required to adjudicate, either in court or arbitration, any claim outside of California or under any law that would deny the employee the protections provided by California law. In fact, any such offending provisions may be rendered void by the employee. If rendered void, the matter will be adjudicated in California and California law will govern the dispute.
Two Recent U.S. District Court Decisions – Freeman and Badger
If the employee was a resident of another state at the time he or she signed the agreement, the answer is less clear, as two California District Court decisions applying California law recently came to two very different conclusions.
In Freeman Expositions, Inc. v. Global Experience Specialists, Inc., No. SACV 17-00364, 2017 WL 1488269 (C.D. Cal. Apr. 24, 2017), Landon Shores, then a Nevada resident, was hired by Global Experience Specialists (“GES”). In connection with his hire, Shores signed a noncompete agreement with GES. The agreement prevented Shores from competing with GES for twelve months following his separation from the company. The agreement also contained a forum selection clause, specifying that Nevada courts had exclusive jurisdiction over any dispute arising out of the agreement, as well as a choice of law provision in favor of Nevada law. In early 2017, Shores resigned from GES, moved to California, and began working for a competitor, Freeman Enterprises, Inc. (“Freeman”), in California. GES promptly filed a complaint in Nevada state court, seeking to enjoin Shores from: (1) soliciting or doing business with any clients of GES, and (2) performing any work which would be in competition with GES. Freeman then filed a case against GES in a California state court seeking, among other things, declaratory judgment that the choice of forum and law provisions in the agreement between GES and Shores were not enforceable. After the case was successfully removed, Freeman moved for summary judgment on this cause of action.
In granting Freeman’s motion for summary judgment, the court noted that “[e]nforcing the forum selection clause would contravene California’s strong public policy against noncompete agreements” because “[e]nforcement of the forum selection clause w[ould] result in enforcement of the noncompete clause.” The court then ruled that the forum selection clause would not be enforced because “California has a materially greater interest than Nevada in resolving the issue presented in the case.” Specifically, California had an interest in Freeman’s ability to hire a California resident to work in California.”
Just a few weeks later, the Eastern District decided Scales v. Badger Daylighting Corp., No. 1:17-CV-00222, 2017 WL 2379933 (E.D. Cal. Jun. 1, 2017) and went a different way on the enforcement of the forum selection clause. In Badger, Badger Daylighting Corporation (“Badger”), a Nevada corporation with its principal place of business in Indiana, hired Daniel Scales, a California resident, to work out of its Taft, California office. As part of his employment with Badger, Scales signed a noncompete agreement providing that, for a period of two years following his separation from Badger, he would not, “within the geographical area of the State(s) of California, Oregon, and Washington, compete in any manner with [Badger].” The agreement further provided that it would be “governed by and construed in accordance with the laws of the State of Indiana and any disputes arising hereunder shall be brought and heard in the state or federal courts sitting in Marion County, Indiana.” Two years later, Scales resigned from Badger and accepted a position with a competitor. Badger filed suit against Scales in an Indiana state court, alleging that Scales had breached the parties’ noncompete agreement. Scales, along with some other former Badger employees, then filed suit in California, seeking a determination that the noncompete agreement was unenforceable. After the case was removed to federal court, Badger filed a motion to dismiss for forum non conveniens.
In deciding Badger’s motion, Scales argued (much like Shores in Freeman) that enforcement of the forum selection clause would violate California’s public policy against noncompete clauses, as the court in Indiana would enforce the noncompete. Unlike Freeman, the court in Badger declined the invitation to focus on the potential effect of enforcing the forum selection clause. It reasoned that “[f]ocusing on the effect, rather than the reasonableness, of a forum selection clause would require the court to make a determination of the potential outcome of the litigation on the merits in the transferee forum and to consider whether that outcome would conflict with a strong public policy of the transferor forum.” The court then noted that “attempting to determine what law an Indiana court would apply would be entirely speculative and irrelevant to a determination of whether the forum selection clause of the parties’ Agreement is enforceable.” Ultimately, the court granted Badger’s motion to dismiss the case, holding that the forum selection clause in the parties’ agreement was valid and that the case should proceed in Indiana.
With Freeman and Badger coming to two different results, the question remains – what are California employers looking to hire out of state employees subject to noncompete agreements to do? Because the analysis will turn on the specific facts and circumstances of the agreement at issue, employers should consider having counsel review the prospective employee’s noncompete agreement and underlying facts to determine if the agreement is enforceable and under what law.
 Freeman is currently on appeal before the Ninth Circuit.
Jared De Jong Discusses Cyber Liability Insurance for Tech Insurance Blog
Attorney Jared De Jong discussed cyber liability insurance for a Tech Insurance blog titled "3 Ways Cyber Liability Insurance Can Protect IT Consultants from Phishing Lawsuits." Read the full article here >>
California’s Second District Court of Appeal Reaffirms the State’s Long-Standing Public Policy to Allow Robust Discovery When Seeking Assets Which Might Be Used to Satisfy a Judgment
What is the scope of discovery that a judgment creditor can obtain from a third party in a judgment debtor examination? Extensive, according to the court in Yolanda’s, Inc. v. Kahl & Goveia Commercial Real Estate, 11 Cal. App. 5th 509 (2017), a recent decision by the Second District Court of Appeal concerning post-judgment discovery efforts which reaffirms the State of California’s long-standing public policy to “leave no stone unturned in the search for assets which might be used to satisfy the judgment.”
Yolanda’s involves a dispute between a restaurant tenant in a shopping center and its landlord concerning a gym tenant’s monopolization of parking spaces in a common area lot. The restaurant tenant brought an action against the landlords of the shopping center for breach of a commercial lease and related claims. Also named in the lawsuit was the landlord’s associated shopping center management company who shared at least one principal member. Following trial, the trial court awarded approximately $1.9 million in damages to the tenant and against all of the defendants. On appeal, the judgment against the landlord defendants was affirmed, but the judgment against the management company was reversed since it was not a party to the lease agreement. Gietzen v. Goveia, No. 2D CIVIL B255925, 2016 WL 1254386 (Cal. Ct. App. Mar. 30, 2016).
After the case was remanded to the trial court, the tenant, as the judgment creditor, obtained an order which required the person most knowledgeable for the former defendant management company to appear as a third party witness at a debtor examination and issued a subpoena for the company to produce documents concerning the judgment debtor’s assets. In response to the subpoena, the management company produced a document showing a transfer of a vehicle to one of its principals and his wife for the forgiveness of an alleged debt. The management company also produced two bills of sale transferring four vehicles and other items including three leases and all goods, furniture, and equipment from the management company to the other principal of the company (the same individual who also served as the principal of the judgment debtor). But while the management company produced responsive documents, it refused to answer the tenant’s questions about the location of the assets because the examination was “beyond the scope of a third party judgment debtor’s examination.”
The trial court overruled the management company’s objection, and ordered it to respond to the tenant’s questions concerning: (1) the ultimate disposition of assets transferred by the management company to its principals; (2) the interrelationship between the management company and the judgment debtors and related parties for purposes of establishing possible alter ego liability; and (3) any other questions that may assist the tenant in determining the judgment debtor’s true financial condition and the nature and location of the judgment debtor’s assets and sources of income. The management company appealed.
The Court of Appeal’s Decision
The Court of Appeal rejected the management company’s arguments and reliance on the limited scope of Code of Civil Procedure section 708.120. While, under section 708.120, a third party may be ordered to appear for examination upon the judgment creditor’s application showing to the court’s satisfaction that the third party is in possession or control of property in which the judgment debtor has an interest or is indebted to the debtor, the court specifically noted that section 708.120 is not the only procedure available for examining a third party. While the purpose of section 708.120 is to provide a tool that allows a judgment creditor to find property or money that is owed to the judgment debtor, Code of Civil Procedure section 708.130 (a much broader statute) permits the examination of any person with information which may lead to the enforcement of a judgment in the same manner as if the third party was a trial witness. This would not limit the examination to questions concerning assets that are in the third party’s possession or questions determining whether the third party is indebted to the judgment debtor.
Broader Impact and Practical Implications of Yolanda’s Decision
The broader impact of the court’s decision may be in its upholding of the trial court’s inherent power under Code of Civil Procedure section 187 to adopt any suitable method of practice if the procedure is not specified by statute or the Rules of Court. Accordingly, since nothing in section 708.120 states that it is the only procedure available for examining a third party, the Court of Appeal found that the trial court had inherent power under section 187 to fashion an appropriate procedure for the tenant to examine the third party management company.
The immediate effect of Yolanda’sdecision will be on prevailing plaintiffs who are faced with enforcing judgments against corporate defendants who create complex business structures and agency relationships in order to shelter their assets. In such cases, the door may be open for the examination of each of the judgment debtor’s affiliates and agents to determine if there was any attempt to conceal assets from the judgment creditor. In practice, the information the judgment creditor in Yolanda’s obtained concerning the transfer of assets from the management company to the judgment debtor’s principal once again shows the vital importance of leaving no stone unturned in the search for assets which might be used to satisfy a judgment.