Cal-Peculiarities: How California Employment Law is Different 2022 Edition

330 | 2022 Cal-Peculiarities ©2022 Seyfarth Shaw LLP  www.seyfarth.com California’s broad ban on covenants restraining trade can apply even if the parties entered into the covenant in a state where such covenants are lawful . 11 T his peculiar hostility to noncompete covenants has encouraged a “race to the courthouse” to get a dispute heard in the state most congenial to a party’s litigation interest . 12 S o California became a favored forum for parties seeking judicial declarations that covenants not to compete are invalid . 13 12.1.4 The limited effectiveness of forum-selection provisions Some employers have sought to avoid California determinations of their employment agreements by convincing federal courts to enforce forum-selection clauses that call for litigation to occur exclusively in some other designated stat e. 14 But a forum-selection clause addresses only the site of the adjudication, not the choice of which state’s law to apply, so an out-of-state court could still apply California law . 15 In 2013, the U.S. Supreme Court addressed the enforceability of forum-selection clause s. 16 T his decision, although not involving an employment dispute, suggested that (1) forum-selection clauses calling for litigation to occur exclusively in a state other than California are valid, and (2) such clauses can require that, upon transfer of a California-based action to a non-California jurisdiction, the law of that jurisdiction should apply . 17 In 2016, however, the California Legislature further hindered an employer’s ability to leverage forum-selection clauses. Labor Code section 925 dramatically reduces the reach of forum-selection clauses. The law forbids employers to require an employee “who primarily resides and works in California” to agree to a contractual provision that would either “[r]equire the employee to adjudicate outside of California a claim arising in California,” or “[d]eprive the employee of the substantive protection of California law with respect to a controversy arising in California.” (See § 5.3.) The principal loophole is for contracts where the employee is represented by legal counsel in negotiating the contract. Section 925, obviously, greatly curtails an employer’s ability to use non- California courts to enforce noncompete covenants. 12.1.5 The ban on noncompete covenants as applied to buy-sell contracts Section 16600’s ban on noncompete covenants is subject to a statutory exception applying upon the sale of all or substantially all of a business, including its goodwil l. 18 But the Court of Appeal has held that when the sale involves two separate agreements—a stock purchase agreement and an employment agreement—the agreements must be read together. The Court of Appeal concluded that the employment agreement’s covenant not to compete or solicit, which was not designed to protect the acquired company’s goodwill, failed to qualify under the “sale of business” exception . 19 12.1.6 The ban as applied to settlement agreements Settlement agreements, like contracts generally, are enforceable, notwithstanding California’s ban on noncompete covenants, to the extent that the settlement agreement protects trade secrets. In a settlement of a trade secret lawsuit, the parties agreed to a stipulated injunction by which defendants would refrain from contacting customers on plaintiff’s customer list (allegedly including trade secrets). When a dispute arose about compliance with this stipulated injunction, the plaintiff successfully moved for an order of contempt. The Court of Appeal held that the stipulated injunction was facially valid, as it existed to protect trade secrets . 20 12.1.7 The ban as applied to third-party contracts The California ban on noncompete covenants can extend even to contracts to which an employee is not a party, such as “no hire” contracts between two businesses. At issue in one case was a provision in a contract between a consulting firm and its customer that the customer would not hire the consulting firm’s employees for 12 months following the contract’s termination. This provision aimed to protect the consulting firm’s key asset—the expertise of its consultants—by discouraging the firm’s customers from hiring away the firm’s consultants. When the customer breached this provision, the consulting firm successfully sued its customer to recover damages. But the