As technology continues to advance protection of an employers' trade secrets and good will has become increasingly more important. An ever-increasing number of employers now use written noncompetition agreements to protect their legitimate interests in their intellectual property, their trade secrets and their goodwill. While noncompetition agreements are disfavored in law because they constitute restraints of trade, they can be enforced with relative ease in the majority of states if certain fundamental requirements, which differ only slightly from state-to-state, are satisfied.
California and Texas are Exceptions
Two noteworthy exceptions to the willingness of states to enforce properly drafted noncompete agreements are two states with high concentrations of high technology businesses: California and Texas. Section 16600 of the California Business and Professions Code provides that "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."
As a practical matter this means that in all but a very few and unusual types of situations, noncompete agreements are not enforceable in California. Section 15.50 of the Texas Business and Commerce Code permits the enforcement of noncompete agreements but only if they are "ancillary to or part of an otherwise enforceable agreement at the time the agreement is made." The Texas Supreme Court interpreted this statutory provision in Light v Centel Cellular, 883 S.W. 2d 642 (Tex. 1994) in a way that makes it extremely difficult to enforce noncompete agreements in Texas.
While California and Texas have the right to place restrictions on the enforceability of noncompetes, their doing so creates problems for employers outside those states because the courts in both California and Texas have refused, as a matter of public policy, to give effect to choice of law provisions that choose the laws of states other than their own.
Thus, if a Minnesota employer operating nationally has a provision in its noncompete agreements which states that Minnesota law governs the agreement, the Courts of California and Texas have refused to honor that choice-of-law provision and applies the laws of their own states instead.
Enforcing Non-Compete Agreements in California
Further, in recent years courts in both California and Texas have entered injunctions prohibiting the former employers from commencing litigation in the state where the contract was made, depriving the former employers of the benefits of the choice of law provisions in their noncompete agreements.
Two recent cases involving efforts by Medtronic, Inc. to enforce noncompete agreements against former employees illustrate this phenomenon and also, hopefully, portend an end to this pernicious practice, at least in California.
The first case is Advanced Bionics, Inc. v. Medtronic, Inc., 29 Cal. 4th 697 (Cal. 2002). In this case: Mark Stultz worked for Medtronic, a Minnesota-based company, in Minnesota, where he resided. He signed a noncompete agreement with Medtronic which by its terms was governed by Minnesota law. He accepted a competitive position with Advanced Bionics, a California-based company.
On the day Stultz resigned from Medtronic, he and Advanced Bionics started a lawsuit in California to have his noncompete agreement declared void; they also moved, without notice to Medtronic, for a temporary restraining order to prevent Medtronic from attempting to enforce the noncompete agreement in any other court.
Minnesota Court Granted Temporary Restraining Order
The California court requested that Medtronic be given notice of a temporary restraining order motion. Before the California hearing, Medtronic commenced an action in Minnesota and obtained a temporary restraining order preventing Stultz from violating his noncompete and enjoining Stultz and Advanced Bionics from taking any action in any other court that would prevent the Minnesota court from deciding the case before it; unlike the request made in California by Stultz and Advanced Bionics, however, Medtronic did not ask for, and the Minnesota court did not grant, any relief which would otherwise prohibit the case in California from moving forward.
Later, the Minnesota court granted Medtronic a temporary injunction, valid for the entire two year term of the noncompete, preventing Stultz from violating his noncompete in the course of his Advanced Bionics employment. The Court did not, however, restrain Stultz and Advanced Bionics from asking the California court to enjoin Medtronic from proceeding in Minnesota. Without giving notice to Medtronic, Stultz and Advanced Bionics obtained just such an injunction from the California court.
When the Minnesota judge realized what had happened, he amended his order on his own motion to reinstate the prohibition on interference with his jurisdiction and directed Stultz and Advanced Bionics to ask the California court to vacate its temporary restraining order. The California court refused to do so. Thus, Stultz was enjoined from violating his noncompete by a Minnesota court, but no further action could be taken in Minnesota.
Appeals followed in both states. The Minnesota Court of Appeals upheld both the temporary restraining order enjoining Stultz from violating his noncompete and the judge's amendment to that order preventing interference with his jurisdiction, ruling that comity did not require the Minnesota courts to defer to the California courts. Medtronic, Inc. v. Advanced Bionics Corporation, 630 N.W. 2d 438 (Minn.Ct.App.2001). The California Court of Appeals upheld the anti-suit injunction which prohibited the Minnesota case from progressing to trial. The California Supreme Court then reversed the California Court of Appeal's decision.
California Supreme Court Refused to Interfere With Minnesota Rulin
Ultimately, in a case of first impression, the California Supreme Court ruled in December 2002 that the courts of California could not continue their practice of enjoining courts in other states from hearing cases to enforce noncompetes governed by the laws of those states.
While the California Supreme Court agreed with the premise that California has a strong interest in protecting its employees from enforcement of noncompetition agreements, the Court said that this public policy interest was not strong enough to permit issuance of injunctive relief to cut off court actions in other states. The Court based its decision on principles of both judicial restraint and comity. A petition for rehearing in Advanced Bionics was denied by the California Supreme Court on March 7, 2003.
Federal Court Followed California Lead
The second case of note is Bennett v Medtronic, 285 F 3d 801 (9th Cir. 2002). That case involved a fact pattern similar to those in Advanced Bionics, except that the employees in question were residents of Tennessee who worked for Medtronic in Tennessee and whose noncompete agreements were governed by Tennessee law.
As in Advanced Bionics, the former employees and their new employer obtained a temporary injunction-this one from the federal district court in San Diego-prohibiting Medtronic from continuing to prosecute its action to enforce the noncompetes in Tennessee; that injunction was entered before the Tennessee court was able to hold a hearing on Medtronic's request for injunctive relief. Medtronic appealed the temporary injunction to the Ninth Circuit, which reversed the district court's decision and vacated the temporary injunction.
The Ninth Circuit held that the district court's order violated the federal Anti-Injunction Act, 28 U.S.C. §2283, which prohibits federal courts from enjoining state court proceedings except in extraordinary circumstances which were not present in this case.
The decisions in Advanced Bionics and Bennett may effectively stop California employers from racing to California courts to prevent out-of-state employers from going to court outside of California to enforce noncompetes not governed by California law. That does not necessarily mean that employers outside of California will have a clear field in which to enforce their noncompetes.
Parallel proceedings may go forward in California and another state, with the state first reaching final judgment most probably having the final say. It appears, however, that California courts will no longer attempt to keep out-of-state interim relief: which is often all that really matters.
Bottom Line: No Such Move in Texas Yet
As yet there has been no authoritative Texas decision similar to the California decision in Advanced Bionics that would prevent Texas state courts from enjoining actions in other states. The principles of judicial restraint and comity underlying the California Supreme Court's decision should, but won't necessarily be, persuasive in Texas.
Corporate counsel attempting to avoid this problem may be well advised to include not only a choice-of-law provision in their noncompete agreements, but exclusive jurisdiction and venue provisions as well. Those provisions should provide that any disputes will only be litigated in the state whose laws govern interpretation of the agreement.
There are cases in both California and Texas which suggest that the rules regarding enforcement of forum selection clauses are different than the rules regarding choice of law in the noncompete context, and that courts in both states may yield jurisdiction to the court selected in the agreement.