California Labor Code section 925 remains a potent weapon for departing employees who live and work in California who wish to avoid covenants not to compete. Often, employers will place choice of law provisions in their employment agreements and hope to enforce them in other states where such covenants are more likely to be enforced.
That practice became more difficult with the passage of Labor Code 925. Now, a federal court sitting in Minnesota has granted several defendants summary judgment on the basis that such covenants are not enforceable as a matter of law.
A. Labor Code 925
California Labor Code section 925 went into effect on January 1, 2017 and provides that employers cannot force an employee who resides and works primarily in California to agree, as a condition of employment, to: (1) litigate a claim arising in California in a forum outside of California; and (2) waive the employee’s right to the substantive protection of California law with respect to a controversy arising in California. Such contractual provisions are voidable by the employee and must be adjudicated in California under California law. Further, section 925 applies not only to agreements entered into on or after January 1, 2017, but also those agreements modified or extended on or after that date.
B. The facts in CHR
In C.H. Robinson Worldwide, Inc. v. Traffic Tech, Inc. (D. Minn. Sep. 22, 2021), plaintiff CHR entered into business agreements with the defendant employees, as a condition of their employment, that contained customer non-solicitation and business interfering clauses, and provided that the agreements would be governed by Minnesota law. The employees left CHR to begin work with a competitor. CHR filed suit in Minnesota state court against the employees, each of whom lived and worked in California, for breach of contract and tortious interference. The defendants removed the case to federal court and moved for summary judgment.
CHR argued that the individual defendants breached their business agreements by soliciting CHR employees to join their new company. The individual defendants argued that, despite these provisions, California law governed because they were California residents, work primarily in California, and because California prohibits restrictive covenants in employment agreements.
C. The outcome
The Court sitting in diversity applied Minnesota choice of law rules, which generally honor contractual choice of law provisions. Here, however, the Court noted that the operation of the state law chosen by the parties, Minnesota, would be contrary to the fundamental policy of California, which has a materially greater interest than Minnesota in determination of the particular issues raised by the parties.
In determining that, the Court turned to the Sixth Circuit’s four factor test, a test that considers among other things the extent to which the contacts are divided between the two states, the parties’ relative levels of bargaining power, and whether application of the law is repugnant to the public policy of the state that has enacted the anti-waiver statute.
Reviewing the facts, the Court found that division of contacts (e.g., where the parties were based, where and under what circumstances the agreements were signed, and where the parties performed their obligations under the agreement) favored California. It also found evidence of unequal bargaining power. Finally, the Court determined that California law evinced a public policy against restrictive covenants in employment agreements.
Having found that California law applied, the Court concluded labor Code 925 applied, and that the choice of law provisions were void.
Employers must recognize that a non-California choice-of-law provision will -generally not be enforced against an employee that resides and works primarily in California. Employers also should also be careful in amending employment agreements, as Labor Code 925 has a provision that drags in agreements prior to the date of enactment, if the agreements have been amended, as they were in this case.