Blog Post

In Non-Compete Agreements, a ‘Truly Obnoxious’ Choice-of-Law Provision May Be Unenforceable

I wrote recently about the importance of inserting choice-of-law provisions in non-compete agreements. But as a recent decision by a New York appellate court makes clear, a court may refuse to apply a choice-of-law provision if it finds that the chosen law offends the public policy of the state in which the court sits.

In Brown & Brown, Inc. v. Johnson and Lawley Benefits Group, LLC, 2014 WL 486750 (N.Y.A.D. 4 Dept., February 7, 2014), a New York appellate court ruled that Florida’s law on non-compete agreements is “truly obnoxious” to New York public policy and cannot be applied against a New York employee of a Florida-based company.

Brown & Brown (“B&B”) is an insurance intermediary with headquarters in Florida. B&B hired defendant Theresa Johnson in 2006 to provide actuarial analysis. Johnson signed an employment agreement that contained three restrictive covenants, including a non-solicitation clause that prohibited Johnson from soliciting or servicing any client of B&B’s New York offices for two years after the termination of her employment. The agreement contained a Florida choice-of-law provision. B&B terminated Johnson in February 2011, and Johnson was hired by Lawley Benefits Group, LLC. B&B sued to enforce the restrictive covenants.

The trial court ruled that the choice-of-law provision was unenforceable because Florida bore no reasonable relationship to the parties or the dispute. The appellate court disagreed but held that the choice-of-law provision was unenforceable for a different reason – because it is “truly obnoxious’ to New York public policy. The court noted that under New York law, one of the factors for determining whether a restrictive covenant is reasonable is whether it imposes an undue hardship on the employee. In contrast, under Florida law, courts are required to construe restrictive covenants in favor of the party seeking to protect its legitimate business interests, and in evaluating the reasonableness of the covenant the court cannot consider hardship to the employee. Applying New York law, the court held that the non-solicitation covenant could not be enforced.

The Brown & Brown case is not an anomaly. The opinion notes that courts in Alabama, Georgia and Illinois have also concluded that Florida law conflicts with the public policy of their respective states. On the other hand, many courts in other states will enforce choice-of-law provisions, particularly if there is not a stark difference between the chosen law and the law of the forum state.

So what should an employer do to maximize the chances that its non-compete agreements with out-of-state employees will be enforced? First, decide which state’s non-compete law is best suited for your business and whether that state’s law bears a reasonable relationship to your business. The state in which the company is incorporated or has its headquarters, or where the employee works, is usually suitable for a choice-of-law provision. Next, consider whether courts in the states in which your employees work are likely to enforce the choice-of-law provision. If the answer is yes, inserting the choice-of-law provision in employees’ non-compete agreements may be your best best. If the answer is no, consider foregoing a choice-of-law provision and, instead, revise the non-compete agreement so that it will pass muster under the laws of the states in which the employees work. In some cases that may not be feasible because the other state’s laws frown upon non-compete agreements. In that event, consider inserting the choice-of-law provision anyway, knowing that you will have a fight on your hands when it comes time to enforce the agreement.

And consult with legal counsel every step of the way. Choice of law is a tricky issue, and other issues such as venue and personal jurisdiction make the enforcement of non-compete agreements even more complicated.