NONCOMPETE CHOICE OF LAW DISPUTES

This note attempts to make sense of the several Massachusetts cases in which a Massachusetts-based company sought to enforce a noncompetition agreement containing a Massachusetts choice of law provision against a former employee who worked outside of Massachusetts. Because Massachusetts is considerably more pro-enforcement than many states, the former employee in each of these cases asked the court to apply the law of the state where the employee resided, rather than Massachusetts law. Only a few of the employees succeeded. Why did they succeed and the others fail?

In most of these cases, the court applied the choice of law principles set forth in the Restatement (Second) of Conflict of Laws, § 187. Under this approach, courts will apply the law of the state specified in the choice of law provision, except where “‘application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state’ and is the State whose law would apply under § 188 of the Restatement ‘in the absence of an effective choice of law by the parties.’” Hodas v. Morin, 442 Mass. 544, 550 (2004), quoting Restatement (Second) of Conflict of Laws,§ 187(2). Thus, in order to avoid the Massachusetts choice of law provision in his or her noncompete, the former employee had to demonstrate (1) a state other than Massachusetts had a “materially greater interest” in the matter, (2) application of Massachusetts noncompete law would be contrary to the fundamental policy of that state and (3) Massachusetts would apply that state’s law if the noncompete did not contain a choice of law provision.

Cases in Which the Employee Prevailed

A similar fact pattern was present in each of the three cases in which the employee succeeded in persuading the court to disregard the Massachusetts choice of law provision and apply another state’s law to the employee’s noncompetition agreement. Specifically, in each case, the employee worked for the employer in California and remained in California after his employment terminated.

In Roll Systems, Inc. v. Shupe, No. CIV A. 97-12689, 1998 WL 1785455 (D.Mass. Jan. 22, 1998), the employee worked for the employer in California, and after his employment terminated, he continued to work and reside in California. The employer sued in Massachusetts and filed a motion for a preliminary injunction seeking enforcement of the noncompete. The court recognized that “likelihood of success on the merits depends to a large degree on whether the law of Massachusetts or of California will be applied.” Id. at *2. The court first held that “California does have a fundamental policy against the enforcement of restrictive covenants as broad as the one [employee] signed.” Id. at *2. The court specifically referenced comment g to the Restatement (Second) Conflict of Laws § 187, which provides that “a statute which makes one or more kinds of contracts illegal or which is designed to protect a person against the oppressive use of superior bargaining power” may embody a “fundamental policy.” Id. The court did not explicitly state that application of Massachusetts law would be contrary to California’s fundamental policy, but that certainly is what the court held. Secondly, the court held that California had a materially greater interest in the dispute than Massachusetts because the employee was a California resident working out of California both during and after his employment with the plaintiff. “California has a strong interest in enforcing its fundamental policy regulating attempted limits on the ability of its citizens to change employment without restriction.” Id. at *3. The court recognized that “Massachusetts also has a general interest in protecting the legitimate interests of its businesses,” but stated that “the fact that [employee’s] contract was not performed in Massachusetts substantially decreases the Commonwealth’s interest in having its laws govern this dispute.” Id. at *3, n. 2. Finally, the court held that Massachusetts law would apply if the noncompete had no choice of law provision. The court noted that, under Massachusetts law, where the parties did not include a choice of law provision in their contract, courts should apply “the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties.” Id. at *3, quoting Bushkin Assocs., Inc. v. Raytheon Co., 473 N.E.2d 662, 669 (Mass. 1985). Stating that “[t]he considerations discussed as to why California has a materially greater interest in application of its laws to this issue are the same as those to be applied in the present inquiry,” the court concluded, “California has the more significant relationship to [employee’s] activities in his present employment and California law would apply absent a choice-of-law provision.” Id. The court denied the employer’s motion for preliminary injunction insofar as it sought to enforce noncompetition and nonsolicitation covenants, but granted the motion as it related to disclosure of confidential information.

In Aware, Inc. v. Ramirez-Mireles, 13 Mass.L.Rptr. 257, 2001 WL 755822 (Mass.Super.Ct. Apr. 4, 2001), the employee lived in California and worked out of the employer’s office there during the entire time of his employment, though he communicated regularly with the employer’s employees in Massachusetts and spent two or three days in the Commonwealth for training and executing employment related papers. Id. at *1. The employer sued the employee for breach of his noncompete when he accepted a job with the employer’s competitor in California. The employee moved to dismiss on forum non conveniens grounds. The court concluded that the “private factors” typically considered in a forum non conveniens analysis slightly favored a California forum. But the court made it clear that choice of law issues significantly impacted its analysis. “Applying Massachusetts choice-of-law rules, it seems clear that California law should be applied.” Id. at *2, citing Roll Systems, Inc. v. Shupe, supra. The court did not reference the Restatement test, but instead emphasized that, in ”sharp contrast” with Massachusetts common law, California law “reflects a strong public policy . . . to ensure that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice.” Id. Anticipating arguments raised by courts in other cases, the court addressed the objection that while California has a strong policy against enforcement of noncompetes, “there may be an exception when necessary to protect an employer's trade secrets.” Id. “Neither this Court, nor the lawyers in this case, however, have been able to find a single reported opinion in which a California court actually has enforced a non-competition agreement or covenant for the purpose of protecting trade secrets.” Id. The court granted the motion to dismiss on forum non conveniens grounds.

Finally, and most recently, in Oxford Global Resources, LLC v. Hernandez, 34 Mass.L.Rptr. 266, 2017 WL 2623137 (Mass.Super.Ct. June 9, 2017), the plaintiff worked for the employer in California. The employee’s noncompete was governed by Massachusetts law and contained a Massachusetts forum selection clause. The employer sued the employee for breaching the agreement and the employee moved to dismiss the action under the forum non conveniens doctrine. The court concluded that the Massachusetts choice of law provision was unenforceable because it was a “contract of adhesion.” Id. at *2. The employee “had neither the opportunity nor the bargaining power to negotiate over whether California or Massachusetts law would govern his non-competition, non-solicitation, and confidentiality agreements.” Id. Moreover, the court held that it was “apparent that the choice-of-law provision was an attempt by [employer] to circumvent California’s strong public policy against the enforceability of non-competition agreement[s].” Id. at *3. Finally the court held that if the noncompete agreement did not contain a choice of law provision, California law would apply because California had the “most significant relationship” to the matter. Id.

[Employee] was a California resident who was recruited and hired by [employer] in California, to work in [employer’s] California office, and to service only California clients. Although [employer] says its principal place of business is in Massachusetts, [employer] has alleged no facts and presented no evidence suggesting that [employee’s] contract with and work for [employer] implicated Massachusetts in any way.

Id. The court held that, applying California law, the Massachusetts forum selection clause was unenforceable. The court then granted the motion to dismiss on forum non conveniens grounds.

Cases in Which the Employer Prevailed

Generally speaking, the remaining cases, in which courts refused the employee’s request to disregard the Massachusetts choice of law provision in the employee’s noncompete, differ from the previous three with respect to their fact patterns, but also with respect to the court’s legal analysis. In other words, while the different outcomes could be attributable to different fact patterns, the courts also construed and applied the Restatement test quite differently.

In a number of cases where the court refused to disregard the Massachusetts choice of law provision in the employee’s noncompete, the employee worked for the employer in Massachusetts exclusively or for a significant period of the employee’s tenure. For example, in EMC Corp. v. Donatelli, 25 Mass.L.Rptr. 399, 2009 WL 1663651, *2-4 (Mass.Super.Ct. May 5, 2009), the employee worked for the plaintiff in Massachusetts for twenty-one years, including the seven years subsequent to executing the noncompetition agreement. In fact, at the time the suit was filed, the employee still lived in Massachusetts and had not yet begun work with a competitor, Hewlett-Packard, in California. The court held that because the employee worked for the employer in Massachusetts, the employee could not satisfy the first or third prongs of the Restatement test. That is, the court held that California did not have a materially greater interest in the matter than Massachusetts (“he is not, even now, a California resident, and therefore is not yet one of ‘its workers’ whose freedom of movement California has a strong interest in protecting”) and that Massachusetts, not California law would apply in the absence of a choice of law provision. Id. at *3-4. Applying Massachusetts law, the court granted EMC’s motion for a preliminarily injunction and enjoined the employee from commencing employment with Hewlett-Packard.

Similarly, in Oxford Global Resources, Inc. v. Guerriero, Civ. Act. No. 03-12078, 2003 WL 23112398 (D. Mass. Dec. 30, 2003), the employees, who asked the court to apply Texas law to their noncompete agreements, had each worked for the employer in Massachusetts for a significant portion of the time they were employed by the employer. One employee worked in Massachusetts for over five of his eight years with the employer; the second worked in Massachusetts for four of his seven years with the employer; and the third worked in Massachusetts for half of his three years with the employer. Id. at *5. Focusing on the third prong of the Restatement test, the court held that, even in the absence of a choice of law provision, Massachusetts law would apply:

In short, this case involves a controversy, now disputed in a Massachusetts forum, over a contract negotiated and executed in Massachusetts, by parties then all resident in Massachusetts (including a plaintiff long headquartered here), for services that were performed largely in Massachusetts. Defendants’ current residence in Texas is that state’s only connection to this dispute, and the interest of Texas in protecting immigrants from their Massachusetts employment agreements is relatively minimal.

Id. at *6. The court applied Massachusetts law and granted the employer’s motion for a preliminary injunction.

Finally, in Shipley Company, LLC v. Kozlowski, 926 F.Supp. 28 (D.Mass 1996), the employee worked for the employer in Massachusetts for two of the 13 years he worked for the company. The court did not indicate where the employee worked for the other ten years. Nonetheless, the court found that the employee’s time in Massachusetts and continuing contacts with Massachusetts were a sufficient basis on which to conclude that California, whose law the employee asked the court to apply, did not have a materially greater interest in the matter than did Massachusetts and Massachusetts law would apply in the absence of a choice of law provision.

Massachusetts has a materially greater interest in the matter since the contract was executed in Massachusetts, the defendant worked in Massachusetts for two years and continues to have contact with the state through his employment, the plaintiff’s principal place of business is Marlborough, Massachusetts, one of the plaintiff’s manufacturing facilities is located in Massachusetts, and more than half of the plaintiff’s employees work in Massachusetts.

Id. at 30. Applying Massachusetts law, the court granted the employer’s motion for a preliminary injunction and enjoined the employee from working for the employer’s competitor.

Is Employee Location the Key?

From this review of cases, it might seem that the outcome of the noncompete choice of law disputes turned primarily on whether the employee worked for the employer in Massachusetts or in the state whose law the employee asked the court to apply. In fact, in Oxford Global Resources, Inc. v. Guerriero, supra, the court adopted this very explanation:

The cases divide into two lines. In one line, an employer based in an "enforcing" state (e.g., Massachusetts) reaches out into a "non-enforcing' state (e.g., Texas) for the purpose of hiring an employee in that state, and, when the inevitable dispute arises, seeks to apply the enforcing state’s law. . . . In these cases, courts sometimes find it unfair to apply the law of the enforcing state because doing so would allow the out-of-state employer to limit the employee’s freedom to work when a local employer could not do the same. . . . In the other line of cases, however, an employee based in an enforcing state begins working at an employer in that state, and after ending his employment, moves to a non-enforcing state, and then, in the subsequent dispute, seeks to avoid application of the enforcing state’s law. . . . In these cases, courts generally find it unfair to apply the law of the non-enforcing state and thereby allow the employee to escape the obligations of the contract by, in essence, fleeing the jurisdiction.

Id. at *5-6 (citations omitted).

This explanation fails, however, to account for those decisions where courts applied Massachusetts law to the employee’s noncompete even though the employee did not work in Massachusetts. The explanation also overlooks the substantive differences in how courts construe and apply the prongs of the Restatement test.

In a number of these cases, courts applied Massachusetts law to the employee noncompete even though the employee did not work in Massachusetts. For example, in Inner-Tite Corp. v. Brozowski, 27 Mass.L.Rptr. 204, 2010 WL 3038330 (Mass.Super.Ct. Apr.14, 2010), the employee worked in Georgia for the two and a half years he was employed by the plaintiff. He spent six weeks in Massachusetts being trained when he commenced employment. Still the court did not find that Georgia had a materially greater interest in the matter than Massachusetts or that Georgia law would govern the noncompete in the absence of a choice of law provision. See id. at *14-15. The court applied Massachusetts law to the employee’s noncompete, which it substantially enforced.

In Iron Mountain Info. Mgmt. v. Viewpoint Archive Services, LLC, 707 F.Supp.2d 92 (D.Mass. 2010), the employee worked for the employer in Georgia for each of the approximately seven years he was employed, though he “travelled to Massachusetts on business several times a year.” Id. at 94, 107. The court concluded that Georgia did not have a materially greater interest in the matter than Massachusetts. Id. at 107.

Finally, in Simplivity Corp. v. Hofdahl, 33 Mass.L.Rptr. 483, 2016 WL 4080369 (Mass. Super.Ct. June 24, 2016), the court rejected the employee’s request to apply Arizona law to his noncompete with a Massachusetts employer notwithstanding a Massachusetts choice of law provision. The employee lived and worked in Arizona for the period he was employed by the plaintiff. The court made no reference to the Restatement test and cited to no authority, but applied Massachusetts law over the employee’s objection. Id., at *6.

Accordingly, the outcome of noncompete choice of law disputes cannot be attributed to where the employee worked, though clearly, if the employee worked for the employer in Massachusetts, there is no persuasive argument that a court should ignore a Massachusetts choice of law provision in the employee’s noncompete. When the employee worked for the employer outside of Massachusetts, including in California, predicting the outcome is considerably more difficult. In fact, courts have even disagreed whether California has a fundamental policy against the enforcement of employee noncompetes, though this point seems beyond question in California courts. Several Massachusetts courts have held that California has a fundamental policy against the enforcement of noncompetes. Oxford Global Resources, LLC v. Hernandez, 2017 WL 2623137, at *3; Ethicon Endo-Surgery, Inc. v. Pemberton, 27 Mass. L. Rptr. 541, 2010 WL 5071848, *5 (Mass.Super. Oct. 27, 2010); Aware, Inc. v. Ramirez-Mireles, 2001 WL 755822, at *2; Roll Systems, Inc. v. Shupe, 1998 WL 1785455, at *2. However, other courts here held that California’s policy is not fundamental or that it contains a wide exclusion permitting courts to enforce noncompetes to protect trade secrets. Aspect Software, Inc. v. Barnett, 787 F.Supp.2d 118, 126 (D. Mass.2011) (“while California’s policy against non-competition covenants has been characterized as ‘fundamental,’ . . . that fundamental policy does not extend to contractual clauses that are designed to protect an employer’s trade secrets”); Shipley Company, LLC v. Kozlowski, 926 F.Supp. at 30 (“California does not have a fundamental policy barring all non-competition clauses”). See also EMC Corp. v. Donatelli, 2009 WL 1663651, at *3 (“The Court does not agree that California’s legislative policy, at least in this case, is somehow more ‘fundamental’ than, and therefore trumps, Massachusetts’ common law.”).

Moreover, the characterization of the non-compete choice of law cases in Oxford Global Resources, Inc. v. Guerriero also overlooks the substantive differences in how courts have construed and applied the Restatement test. In particular, some courts applied the “materially greater interest” prong by considering both the interest of the employee’s state in protecting employees and promoting employee mobility and Massachusetts’ interest in protecting employers, but concluded that where the employee worked outside of Massachusetts, Massachusetts’ interest is entitled to less weight than if the employee worked in Massachusetts. See, e.g., Roll Systems, Inc. v. Shupe, 1998 WL 1785455, at *3. Other courts effectively have concluded that Massachusetts’ interest in protecting its employers and enforcement of contracts with Massachusetts employers is alone sufficient to reject an employer’s claim that another state has a materially greater interest in the matter than Massachusetts. For example, in Iron Mountain Info. Mgmt. v. Viewpoint Archive Services, LLC, 707 F.Supp.2d at 197, the court found that the employee failed to demonstrate Georgia had a materially greater interest in the matter than Massachusetts because the employer is located in Massachusetts.

[I]t cannot be said that Georgia has a materially greater interest in the issue at hand. Certainly Georgia has an interest in protecting its citizens . . . from unreasonable restraints. However, Massachusetts has an equally strong interest in protecting its citizens. . . . Massachusetts undoubtedly has an interest in protecting the confidential business information and good will of a company with a principal place of business here. The defendants’ contentions notwithstanding, nothing suggests that Georgia enjoys “significantly stronger” ties to the parties and the [noncompete] than Massachusetts.

Id.

Similarly, in Anaqua v. Bullard, 33 Mass.L.Rptr. 106, 2014 WL 10542986 (Mass.Super.Ct. July 24, 2014), the court applied Massachusetts law to the employee’s noncompete and entered a preliminary injunction prohibiting the employee from accepting employment with a competitor. The court found that because the employer is located in the Commonwealth, Massachusetts’ interest in the matter was sufficient to preclude a finding that California had a materially greater interest in the matter.

Massachusetts has a substantial relationship to [employer] (which is located here), [employee] (who worked for employer), and their contract. Application of Massachusetts law to the noncompetition clause might contravene the public policy of California, but California, where [employer] is now employed, has no greater interest—certainly not a “materially greater interest’--than does Massachusetts in a dispute over a Massachusetts contract whose breach will affect a Massachusetts resident and employer.

Id. at 10.

Finally, in Aspect Software, Inc. v. Barnett, supra, the court applied Massachusetts law to the employee’s noncompete and enjoined the employee from working for the competitor. In its analysis of the “materially greater interest” prong of the Restatement test, the court effectively held that because the employer is located in Massachusetts, no other state can be said to have a greater interest in the matter than Massachusetts.

The non-compete clause was negotiated between a company with its principal place of business in Massachusetts and its employee, who worked at least in part in Massachusetts; any harm caused by a violation of the non-compete clause will be felt in Massachusetts. Even if the Court chose to credit in full the position . . . that California has an interest in the freedom of its residents to seek employment regardless of trade-secret-related non-compete clauses and has a separate and distinct interest in the freedom of its employers to hire an employee regardless of any trade-secret-related covenants not to compete that employee may have entered into in other states, California’s twin interests in pursuing its non-fundamental policy would not materially outweigh Massachusetts’ interest in ensuring that Massachusetts contracts are enforced.

Id. at 126-127.

In each of the cases, the court effectively adopted a per se rule that where an out-of-state employee enters into a noncompete agreement with a Massachusetts employer, the state in which the employee works will never have a materially greater interest in the outcome than Massachusetts because Massachusetts has a substantial interest in protecting its employers and enforcing their contracts.

In Simplivity Corp. v. Hofdahl, supra, the court did not even reference the Restatement test, but rather employed a different test altogether and plainly adopted a per se rule in favor of applying a Massachusetts choice of law provision in an employee noncompete.

The court disagrees with [employee’s] choice of law argument. [Employer] has its principal place of business in Massachusetts, which is where it trains its sales representatives. [Employer] did not engage in any unconscionable act in providing that its employment agreements will be governed by the law of Massachusetts. This court sees no reason not to apply Massachusetts law in deciding whether and the extent to which the covenant not to compete should be enforced.

Id. at *6. At oral argument, the court was even more explicit: “Our law is non-competes are enforceable. Massachusetts, therefore, entitles companies based in Massachusetts to put non-competes in their [employee agreements] and if it meets our requirements, I’m going to enforce it. The fact that Arizona may or may not is of no significance to me.”

In summary, predicting whether a particular court will apply or disregard a Massachusetts choice of law provision in an employee’s noncompete is simple only if the employee worked for the employer in Massachusetts. If the employee worked outside of Massachusetts, including in California, whether the court will apply or disregard the Massachusetts choice of law provision likely will turn more on the judge’s preferences than any doctrine or case law to which the parties may direct the court’s attention.