Conflicting Noncompete Laws Create a Choice-of Law Chess Match

Federal regulatory and legislative efforts to produce a uniform federal law banning noncompete agreements have so far failed. And earlier this month, President Donald Trump revoked former President Joe Biden’s 2021 executive order directing the Federal Trade Commission chair to regulate noncompetes.

As a result, state statutes and case law will continue to determine the validity of such agreements in the foreseeable future.

The distinctiveness of each state’s laws, however, is keeping employers and their litigators awake at night over how to enforce employment noncompetes and otherwise protect legitimate business interests. In the past year, this task has become a head-spinning game of chess, as illustrated this summer by the disparity in the way two states decided to treat them.

Florida enacted the CHOICE Act, effective July 1, strengthening the enforceability of noncompetes in the state. Meanwhile, Wyoming passed legislation, also effective July 1, that prohibits noncompetes going forward, joining North Dakota, Montana, Oklahoma, California, and Minnesota as states that declared such agreements unlawful.

To add to the complexity of the chess board, other states have limited noncompetes but not outlawed them altogether, including Louisiana, Maryland, Arkansas, and Oregon. Pennsylvania and New Jersey have diametrically different consideration laws, for example. A noncompete presented to an employee in New Jersey two months into the relationship is lawful. Just across the bridge in Pennsylvania, such a covenant is unenforceable without new and additional consideration.

Still other states have passed “low wage” thresholds, all in different amounts, that bar enforcement of noncompetes if the employee earns less than the statutory threshold, which changes each year in the states of Colorado, Maine, Oregon, Rhode Island, Virginia, and Washington. These states all have low-wage thresholds that are determined annually, making it quite the headache for noncompete drafters.

Employers now face a battle at the state level, where an agreement that may be lawful in one place is invalid in a neighboring jurisdiction. For employers operating in multiple states, these differences can make drafting and enforcing noncompete agreements haphazard. But using choice-of-law and jurisdictional provisions can reduce this uncertainty.

Employers’ Challenges

Multijurisdictional employers must understand jurisdictional variations to manage multistate noncompete agreements effectively. Draft agreements must include state-specific considerations.

Employers and their HR managers would be wise to engage counsel to follow rapidly changing state legislation and judicial decisions in any jurisdiction where the employer, or their employees, are located. The myriad considerations include:

• Is there a state statute that governs enforceability or addresses permissible temporal or geographic scope of validity to ensure enforceability?
• Is there an enforceability wage threshold?
• Is there a duration limit?
• Is continued employment sufficient consideration to support a noncompete?
• Can a court in that particular state modify the noncompete by blue pencil, reformation, or otherwise?
• Can an employer in that state enforce a noncompete where the employee was terminated?

All of these issues vary by state and can lead to uncertainty in drafting and enforcing noncompetes. The question then becomes how can drafters of noncompetes create more certainty?

Favorable Provisions

Choice-of-law and jurisdictional provisions can add some certainty when determining enforceability of noncompete agreements for employees in multiple states. These provisions can help dictate which state’s noncompete laws govern disputes and where litigation must occur.

Selecting a jurisdiction and choice of law favorable to the employer’s interest can enhance enforceability if the chosen law and venue have a strong connection to the parties and don’t offend the public policy of applicable jurisdictions.

These issues were front and center in the US Court of Appeals for the First Circuit’s decision last fall in DraftKings, Inc. v. Hermalyn. In that case, the First Circuit rejected an appeal from Michael Hermalyn, a former DraftKings executive, who moved from Massachusetts to California allegedly to undo his noncompete.

The three-judge panel ruled that the Massachusetts choice of law in the agreement should govern Hermalyn’s agreement with his Boston-based former employer. Hermalyn, who left DraftKings to launch a Los Angeles office for its rival Fanatics Inc., had argued that California’s prohibition on noncompetes should control, as he now lived and worked there.

But the First Circuit rejected Hermalyn’s arguments and held that the more noncompete-friendly Massachusetts law, chosen by the parties, applied to his dispute with DraftKings.

DraftKings is one of many such cases where employees were perceived as navigating forums to find the most favorable one and arguing choice of law to enforce or void their noncompete agreements. Former employees and their lawyers also have filed declaratory judgment suits in more favorable forums to invalidate an agreed-upon choice-of-law and jurisdiction clause in a less favorable forum.

One recent example is BeOne Medicines and Mariana Cota Stirner, where a former AbbVie Inc. executive sued AbbVie in California Superior Court, seeking to invalidate noncompete and non-solicitation restrictions in the executive’s employment agreement.

According to the complaint, AbbVie made the first chess move by filing suit in Illinois to block the executive, who served as vice president of oncology and hematology, from starting her new role as chief medical officer at BeOne’s San Mateo office.

The former employee countered that move by filing her own declaratory complaint in California where she lived, arguing that AbbVie’s restrictive covenants violate California’s Business and Professions Code—which voids noncompete agreements regardless of where they were signed—and seeking injunctive relief to prevent AbbVie from enforcing the restrictions. A preliminary injunction hearing on that request for declaratory relief is scheduled for Aug. 28.

In the meantime, the choice-of-law and jurisdictional chess match between employer and employee will continue to play out all over the country, promising more sleepless nights for noncompete drafters and litigators

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Thomas A. Muccifori is a partner at Archer & Greiner focusing on business litigation, trade secret protection, and restrictive covenants.

Write for Us: Author Guidelines