Court Rejects Attack on New York Choice of Law Clause Based on California Public Policy

On January 13, 2020, Justice Borrok of the New York County Commercial Division issued a decision in Career Partners, Inc. v. Brady, 2020 NY Slip Op. 30151(U), rejecting an attack on a New York choice of law clause based on California public policy, explaining:

The New York Court of Appeals has held that a choice-of-law clause is valid and enforceable so long as the chosen law bears a reasonable relationship to the parties or the transaction. As discussed above, Section 7 of the Agreements provide that New York law governs disputes arising under the Agreements.

However, and relying primarily on Marine Midland Bank, NA. v United Missouri Bank, NA., 223 AD2d 119, 123 [1st Dept 1996], notwithstanding the clear and unambiguous language in the Agreements, the Defendants nevertheless argue that California law should apply to the action because the Defendants argue that California has a materially greater interest in this litigation and applying New York law would violate California's codified public policy against enforcement of restrictive covenants.

At the time the Agreements were entered into, California had enacted the California Business and Professions Code § 16600, which provided that: Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.

Interpreting this statute, in Dowell v Biosense Webster, Inc., 179 Cal App 4th 564 [2009], the California Court of Appeal, Second Appellate District affirmed the trial court's finding that section 16600 voided a non-solicitation clause, which mandated that the employee will not solicit any business from, sell to, or render any service to, or, directly or indirectly, help others to solicit business from or render service or sell to any of the accounts, customers or clients with whom the employee had contact during the last 12 months of employment, for 18 months after termination. The court explained the strong public policy embodied by section 16600:

Section 16600 expresses California's strong public policy of protecting the right of its citizens to pursue any lawful employment and enterprise of their choice. California courts have consistently affirmed that section 16600 evinces a settled legislative policy in favor of open competition and employee mobility. The interests of the employee in his own mobility and betterment are deemed paramount to the competitive business interests of the employers, where neither the employee nor his new employer has committed any illegal act accompanying the employment change.

In addition, the Defendants rely onAMN Healthcare, Inc. v Aya Healthcare Servs., Inc., where the California Court of Appeal, Fourth Appellate District affirmed the trial court's decision that a non-solicitation clause, prohibiting the solicitation of any employee of the former employer for one year or eighteen months after termination of employment was void. Again, the court referred to California's public policy underlying section 16600:

At common law and in many states, a restraint on the practice of a trade or occupation, even as applied to a former employee, is valid if reasonable. However, California long ago rejected the so-called rule of reasonableness when it enacted Civil Code former sections 1673 through 1675, the predecessor sections to Business and Professions Code sections 16600 through 16602. At least since 1872, a noncom petition agreement has been void unless specifically authorized by sections 16601 or 16602. These legislative enactments settled public policy in favor of open competition, and rejected the common law rule of reasonableness, and today in California, covenants not to compete are void, subject to several exceptions.

Although the non-solicitation clause was limited to solicitation of employees, the court noted that such a restriction remained void under the plain meaning of section 16600 and the absence of any statutory language to the contrary.

The Defendants also argue that pursuant to § 925 of the California Labor Code, employers are not permitted to require employees who primarily reside and work in California to agree to a provision which requires them to litigate outside of California a claim which arises in California and which deprives the employee of the substantive protection of California law. To wit, section 925 provides that:

(a) An employer shall not require an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following:

(1) Require the employee to adjudicate outside of California a claim arising in California.

(2) Deprive the employee of the substantive protection of California law with respect to a controversy arising in California.

(b) Any provision of a contract that violates subdivision (a) is voidable by the employee, and if a provision is rendered void at the request of the employee, the matter shall be adjudicated in California and California law shall govern the dispute.

(c) In addition to injunctive relief and any other remedies available, a court may award an employee who is enforcing his or her rights under this section reasonable attorney's fees.

(d) For purposes of this section, adjudication includes litigation and arbitration.

(e) This section shall not apply to a contract with an employee who is in fact individually represented by legal counsel in negotiating the terms of an agreement to designate either the venue or forum in which a controversy arising from the employment contract may be adjudicated or the choice of law to be applied.

(f) This section shall apply to a contract entered into, modified, or extended on or after January 1, 2017.

Therefore, based on the dicta in Marine Midland, the Defendants argue that California law should apply and that under California law, the restrictive covenants are void.

As an initial matter, even if California law were to apply, the court notes that section 925 of the California Labor Code would not apply to void the Agreements as they were entered into in 2010 - i.e., well before January 1, 2017. In addition, the claim does not solely arise in California. Here, alleged breaches of the confidentiality and non-solicitation clause are occurring in New York.

But putting that aside, the Defendants' reliance on the Marine Midland dicta is misplaced.

Marine Midland involved the enforcement of a promissory note by an assignee of the promissory note and security agreement against the deceased obligor's Kansas estate. The plaintiffs brought an action in New York County seeking to recover and moved for summary judgment, the estate cross-moved for summary judgment arguing that Kansas, and not New York law, should govern and under Kansas law there was a nonclaims statute that precluded recovery. To wit, Kansas had enacted a nonclaims statute which provided:

All demands, including demands of the state, against a decedent's estate, whether due or to become due, whether absolute or contingent, including any demand arising from or out of any statutory liability of decedent or on account of or arising from any liability as surety, guarantor or indemnitor, and including the individual demands of executors and administrators, not exhibited as required by this act within four months after the date of the first published notice to creditors as herein provided shall be forever barred from payment, except that the provisions of the testator's will requiring the payment of a demand exhibited later shall control.

New York State Supreme Court Justice Ira Gammerman denied the motion for summary judgment and granted the cross motion, holding that notwithstanding the express choice of law provision in the agreement, indicating New York law governed enforcement of the promissory note, that Kansas law applied and under Kansas' nonclaims statute, recovery was precluded.

On appeal, the First Department reversed concluding that the New York choice of law provision was valid and enforceable and the transaction at issue bore a reasonable relationship to New York. Namely, the original assignor of the note had headquarters in New York, payments on the note were made to the New York headquarters, and the plaintiff note holder was located in New York. Although the First Department noted that a choice of law provision might be invalid where procured by fraud or where the issue was of such averring concern to the public policy of the other jurisdiction as to override the intent of the parties and the interest of this State in enforcing its own policies, no such showing had been made in that case. The court further explained:

New York's recognized interest in maintaining and fostering its undisputed status as the preeminent commercial and financial nerve center of the Nation and the world. That interest naturally embraces a very strong policy of assuring ready access to a forum for redress of injuries arising out of transactions spawned here. Indeed, access to a convenient forum which dispassionately administers a known, stable, and commercially sophisticated body of law may be considered as much an attraction to conducting business in New York as its unique financial and communications resources.

New York's interest in providing a convenient forum is least subject to challenge when a transaction is centered here.

In contrast to these significant New York public policy considerations, we are confronted with a policy characterized by defendant as fundamental to the prompt, orderly and efficient administration of estates under Kansas law as embodied in a statute which on its face is violative of due process and has been held unconstitutional by that State's own Supreme Court on that basis. Such can hardly be held to be the kind of predominating public policy concern that would warrant overriding this State's very substantial interest in resolving a dispute in a commercial transaction centered here. Clearly, in this case the relevant public policy considerations strongly support the upholding of the New York choice of law provision agreed to by the parties themselves with respect to enforcement of the transaction in issue.

Here, the allegations in the dispute at nisi prius involve a New York company's enforcement of Agreements concerning confidentiality and non-solicitation by two former employees who have allegedly opened shop (i.e., Gold Coast) in New York City in violation of the Agreements which expressly provide that New York law governs. Put another way, the chosen law - New York bears a reasonable relationship to the parties and the dispute. And, here, like in Marine Midland, the foreign jurisdiction simply does not have a greater interest which outweighs New York's substantial interest in resolving a commercial dispute involving a New York based company with a competitor set up in New York involving the potential violation of a confidentiality and non-solicitation provision so as to do business, among other places, in New York.

For the avoidance of doubt, to the extent that the Defendants also urge this court to follow TGG Ultimate Holdings, Inc. v Hollett, 224 F Supp 3d 275 [SDNY 2016] and Medicrea USA, Inc. v K2M Spine, Inc., 2018 US Dist LEXIS 110286 [SDNY Feb. 7, 2018]), these cases do not lead to a different result.

In TGG, the plaintiffs brought an action for the defendants' violation of post-employment obligations pursuant to a non-compete and non-solicitation agreement. The court in that case found that California law applied despite a New York choice of law provision in the defendant employees' agreements because the choice oflaw provision was the only basis for contact with New York. For the avoidance of doubt, the court noted that TGG was incorporated in Delaware, with its principal place of business in South Carolina, that TGG maintained no operations in New York and only had one major client in New York (i.e., the New York Department of Education), and that the defendants in that case were California residents:

TGG has failed to demonstrate the existence of any contacts of this action with New York other than the choice-of-law provision itself. Neither TGG nor its subsidiaries are incorporated, nor operate principally, in New York.

By contrast, the choice of law provision in this case is not the only basis for contact with New York. During Mses. Brady and Baines' employment, they undeniably traveled to New York in the course of their employment and, most significantly, the allegations which form the basis for relief are alleged violations of the confidentiality and non-solicitation provisions, and the formation of Gold Coast, which has offices in New York, pursuant to which Ms. Brady and Baines continue to violate their employment agreements in New York using, among other confidential information, the confidential customer requirements obtained while working for CPI.

In Medicrea, the court declined to apply a New York choice of law provision in an employment agreement in favor of California law because, in that case, the California defendants worked both during the employment and after the employment, in California. Again, this is very different than the case at bar. As discussed above, Mses. Brady and Baines allegedly now violate their Agreements in New York through their operation of Gold Coast.

Accordingly, the selected choice of law provision of New York bears a reasonable relationship to the parties, New York has a materially greater interest in the dispute and New York law governs the dispute.

(Internal quotations and citations omitted).

The parties to commercial contracts often choose both the forum in which any dispute over the contract will heard and the law governing the interpretation of the contract. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding which law governs on contract and in which forum a dispute over the contract may be heard.