When drafting or reviewing a restrictive covenant, you are likely to spend a significant amount of time considering its specific purpose and scope.
Few, however, are likely to devote any significant attention to the remaining provisions in document, including the likely “Miscellaneous” portion that is almost always a part of the agreement. This is a mistake. There are numerous provisions contained in this section that can, in some circumstances, be outcome-determinative. Below is a consideration of three such provisions and their importance to your agreement.
The recent Supreme Court decision in Atlantic Marine Construction Co., Inc. v. U.S. District Court for the Western District of Texas, 134 S. Ct. 568, 571 U.S. ___ (Dec. 3, 2013), while not a restrictive covenant case, is a very exciting case for employers.
In the context of deciding a motion to transfer, the Court held that contractual forum selection clauses should be enforced in all but the most exceptional cases.
The Court set out a three part test to be used when considering a motion to transfer:
(1) the plaintiff’s choice of forum should merit no weight, and the plaintiff, as the party defying the forum-selection clause, should have the burden of establishing that transfer to the forum for which the parties bargained is unwarranted. This is not especially surprising, as there is ample case law in other contexts such as class actions and derivative lawsuits that also hold that the plaintiff’s choice of forum is to be given no (or reduced) weight.
(2) the court should not consider the parties’ private interests aside from those embodied in the forum selection clause; rather, it should consider only public interests and, as noted by the Supreme Court, public-interest factors will rarely defeat a transfer motion.
(3) when a party bound by a forum selection clause flouts its contractual obligation and files suit in a different forum, a transfer of venue will not carry with it the original venue’s choice-of-law rules.
Atlantic Marine is of particular significance to employers because it makes it very difficult for a court sympathetic to an employee to override the contractual choice of forum based upon public policy. The transferee court must now apply the choice of law rules of the state designated by the parties. This decision is especially helpful to employers who seek to enforce non-competition agreements against employees who work or live in states that disfavor such restrictive covenants (such as California).
Prior to Atlantic Marine, employees who worked or lived in states that disfavored restrictive covenants such as non-competition agreements often would file a preemptive lawsuit in their home states in an effort to secure a venue hostile to the restrictive covenants. That strategy often allowed employees to effectively avoid their restrictive covenant obligations because the employees’ chosen courts would decline to transfer the suit to the parties’ contractually selected forum on public policy grounds, resulting in employers filing parallel suits in their home states and an unseemly and unpredictable race to judgment in the parallel actions. Under the Supreme Court’s recent decision, going forward that strategy is unlikely to help an employee get out from under a restrictive covenant.
Stay tuned for Part II…