Calfee, Halter & Griswold LLPNew Law Restricts Employers’ Ability to Litigate Outside of California or Use Non-California Choice-of-Law Provisions in Employment Agreements

November 22, 2016

In September of 2016, California passed Senate Bill 1241 (SB 1241), which drastically changes the employment contract landscape for companies who employ individuals working and living in California. Affecting contracts entered into, modified, or extended after January 1, 2017, the law generally forbids employers from requiring their California employees to agree to litigate or arbitrate outside of California or submit themselves to the laws of another state, with one main exception: the law does not apply to contracts with individual employees who are represented by counsel when entering into employment agreements.

The Specifics of SB 1241

SB 1241 applies to contracts entered into, modified, or extended on or after January 1, 2017. The central provision of the law states as follows:

  • (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.

The main exception to the application of the law states,

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.

The law also specifies that any contract provision that violates these restrictions is voidable at the employee’s request and that a court may award attorney’s fees to an employee who is enforcing his or her rights under the law.

Traditional Use of Forum-Selection Clauses and Choice-of-Law Provisions to Avoid California Law Will Be Unavailable After January 1, 2017

Prior to the passage of this law, employment lawyers and companies with California employees were already familiar with California’s distinctive employment laws which are often harsh on employers. For example, the state has a general intolerance for non-competition clauses. In the past, to avoid application of California law, out-of-state employers hiring California workers increasingly used forum-selection clauses and choice-of-law provisions in employment contracts. While it was always a toss-up whether such provisions would be honored by courts, they were traditionally employers’ best chance of success at attempting to have their non-compete provisions upheld against California employees. See, e.g., Lowry Computer Prods. v. Head, 984 F. Supp. 1111, 1113 (E.D. Mich. 1997) (upholding employment agreement’s forum-selection and choice-of-law provisions which specified that Michigan law would apply to the non-compete provision in a case involving a California employee of a corporation with its principal place of business in Michigan). But see, Contech Constr. Prods. v. Blumenstein, 2012 U.S. Dist. LEXIS 97050, *42 (S.D. Ohio 2012) (holding that, despite the parties’ choice of Ohio law in their employment agreement, application of Ohio law would be contrary to the fundamental public policy of California, and therefore applying California law to a dispute involving a California resident working for Ohio and Minnesota corporations.) The new law completely precludes this traditional avenue of attempting to avoid California law.

What This Law Means for Your Business

As discussed above, courts’ enforcement of non-California forum-selection clauses and choice-of-law provisions is currently unpredictable. In some cases, courts enforce a choice-of-law provision that allows for enforcement of a non-compete, but in others, courts deem the choice of law contrary to California public policy and gut the non-compete. However, today’s uncertainty is preferable to tomorrow’s clear prohibition. After January 1, 2017, your company will not be permitted to require an unrepresented California employee to agree to a forum-selection clause outside of California or submit themselves to the substantive laws of another state as a condition of employment. This leaves a very small window of time during which you may want to consider promulgating, modifying, or extending such employment agreements.

Alternatively, if the validity of a non-compete provision in a contract with a California employee is particularly important to your business (for example, for key employees), and promulgating a contract is not feasible before the new year, it might be wise to take other steps to attempt to preserve your non-compete provisions. For example, you may want to consider requesting that a California-based employee obtain a lawyer, perhaps paid for by the company, to provide counsel before signing a contract including non-compete and other restrictive covenants governed by law other than that of California and/or providing a forum selection clause providing that disputes will be litigated outside of California. The resulting agreement should include the employee’s acknowledgement that he or she was represented by counsel in negotiating and accepting the terms of the agreement.

SB 1241 largely has flown under the radar. Employers should recognize this new law in California and take appropriate steps to serve their best interests as to their employees located in the Sunshine State.

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For additional information and discussion on this topic, please get in touch with your regular Calfee contact or one of the attorneys listed below: Richard P. Goddard 216.622.8313 rgoddard@calfee.com John R. Cernelich 216.622.8251 jcernelich@calfee.com Abbey Kinson Brown 216.622.8358 abrown@calfee.com

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