Court of Appeals Invalidates Choice of Law Provision in Determining the Enforceability of a Non-Compete Agreement
Paula Lopez, August 7, 2015.
In Brown & Brown v. Johnson, the New York Court of Appeals (New York’s highest court) rejected a choice of law provision contained in an employment agreement that designated Florida law as the law governing the agreement because it found that Florida’s employer-friendly approach in enforcing employment-related restrictive covenants is contrary to New York’s public policy. A choice of law provision in an agreement allows parties to agree that a particular state’s laws will be used to interpret the agreement regardless of where the agreement is signed or the parties reside. The Court’s holding in Brown & Brown puts employers who include choice of law provisions in their employment agreements on notice of the nuanced approach New York courts will take in determining whether such provisions will be upheld, especially when it comes to enforcing restrictive covenants.
Employers look to all available means for protecting confidential information and their legitimate business interests such as trade secrets, client relationships, and client databases. In addition, employers have an interest in preventing former employees from competing with them by raiding their key personnel and usurping their clients because of a relationship developed by the former employee during his employment. In accomplishing these goals, employers often include restrictive covenants in their employment agreements such as non-compete and non-solicitation provisions. Whether such provisions will be enforced often depends on the laws of the state where the employee-employer relationship existed or the state law the parties agreed would govern the agreement.
Determining which mechanisms to use in protecting their interests in employment agreements are key considerations for multi-state employers having headquarters in one state but operating in various states. Which state’s law is going to apply to restrictive covenants in an employment or severance agreement is crucial in determining the enforceability of the agreement because there is a drastic variation among states as to what types of post-employment restrictions an employer can contract for with its employees, if any, and whether they will be enforced.
The plaintiff in Brown & Brown is a Florida corporation that recruited Theresa Johnson to work in its New York office. At the time of hire, Johnson had been working for Blue Cross/Blue Shield. On Johnson’s first day of work at Brown & Brown, she was presented with and signed an employment contract that included a choice of law provision designating Florida as the state law governing the agreement and a non-solicitation agreement that prevented Johnson from servicing any customers of Brown & Brown’s New York office for two years after her termination. After several years working for Brown & Brown, Johnson was terminated. She found new employment with a competitor of Brown & Brown. When Brown & Brown discovered that Johnson was working with former Brown & Brown customers, it sued Johnson in a New York court for breach of the agreement and to enforce the non-solicitation covenant. Brown & Brown sought to have the New York court apply Florida’s law in determining the enforceability of the non-solicitation provision.
In refusing to apply Florida law to the agreement, despite the choice of law provision, the Court acknowledged that the laws of both states require that that restrictive covenants be reasonable in time, scope and geographical area and be intended to protect a legitimate business interest. However, the Court could not overlook the stark difference between Florida’s and New York’s approach in determining the enforceability of restrictive covenants in employment agreements.
For instance, New York applies a three-factor test to determine the reasonableness of the provision that looks at whether the restraint is (1) “no greater than is required for the protection of the legitimate interest of the employer” (2) “does not impose undue hardship on the employee,” and (3) “is not injurious to the public.” If the provision fails to meet any of the three factors it would be deemed invalid. The employer bears the burden of proof in establishing all three factors and only upon meeting these factors will the burden shift to the employee to show that the restraint is overbroad or unnecessary.
Meanwhile, Florida courts enforcing post-employment restrictive covenants only require the employer to make a prima facie showing that the restraint is necessary to protect a legitimate business interest before the burden shifts to the employee to show the restraint is unnecessary or overbroad. Florida’s law expressly prohibit the courts from considering the economic hardship that may be suffered by the employee in determining the provision’s validity.
In addition, Florida’s law and New York’s law impose different requirements as to how courts are required to construe restrictive covenants. Florida courts are required to construe restrictive covenants broadly in favor of protecting the employer’s interests and are not permitted to use rules of contract interpretation requiring that the provision be construed against the drafter. New York law, on the other hand, requires courts to strictly construe restrictive covenants because of the public policy considerations against allowing a party to deprive a person of their livelihood. Based on these differences, the Court held that the choice of law provision was unenforceable and reviewed it under New York’s framework.
In applying New York law to its review of the restrictive covenant at issue, the Court observed that many of the provisions were overbroad because they prohibited Johnson from working with customers she had never worked with while at Brown & Brown. While the Court recognized that it had the discretion to “blue pencil” (means by which courts revise overbroad provisions to be enforceable by tailoring them to be reasonable in scope, duration, and geography) the provision and limit the restrictive covenant to only cover those customers with whom Johnson directly worked, it found that there are issues of fact as to whether the provisions are unenforceable due to overreaching and coercion on the part of the Brown & Brown in getting Johnson to agree to its terms and remanded the case for further proceedings.
In light of differing state laws and differing views on the enforceability of post-employment restrictive covenants, one way employers have gotten around certain state prohibitions is by including a choice of law provision in the agreement that applies the law of a state that takes a favorable stance on these agreements. Normally, the employer or employee must have a rational relationship to the state, whose law will be governing the agreement. However, the decision in Brown & Brown demonstrates that a choice of law provision will be disregarded if the law of the state chosen is antithetical to New York’s public policy, regardless of the fact that one party to the agreement was a resident of state whose law was chosen to apply to the agreement.