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Choice-of-Law and Choice-of-Forum May Depend on the Choice of Where to File and When: Multi-State Employers Continue to Face Challenges When Enforcing Restrictive Covenants Across State Lines

Employers who operate in a multi-state environment should take note of a recent case out of the 6th Circuit (which governs employers that operate in Kentucky, Michigan, Ohio, and Tennessee.) Stone Surgical, LLC v. Stryker Corporation involved a departing sales representative from Stryker, a medical-device manufacturing company headquartered in Michigan. The sales rep lived and worked in Louisiana through his company Stone Surgical, LLC and was responsible for Stryker’s South Louisiana territories. As a condition of employment, the sales rep signed a non-compete agreement that included Michigan choice-of-law and choice-of-forum clauses. After twelve years with Stryker, the sale rep resigned to take a position at Biomet, a regional competitor, to service his former Stryker Louisiana-based sales territories.

Stryker filed suit in the Western District of Michigan asserting claims for breach of contract, breach of fiduciary duty, and misappropriation of trade secrets. The sales rep subsequently filed in the Eastern District of Louisiana but the action was transferred to the Michigan forum and consolidated under the first-to-file rule. The case went to trial and Stryker was successful, obtaining a six-figure jury verdict, in addition to prevailing on the sales rep’s counterclaims. The sales rep appealed to the 6th Circuit challenging the validity of the choice-of-law and choice-of-forum provisions. The 6th Circuit rejected both arguments. It summarily rejected the choice-of-forum argument because Michigan law applied and it “favors forum-selection clauses.” The choice-of-law issue was a closer question, however. The nature of the relationship and contract dictated that Louisiana law should apply, but under the choice-of-law rules it only would over Michigan if Louisiana had a “materially greater interest.” The court held that Louisiana did not. Although Louisiana has a statute severely restricting non-competes, Michigan favors and enforces non-competes. Thus, even though Louisiana was the state with the “most significant relationship” to the case, it did not have a “materially greater” interest than Michigan in determining the validity of the non-compete. Therefore, the court concluded that there was no reason to upset the parties’ choice to have Michigan law govern their agreement.

The Stone Surgical decision demonstrates just how critical choice-of-law and choice-of-forum issues have become in modern non-compete litigation. The choice of who to sue where matters. Because the law governing restrictive covenants varies widely from state to state, the choice-of-law or choice-of-forum analysis is often what decides the ultimate outcome of the case. Employers with multi-state workforces should ensure their employment agreements comply with the laws of the particular jurisdictions in which they could be challenged. Indeed, some states—such as Louisiana (La. R.S. § 23:921(A)(2)) and California (Cal. Lab. Code § 925)—have laws that declare choice-of-law and choice-of-forum provisions in employment agreements unenforceable. In those states, the “race to the courthouse” becomes all the more important as the party to file first could decide the state law that applies and the party who wins. Thus, the fact that an agreement contains a choice-of-law clause is not always enough to guarantee it will be enforced, depending on where and when the case is filed.

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