Corporations routinely require their employees to enter restrictive covenants (including non-solicition and non-compete agreements) protecting the business from unfair competition. However, employees often live and reside in states that are different from the company’s place of incorporation and principal place of business. This trend has grown in recent years as some companies have moved toward a fully remote work environment. The corporation’s ability to enforce its restrictive covenants may be hampered or become more complicated where state laws governing enforcement of restrictive covenants vary. This article explores a sampling of contradictory restrictive covenant laws and how one might address those contradictions upfront to help ensure a restrictive covenant agreement remains enforceable. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment law, and other legal disputes in federal and state courts and in arbitration.
Some states, like Florida, have strong restrictive covenant laws codified by statute. Florida permits non-compete agreements when they are supported by one or more “legitimate business interests” and reasonable in time and scope to protect the business. See Fla. Stat. § 542.335 (“The person seeking enforcement of a restrictive covenant shall plead and prove the existence of one or more legitimate business interests justifying the restrictive covenant.”). Other states, like Pennsylvania, rely on caselaw to enforce restrictive covenants. See, e.g., Socko v. Mid-Atl. Sys. of CPA, Inc., 2014 PA Super 103, 99 A.3d 928, 935 (2014), aff’d, 633 Pa. 555, 126 A.3d 1266 (Penn. 2015) (permitting enforcement of a restrictive convent when the employee “receive[s] actual valuable consideration” and the restriction is reasonably limited in time and territory). Application of case law can be amorphous thereby making it more difficult to enforce the covenant or predict outcomes. See Insulation Corp. of Am. v. Brobston, 446 Pa. Super. 520, 529, 667 A.2d 729, 733 (Penn. 1995) (adding more stringent requirements to enforce a post-employment restrictive covenant). Yet other states like Minnesota prohibit enforcement of most restrictive covenant agreements. Minn. Stat. Ann. § 181.988 (“Any covenant not to compete contained in a contract or agreement is void and unenforceable”).
Companies can insert choice of law provisions in their restrictive covenant agreements to provide some definiteness as to which state’s laws apply. These provisions pre-select the application of a particular state’s laws, usually to the exclusion of all other state laws. Choice of law provisions, however, are not always enforceable. For example, in Florida, a choice of law provision will not be enforced when its application would violate Florida’s public policy. In Snelling & Snelling, Inc. v. Reynolds, 140 F. Supp. 2d 1314 (M.D. Fla. 2001), the United States District Court for the Middle District of Florida analyzed a restrictive covenant that selected Pennsylvania as the governing law. The court explained that, “[s]ince Snelling has indicated its intention for the governing law, Pennsylvania law will govern the dispute between the parties, as long as that law is not against the public policy of the forum state.” Florida courts analyze the laws of the chosen state as contrasted against Florida law, to determine whether the laws of both states contradict each other. Snelling explained that the court “must determine whether Pennsylvania law governing non-compete covenants is contrary to Florida’s public policy.” If a contradiction exists, further analysis would be conducted to determine whether there is a violation of Florida’s public policy. Other states may construe choice of law provisions differently or enforce them differently.
Several take-aways can be gleaned from the diverging laws on restrictive covenants and application of choice of law provisions. First, it is important to know your state’s restrictive covenants laws and how they are applied. Second, it is important to know about the restrictive covenant laws in the state where your employees reside. Third, it is important to understand how all relevant states apply contractual choice of law provisions, and the extent those applications could impact enforceability of the restrictive covenant. Acquiring this knowledge before you begin drafting a restrictive covenant or requiring an employee to execute a restrictive covenant can help ensure enforcement of the agreement and protect against unfair competition.
Peter Mavrick is a Fort Lauderdale business litigation lawyer, and represents clients in Miami, Boca Raton, and Palm Beach. This article does not serve as a substitute for legal advice tailored to a particular situation.