Virginia Federal Courtroom docket Rejects Massachusetts’ Statutory Prohibition on Out-of-State Dialogue board Alternative Clauses in Noncompete Agreements – Sort Of

Quite a lot of states over the previous couple of years have handed legal guidelines prohibiting the use in noncompete agreements (and completely different employment-related agreements) of out-of-state choice-of-law and dialogue board alternative provisions. A few of these states’ authorized pointers embody enforcement mechanisms with stringent penalties, just like California, which supplies for injunctive discount and attorneys’ expenses to an aggrieved employee; Washington, which entitles aggrieved staff to express damages or statutory penalties of $5,000, along with their attorneys’ expenses; and, beginning in August, Colorado, the place any violation of that state’s noncompete statute (along with the prohibition on out-of-state choice-of-law and dialogue board alternative provisions) would possibly lead to civil and authorized penalties.

Totally different states, nonetheless, just like Massachusetts and Illinois, haven’t any such enforcement mechanisms for violations of their statutory prohibitions of out-of-state choice-of-law and dialogue board alternative provisions. Thus, whereas an employee might prevail inside these states on an argument that an out-of-state choice-of-law or dialogue board alternative provision is void, they’d not be entitled to any damages or attorneys’ expenses. Workers in these states ought to, subsequently, rely upon a courtroom in a single different state to cede its private state’s sovereignty to the legislature of the employee’s home state. There may be little incentive for courts to take motion under concepts of federalism and state sovereignty. Why should a Virginia courtroom let the Massachusetts legislature dictate what it does, notably when the occasions have contracted in some other case?

This was borne out in a present alternative of the US District Courtroom docket for the Jap District of Virginia, by which the Courtroom docket addressed the requirement inside the Massachusetts Noncompetition Settlement Act (“MNCA”) that any civil actions referring to employee noncompete agreements needs to be filed in Massachusetts state courtroom. In The Hilb Group of New England, LLC v. Susan LePage, the defendant, LePage, signed a Confidentiality and Non-Solicitation Settlement (the “Settlement”) in 2019 that included a dialogue board alternative clause granting distinctive jurisdiction of any disputes arising thereunder to “the courts of the Commonwealth of Virginia positioned inside the Metropolis of Richmond and of america District Courtroom docket for the Jap District of Virginia, Richmond Division.” LePage resigned in 2021 and joined a competitor. Plaintiff filed swimsuit for breach of the Settlement in Virginia, and LePage moved to dismiss the grievance for improper venue.

Amongst completely different points, LePage argued that “implementing the dialogue board alternative clause will go in opposition to Massachusetts’s strong public protection curiosity as manifested inside the [MNCA].” The Courtroom docket rejected that argument, holding:

First, federal laws preempts Massachusetts’s procedural pointers. Second, as a result of the Supreme Courtroom docket outlined in [M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972)], any disfavor Massachusetts harbors in path of debate board alternative clauses—as manifested inside the MNCA—does not weaken the presumption of enforceability that dialogue board alternative clauses get pleasure from in federal courtroom. Definitely, to allow the MNCA to trump the occasions’ contractual different of debate board would allow provincial attitudes to dominate. Lastly, no Massachusetts courtroom has held that the MNCA manifests the state’s strong public protection. Thus, the enforcement of the Settlement’s dialogue board alternative clause would not go in opposition to a strong public protection of Massachusetts.

That’s an attention-grabbing alternative on account of the MNCA does not even seem to make use of to LePage’s Settlement – ​​actually, the Courtroom docket recognized in a footnote that the occasions disputed whether or not or not it utilized – on account of the Settlement did not embody a noncompete provision, and the MNCA does not apply to various kinds of post-employment restrictive covenants just like non-solicitation covenants. The Courtroom docket dealt with this in a footnote, opinion that “it needn’t decide whether or not or not the MNCA applies to the Settlement” on account of “the Courtroom docket finds the Settlement’s dialogue board alternative clause enforceable whatever the MNCA.” (Emphasis added). In numerous phrases, the MNCA is irrelevant to this analysis –which, in and of itself, says one factor in regards to the MNCA’s requirement that claims referring to noncompetes needs to be filed in Massachusetts state courtroom.

Beneath this reasoning, even the place the MNCA applies to an settlement, an out-of-state dialogue board alternative clause would nonetheless be enforceable in opposition to a Massachusetts employee in federal courtroom outdoor of Massachusetts based on preemption and concepts of federalism and state sovereignty. It is unclear whether or not or not a courtroom would rule in any other case if a courtroom in Massachusetts had been to hold that “the MNCA manifests the state’s strong public protection” on account of issues with preemption and what the Courtroom docket termed “provincial attitudes” would keep, nevertheless the Courtroom docket in LePage did level out the dearth of such a holding as a associated situation.

Regardless, had been LePage to have lived and labored in California or Washington (or, beginning August 9, 2022, in Colorado), she would have had the selection of submitting an movement in these states looking for to invalidate the dialogue board alternative clause and, if she succeeded, she would have been entitled to injunctive discount, damages, and/or attorneys’ expenses. Nonetheless on account of the MNCA does not have a similar enforcement mechanism providing for such therapies, that alternative was not viable (or, on the very least, economical) in Massachusetts. She may need filed a declaratory judgment movement asking a Massachusetts courtroom to declare the Virginia dialogue board alternative clause void, nevertheless the movement likely would have been analyzed under standard first-filed jurisprudence. Whether or not or not she succeeded or not, LePage would not have been entitled to injunctive discount, damages, and/or attorneys’ expenses, making it an expensive endeavor and any victory pyrrhic.

In sum, some out-of-state choice-of-law and dialogue board alternative clauses keep enforceable, even in opposition to staff who dwell or work in some states that purport to ban them. Employers should beware, nonetheless, of those states by which there are civil and authorized penalties for violations of their respective noncompete authorized pointers (along with prohibitions on out-of-state choice-of-law and dialogue board alternative provisions).

Please attain out to any member of EBG’s Commerce Secret & Employee Mobility observe group or your EBG contact to debate these important factors extra.