Most California employers know that agreements that restrict employees from competing with former employers are illegal and that California courts won’t enforce them. But because of a new California Supreme Court ruling, it is now riskier for you to hire someone who has signed a noncompete clause with a company from another state. This new ruling undermines a California appeals court decision that found employers aren’t bound by noncompete agreements workers signed in other states.
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Employee Signs Noncompete Agreement
On accepting employment with Minnesota-based Medtronic Inc., Mark Stultz signed an agreement not to work for Medtronic’s competitors for two years after his employment ended. The agreement stated that it would be governed by the laws of Minnesota. Stultz eventually resigned and immediately relocated to Sylmar, Calif., to work for Advanced Bionics Corp., a Medtronic competitor.
Stultz and Advanced Bionics promptly asked a Los Angeles court to rule that the noncompete clause Stultz had signed was unenforceable in California. Medtronic turned around and asked a Minnesota court to enjoin Stultz and Advanced Bionics from violating the noncompete agreement, and the court issued a temporary order restraining Stultz’s activities as an Advanced Bionics employee.
California Employer Wins Appeal
However, the Los Angeles court then issued an order temporarily prohibiting Medtronic from pursuing the Minnesota lawsuit, and Medtronic appealed. On appeal, a California appeals court ruled that because the California action was filed first, California courts had the right to decide the dispute and apply California laws.
First-Filed Rule Doesn’t Apply
But now the California Supreme Court has ruled that it was improper for the Los Angeles court to temporarily stop the lawsuit in Minnesota. The high court rejected the first-filed rule that the California appeals court applied. According to the high court, the first-filed rule only applies when the two courts involved are in the same state, which wasn’t the case here. And, said the court, California’s public policy against noncompete agreements didn’t outweigh the need for judicial restraint.
Thus, Medtronic can now proceed with its lawsuit in Minnesota to enforce the noncompete agreement. And, said the court, Advanced Bionics is free to continue its litigation in Los Angeles to have the agreement declared invalid, unless Medtronic can convince the California court that the Minnesota ruling applies here.
Practical Impact
As a result of this ruling, if you hire a worker who signed a noncompete agreement in another state, you could become the target of a competitor’s lawsuit to enforce the agreement. To help avoid this hassle, before hiring a competitor’s employee it’s critical to ask the person for signed verification that they don’t have contracts with their current or former employers that could affect you, such as noncompete agreements, trade-secret provisions, or no-solicitation clauses. If agreements do exist, be sure to review them carefully so you know the potential problems you could face, especially if they involve an out-of-state employer.