Turns out Oklahoma and California have much more in common than one would imagine – they both prohibit non-compete agreements. The Fifth Circuit Court of Appeals recently confirmed in Cardoni, et al. v. Prosperity Bank what many Oklahoma businesses already know – non-compete restraints in Oklahoma do not hold up in court. What makes this case interesting is that the Fifth Circuit refused to apply Texas law to bankers’ non-compete agreements even though they agreed that their agreements should be governed by Texas law, because Texas law was contrary to Oklahoma’s public policy, which prohibits such agreements under any circumstances. As the result, the Oklahoma bankers were allowed to compete despite the non-compete clauses in their employment contracts with a Texas bank.
Prosperity Bank highlights a situation, which has become more common in recent years, where a court will not apply the parties’ selected law because it is either (a) contrary to the fundamental policy of the state where the employee works, or (b) has no substantial relationship to the employment relationship, the employer or the employee. So, how can companies ensure that they are protected from competition from employees located in other states? The following basic rules can help companies draft effective post-employment restraints:
- Non-compete agreements are governed by different laws in each state.
- While the courts usually will defer to the parties’ choice of law to govern their employment contracts, that is not always the case.
- Where the law specified in an employment agreement contradicts a “fundamental public policy” of the state where the employee works, courts may refuse to apply the chosen law.
- If possible, a company should make sure that its non-competes are enforceable in both – the state specified in the contract and the state where the employee works.
- If that is not possible or an employee works in a state that prohibits non-compete agreements, the employer should look to see whether confidentiality or non-solicitations clauses may be used to achieve the same or similar results.
- The bottom line is that figuring out which law applies to non-compete agreements in different states and whether they will be enforced in court down the road involves a factually intensive and complicated legal analysis. For higher-level employees, it pays to have the analysis done before non-compete agreements are signed and not after such employees have already opened a competing business or joined a competitor.
Leiza Dolghih is the founder of Dolghih Law Group PLLC. She is board certified in labor and employment law and has 16+ years of experience in commercial and employment litigation, including trade secrets and non-compete disputes. You can contact her directly at firstname.lastname@example.org or (214) 531-2403.