California and Texas differ in many respects, including how they treat non-compete agreements. While Texas enforces non-compete restraints that are reasonable, California has declared such agreements unenforceable. Recently, a company headquartered in Texas attempted to enforce its non-compete agreements against two California employees. The agreements specifically stated that they “shall be governed and construed in accordance with the substantive laws of the State of Texas,” that the company is based in Irving, Texas, and that the agreements are to be partially performed in in Irving, Texas. Despite this language, the trial court and then the Dallas Court of Appeals applied California law and ruled the agreements unenforceable in Merritt, Hawkins & Associates, LLC v. Caporicci, et al.
The Court of Appeals explained that in a situation like this, where two states have a relationship with the parties and the transaction, i.e., employment, it will apply the law of the state that has “clearly more significant” relationship to the parties and the transaction. The court then concluded that the relationship to California was more significant than to Texas because: (1) both men interviewed for the jobs in California; (2) completed their employment agreements and the jobs in California; (3) the employees lived in California and traveled to Texas infrequently; and (4) the gist of their employment agreements was performance of services in California.
The Court of Appeals also looked at whether California or Texas had a “materially greater interest” in determining whether the non-compete agreements were enforceable. Although the company was based in Texas, the two employees performed services in California, and after they left the company, it had to close its California offices. Based on these facts, the Court of Appeals concluded that while Texas shared a general interest in “protecting the justifiable expectations of entities doing business in several states, that [did] not outweigh California’s interests in this case.”
Finally, the Court of Appeals concluded that the enforcement of the non-compete agreements would be contrary to a “fundamental policy of California,” which was the final nail in the coffin of the company’s argument that the agreements should be enforced under Texas law.
Takeway: Although a company may state in its employment agreement that the law of a certain state will apply, Texas courts may choose to apply the law of another state if that state has a more significant relationship with the parties or the employment agreements. The legal analysis depends on a multitude of factors and will vary depending on where the company is located, where its employees are located, what their job functions are, as well as the public policy of the other states in question. Texas companies that have employees in other states should keep that in mind when hiring or recruiting executives in other states.
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 leiza@dlg-legal.com or (214) 531-2403.
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