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Can You Enforce an Employee’s Non-Compete Even Though They Moved to California?

Many employers have granted their white collar workers increased flexibility to work remotely in response to the pandemic. As a result, some employees have moved away from the areas surrounding their offices and into places with lower costs or higher quality of living. In cases where an employee with a non-compete moves to a state such as California, which has a prohibition against any “contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind,” that can present potential problems for a Company. Cal. Bus. & Prof. Code. § 16600.

 

Medtronic, Inc. v. Walland, No. 21 CIV. 2908 (ER), 2021 WL 4131657, at *2 (S.D.N.Y. Sept. 10, 2021) explored that very issue when Medtronic, sought a preliminary injunction against Joseph Walland (“Walland”) the former CEO of company it had acquired, Medicrea. In denying a preliminary injunction preventing Walland from working for a competitor, the United States District Court for the Southern District of New York applied California law through a choice of law analysis and refused to enforce the non-compete provision in Walland’s employment agreement (“Agreement”).

Walland was hired by Medicrea in 2017 as VP of sales, while living in California. He was promoted to CEO in 2018, and he alleged that he negotiated his CEO employment agreement while living in California. The Agreement stated in pertinent part that it “shall be governed by and construed under the laws of the State of New York, without regard to its conflict of laws principles.” The Agreement contained a non-compete provision whereby Walland agreed not to compete directly or indirectly for twelve months after separation from employment with any “competitive business” – in this case a business in the marketing and sale of spinal implants.

After executing the Agreement, Walland moved to New York in 2018, and presided over Medicrea as CEO until he resigned in December of 2020, having moved back to California in March of 2020. In January 2021, Walland entered into a separation agreement (“Separation Agreement”) with Medtronic (which became the parent corporation of Medicrea in November 2020), wherein he specifically released any claims that the restrictive covenants in his Employment Agreement were unenforceable. By that time, however, Walland had already begun work for another company, Alphatec, which also sold spinal implant-related products. Medtronic then filed suit seeking an injunction preventing Walland from working for Alphatec.

Upon an injunction application to the Court, the parties disagreed as to what law the court should apply. Medtronic argued New York law should apply. Walland, however, argued that “although contractual selection of governing law is generally determinative, courts will not adhere to such a selection where there is fraud, violation of public policy, or insufficient contacts between the State selected and the transaction.” The Court went on to hold that there was an actual conflict of law (regarding enforcement of non-compete provisions) that rendered a choice of law analysis necessary.

Generally, New York courts will not enforce a choice-of-law provision where (1) the chosen law bears no reasonable relationship to the parties or the transaction or (2) where the chosen law violates some fundamental policy of a state that has a materially greater interest than does the chosen state. The court determined because Medicrea was headquartered in New York, and Walland lived and worked in New York for several years, there was a reasonable relationship between the New York choice of law, the parties and the “transaction” (in this case Walland’s employment).

The Court held, however, that because Walland lived in California when he negotiated the Employment Agreement and because he currently lived there, California had a materially greater interest than New York. It went on to hold that the Agreement violates a fundamental public policy of California, insofar as it was a restriction on trade in violation of Cal. Bus. & Prof. Code. § 16600.

The Court also held that Walland’s rights under Cal. Bus. & Prof. Code. § 16600 were not waivable, and thus, the Separation Agreement’s terms regarding waiver were likely unenforceable. Given that both agreements contained unenforceable terms that Medtronic sought to hold Walland to, the Court held that Medtronic was not likely to succeed on the merits, and thus denied the preliminary injunction.

Medtronic v. Walland thus offers some guidance for a company considering entering into or seeking to enforce a non-compete against an employee who is working remotely from another state. Courts will consider factors such as the current locations of the employee and employer, the place(s) where the agreement was negotiated and executed, and whether there is a conflict between states’ laws where one state has a materially strong public policy regarding non-competes. As remote work appears here to stay in many industries, this is an issue that will likely continue to present itself in the coming years and employers are well-advised to seek legal advice when considering these issues.