Recent federal court rulings have revealed a critical loophole in California’s non-compete ban, outlined in SB 699. The legislation, effective from January 1, 2024, was designed to render non-competition agreements unenforceable in the state. However, this goal is being circumvented by employers who rely on choice-of-law provisions in employment contracts to establish jurisdiction based on laws from other states.
In a standout case, DraftKings Inc. v. Hermalyn, a former senior executive at DraftKings sought to invalidate his non-compete clause under California law. Despite his last-minute efforts to gain California residency, the Massachusetts federal court upheld the Massachusetts choice-of-law provision. The court ruled that California had insufficient connection to the case, emphasizing that the executive had never worked within the state for DraftKings.
Similarly, in NetRoadshow, Inc. v. Carrandi, a Georgia federal court enforced a Georgia choice-of-law provision, dismissing the argument that California’s SB 699 should apply following the employee’s relocation to California. The court prioritized Georgia’s public policy over California’s, emphasizing jurisdictional principles favoring the original agreement.
The narrative continued in California, as demonstrated in Poer v. FTI Consulting, Inc., where a California federal court enforced a Maryland choice-of-law provision. It determined the case had no substantial connection to California, highlighting SB 699’s limitations when contractual clauses designate alternative jurisdictions favoring non-compete enforcement.
As employers and employees navigate the complexities of SB 699, these rulings underscore the importance of including unequivocal choice-of-law provisions in contracts. Such provisions often tip the scales in favor of jurisdictions more accepting of non-compete agreements, illustrating a strategic avenue for employers to sidestep California’s restrictive stance. For further insights, view the full article on Bloomberg Law.