On January 28, 2015, the Delaware Court of Chancery released an opinion finding that a choice of law clause in a noncompete contract, designating Delaware as the venue and choice of law for dispute resolution, did not govern the dispute because the state of California had a materially greater interest in the issue. The parties here engaged in an employee investment agreement (“EIA”) in July of 2008, in which Defendant Underwood agreed not to compete with Ascension or its parent for two years after leaving his position at Ascension. Plaintiff Ascension sought to enforce the non-compete clause in the EIA and the Court of Chancery was presented with the question of whether California’s employee friendly statute or Delaware’s contract-friendly policies should govern the validity of the non-compete clause.
In the EIA both parties agreed to Delaware venue as well as Delaware choice of law. However, the court found that California was the state with the strongest contacts to the contract because the EIA was entered between a California resident and a Delaware limited liability company that now has its principal place of business in California, the non-compete clause was negotiated in California, and but for the choice-of-law provision, California law would apply to the EIA. Additionally, California’s interest in its employee-friendly public policy is greater than Delaware’s interest in the sanctity of a contract.
This decision is significant because the Chancery Court, which is historically corporate-friendly, took a strong stance against allowing corporations to contract around unfavorable state laws. The court emphasized that California’s public policy against non-compete clauses is so fundamental that it would prevail over a contracted to term which goes against this policy. This decision empowers employees and ensures that they will be able to rely on his or her state’s employee protection policies as long as he or she is engaging in the employment relationship in his or her state. Even if an employee agrees to a choice-of-law clause, applicable state policies will still be able to protect him or her. In the future, this decision should cause corporations to investigate the state policies on non-compete clauses in the states in which it engages in employee relationships.