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September 10, 2018

Legal Update
Kenneth N. Thayer

SJC rejects Massachusetts choice of law provision in non-compete agreement and holds that California law governs dispute between local employer and its California employee

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In a ruling with significant implications for Massachusetts companies that do business in California, the Supreme Judicial Court barred a Massachusetts employer from enforcing a contract with its California-based employee that would have applied Massachusetts law—rather than the more employee-friendly California law—to prevent the employee from competing with his former employer by soliciting the employer’s customers and clients.

The case, Oxford Global Resources v. Hernandez, involved a dispute between Oxford, a Massachusetts-based staffing company with offices across the country, and Jeremy Hernandez, a former account manager in Oxford’s Campbell, California office. At the outset of his employment, Hernandez was required to sign a “Confidentiality, Non-Solicitation and Non-competition Agreement,” which stated that Hernandez must agree not to solicit any current or prospective Oxford customers for a period of one year following the termination of his employment. The Agreement further stated that Massachusetts law would govern its terms, and that any litigation between Oxford and Hernandez must occur in Massachusetts.

After working at Oxford for three years, Hernandez resigned and joined a competitor, Mindsource, Inc. Shortly thereafter, Oxford received an anonymous tip that Hernandez had taken confidential call lists and other information, and had used them to solicit Oxford clients in California. Armed with this information, Oxford filed a lawsuit against Hernandez in Massachusetts Superior Court for breach of contract, tortious interference, and theft of Oxford’s trade secrets.

Hernandez moved to dismiss Oxford’s suit, claiming that California law should apply to the dispute and that the contract provision designating Massachusetts as the parties’ exclusive litigation forum was unenforceable. The Superior Court judge agreed with Hernandez and dismissed Oxford’s lawsuit. On appeal, the SJC considered two questions: (1) whether California law should govern an employment relationship between a Massachusetts employer and a California employee, even in situations like this where the parties had agreed by contract that Massachusetts law would apply; and (2) whether a contract listing Massachusetts as the sole dispute resolution forum will be enforced in cases such as this involving out-of-state parties, witnesses, and evidence.

On the first question, the Court decided to disregard the provision in the parties’ contract stipulating that Massachusetts law should govern their employment relationship, holding that California law must apply in situations where (a) “California undoubtedly has the most significant relationship to the agreement and the parties,” and (b) a fundamental difference exists between the laws and public policy of the chosen state (Massachusetts) and the state whose interest in the dispute predominates (California). Here, the Court noted that Hernandez had only worked for Oxford in California, and had never conducted any Oxford business in Massachusetts, meaning California’s interest in this case exceeded Massachusetts’. Moreover, the SJC recognized that California law fundamentally differs from Massachusetts law in that California bars all non-competition and non-solicitation agreements. Accordingly, California’s public policy would not be honored if the Court were to enforce the choice of law provision in the parties’ contract. Thus, to prevent employers such as Oxford from executing an “end run” around California’s prohibition on non-compete and non-solicitation agreements, the SJC held that Massachusetts courts must apply California law in employment disputes such as this involving local companies and their California-based employees.

On the second question, the Court ruled that Hernandez could obtain dismissal of the case in Massachusetts and require Oxford to bring suit in California under the doctrine of “forum nonconveniens.” This doctrine provides that, where justice strongly indicates that a case should be tried in another forum than the one in which it was initially brought, then the parties must seek relief in that forum. To make that determination, courts must consider the relevant public and private concerns that would be affected by litigating the case in one forum or another. Here, the SJC noted that all of the evidence and witnesses were located in California, not Massachusetts, and that both parties would enjoy greater ease and efficiency by trying the case there. In addition, the state of California had a much stronger interest in the case’s outcome, since Hernandez lives there and the alleged business harm done to Oxford by Hernandez involved Oxford’s clients in California. The Court also pointed to the existence of a new California statute, Cal. Lab. Code § 925, which bars employers such as Oxford from requiring California-based employees such as Hernandez from agreeing to adjudicate outside California those claims that have arisen in California. Finally, the Court recognized that California courts would be in a better position to decide whether the materials allegedly taken and used by Hernandez here (e.g., customer lists) constituted trade secrets or otherwise protectable business information under California law. For all of these reasons, the SJC ruled that Hernandez met the requirements for “forum nonconveniens” and the case was properly dismissed.

The SJC’s decision in Oxford significantly impacts the relationships between Massachusetts employers and their out-of-state employees, particularly for those companies here in the Commonwealth with employees in California. With this ruling, the Court has strictly limited employers’ ability to set the choice of law and choice of forum terms of their employment agreements with non-Massachusetts employees, in turn creating greater uncertainty with respect to both parties’ respective rights and obligations. In light of this decision, Massachusetts employers should at a minimum reexamine their employment contracts to assess the validity of provisions concerning choice of law and litigation forum.

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