Non-compete law varies drastically by state. Some states broadly favor non-competes. Other states virtually ban them. Some states impose highly specific limitations across the board. Others take a more flexible, case-by-case approach. Courts in some states will reform or strike out portions of an overly broad agreement to make it enforceable. Others will refuse to enforce an overly broad agreement at all. And this is just the beginning. Each state has distinct rules governing the reasonable scope of a non-compete, the business interests that may be protected by a non-compete, the consideration required to support a non-compete, and the showing needed to obtain an injunction, among other things.
Bottom line: A non-compete agreement that is enforceable under one state's laws may not be enforceable under another's. Consequently, "choice of law"—the rules that determine which state's laws apply in a dispute—is often a crucial consideration in the non-compete context.
A recent case from the Sixth Circuit Court of Appeals drives this point home. In Stone Surgical, LLC v. Stryker Corp., the medical device company Stryker sued a top sales representative for going to work for a competitor in violation of his non-compete agreement. Stryker is headquartered in Michigan. The sales rep lived in Louisiana and received products, delivered products to doctors and hospitals, and conducted sales meetings in Louisiana.
As the court notes, "Michigan law favors non-competes and Louisiana law severely restricts them." The non-compete agreement included a choice-of-law provision calling for the application of Michigan law. However, application of a choice-of-law provision is not automatic, and the sales rep argued that Louisiana's more stringent non-compete laws should govern the dispute. In determining whether to apply a choice-of-law provision in a contract, courts will undertake a multi-step analysis that considers, among other things, which state's law would apply absent a choice-of-law provision and whether that state has a "materially greater interest" in the dispute than the state named in the agreement.
In short, if Louisiana did not have a materially greater interest in the dispute than Michigan, then Michigan law—which is friendlier towards those seeking to enforce a non-compete—would apply. The sales rep argued that his non-compete agreement with Stryker was null and void under Louisiana law.
The Sixth Circuit disagreed and upheld the Michigan choice-of-law provision. Though it remarked that the validity of the provision was a close question, it found that Louisiana did not have a materially greater interest than Michigan. The court reasoned:
Stryker is a Michigan corporation, with its headquarters and management centered there. Michigan has a strong interest in protecting its businesses from unfair competition. Stryker will also suffer economic loss as a result of [the sales representative's] breach of the non-compete agreement—something Michigan surely has an interest in protecting Stryker, a Michigan company, from suffering.
The Sixth Circuit affirmed the judgment of the lower court, in which a jury had returned a verdict in favor of Stryker on its non-compete and other claims under Michigan law and awarded $745,000 in damages. Though it is unknown what the ultimate outcome would have been under Louisiana law, the non-compete would, at a minimum, have been harder to enforce.
The takeaway is that choice of law should be carefully considered before signing a non-compete, and its impact should be evaluated at the outset of any non-compete dispute.
For more on this topic, see my article, "Choice of Law in Noncompetition Law and Litigation."
This legal blog is written by attorney Maxwell Goss. Max practices business litigation, with a focus on non-competes, trade secrets, shareholder dispute, and intellectual property.