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California Federal Court Boots Employee’s Challenge Of His Non-Compete Because Of Pennsylvania Forum Selection Provision

Posted in Non-Compete Enforceability, Practice & Procedure, Restrictive Covenants, Trade Secrets

By Robert Milligan and Grace Chuchla

In a recent order, a federal court in the Northern District of California weighed in on the validity a forum selection clause contained in an employment agreement in connection with a California employee’s declaratory relief action to invalidate his non-compete provision with his former employer. The court found for the Pennsylvania-based employer and both denied the employee’s motion to remand the case to California state court and granted the employer’s motion to dismiss for improper venue. In doing so, the court rejected the employee’s argument that the effect of enforcing the forum selection clause would permit a Pennsylvania court to enforce the non-compete provision against him and thus “deprive [Plaintiff] of the protection of his own jurisdication’s laws and remedies.” 

Background

On March 5, 2012, plaintiff Philip C. Hartstein, a resident of San Mateo, CA, resigned from defendant company Rembrandt IP Solutions, a Delaware limited liability company headquartered in Pennsylvania. Rembrandt identifies and develops business opportunities for a related company, which is engaged in the management of funds focused on investing in intellectual property and related opportunities across a broad spectrum of industries, technologies, and business methods, including generating revenues from patents. That same day, Hartstein filed suit in San Mateo County Superior Court, requesting declaratory relief and an injunction to invalidate the non-compete covenant of his employment agreement. Within Hartstein’s employment agreement, there was also a forum selection clause, which stated that Hartstein must “submit to the exclusive jurisdiction of the state courts located in Montgomery County, Pennsylvania and to the Federal Courts located in Philadelphia, Pennsylvania as to all actions and proceedings relating in any way to this Agreement and/or [Plaintiff’s] relationship with [Defendant].”

After leaving Rembrandt, Hartstein began employment as the Vice President and Portfolio Manager of IPNav, a direct competitor of Rembrandt’s. His new position at IPNav was similar to his old position, as both IPNav and Rembrandt compete for many of the same patent portfolios and investment opportunities.

Following Hartstein’s complaint, on May 4, 2012 Rembrandt removed the action to federal court on diversity grounds, asserting that Hartstein earned well over $75,000 and that the value of their trade secrets known to Hartstein was also well over $75,000. Additionally, on May 11, 2012, Rembrandt filed a motion to dismiss for improper venue. Hartstein then responded with a motion to remand based on the fact that Rembrandt had failed to establish that the amount in controversy exceeded $75,000.

Plaintiff’s Motion to Remand

Looking first to Hartstein’s motion to remand, the court found, for numerous reasons, that Rembrandt had met its burden in proving that the amount in controversy exceeds $75,000. It began by rejecting Hartstein’s argument that his worth to Rembrandt was too speculative to be properly considered when determining the amount in controversy. Based on Hartstein’s “central and high level role,” the court found it “more than likely” that Hartstein generated work worth more than $75,000 to Rembrandt. Additionally, putting future profits to the side, the court reasoned that Hartstein’s salary while at Rembrandt is “a simple and straightforward way to value the object of this litigation,” as this figure represents the value of the non-compete to the employee. Given that Hartstein’s salary was well in excess of $75,000, such reasoning drove yet another nail in the coffin of his motion to remand. Finally, Hartstein argued that the value of the non-compete to Rembrandt was zero because he had not misappropriated and did not intend to misappropriate any of Rembrandt’s trade secrets. Again, the court rejected this argument, finding that “the possibility that [Hartstein] will share Defendant’s trade secrets and confidential information…is very real.” Resting on this lengthy list of reasons, the court denied Hartstein’s motion to remand.

Motion to Dismiss for Improper Venue

After rejecting the motion to remand, the court moved on to Rembrandt’s motion to dismiss based on the forum selection clause of Hartstein’s employment agreement. It began its discussion of this motion by recognizing that, while the Supreme Court held forum selection clauses to be presumptively valid in M/S Bremen v. Zapata Off-Shore Co., 407 US 1, 92 S.Ct. 1907, 32 L.Ed.2d 513 (1972), the court also stated that such clauses are unenforceable if enforcement would “contravene a strong public policy of the forum in which suit is brought” Id. at 15. Hartstein’s opposition proceeded exactly along these lines; he claimed that enforcing the forum selection clause would “deprive [him] of the protection of his own jurisdiction’s laws and remedies” and result in a sure-fire win for Rembrandt in Pennsylvania to enforce the non-compete provision.

The court found Hartstein’s argument unpersuasive on the grounds that it did not “challenge the reasonableness of the forum selection clause itself, only the reasonableness of its effect.” Citing to Manchester v. Arista Records, Inc., 1981 US Dist. Lexis 18642 (C.D.Cal Sept. 15, 1981), the court stated that finding in Hartstein’s favor would force it to “make a determination of the potential outcome of the litigation” and lead to “speculation on the merits at the outset of the action.” In short, it did not matter to the court whether the ultimate effect of enforcing the forum selection clause may result in the enforcement of the non-compete provision which “was purportedly contrary to California law”; for the purpose of deciding the reasonableness of the forum selection clause, all that mattered was that, given the facts at hand, forum selection itself was not contrary to California law.

Takeaways

For some employers, particularly out-of-state employers, looking to work around California’s hostility toward non-competes, this decision suggests that forum selection clauses may provide a solution. Building on some previous California federal court decisions, the court makes it amply clear that it will not look beyond the text of a forum selection clause when determining its reasonableness.

However, that is not to say that all forum selection clauses are enforceable in California. For instance, as the court points out here, those that attempt to dictate the forum for suits arising out of franchise agreements are contrary to section 20040.5 of the California Business and Professions Code and therefore unenforceable (See Jones v. GNC Franchising, Inc., 211 F.3d 495). Additionally, some other California state and federal courts have been hostile to enforcing forum selection clauses when the impact would violate a strong California public policy such as California’s prohibition on non-compete provisions in the employment context. Certainly, a California state court may not follow this court’s reasoning particularly since the court relied upon federal law in analyzing the effect and scope of the forum selection clause. Thus, the court’s denial of the motion to remand could have been outcome determinative as a California state court could have ruled differently concerning the enforcement of the forum selection clause.

Finally, this order lays out four factors to keep in mind when trying to determine the amount in controversy in a declaratory relief action seeking to invalidate a restrictive covenant: 1) the employee’s role and responsibilities within the company; 2) the profits earned by the employer on business generated by the employee during the period immediately before his termination; 3) the value of the non-compete to the employee (that is, how much money would the non-compete preclude the employee from earning); and 4) the value of the company’s trade secrets and confidential information known to the employee. Such a list is helpful to keep in mind when arguing for or against remand or removal.

We will continue to keep you apprised of the current developments in this evolving area.