Courts around the country are split as to the circumstances under which the parties’ choice of law set forth in a non-compete agreement will be honored. In a recent diversity jurisdiction case ruling, Arizona U.S. District Court Judge David Campbell recently refused to enjoin violations of a non-compete clause which said that the law of Washington State applied. He held that Arizona had a greater interest than Washington in the case before him, and that Arizona’s “fundamental policy” (a) requires courts in that state to be less tolerant than courts in Washington with regard to enforcing broad non-compete clauses, and (b) prohibits Arizona jurists (unlike their Washington counterparts) from using a “blue pencil” to make such clauses reasonable. He concluded that an Arizona court would be unwilling to enforce the parties’ agreement in the circumstances here. Pathway Med. Technologies, Inc. v. Nelson, Case No. CV11-0857 PHX DGC (D.Ariz., Sept. 30, 2011).
For two years, Nelson was a sales representative in Arizona for Pathway, a developer, manufacturer and seller of medical devices for the treatment of arterial disease. While employed, he signed a confidentiality agreement in which he promised that for one year after his employment ceased, he would not “divert or take away,” or “attempt or assist” anyone else in diverting or taking away, any Pathway customer. The agreement recited that it is governed by Washington law.
Following his resignation from Pathway, he was hired by a direct competitor and allegedly engaged in the prohibited conduct for the benefit of the competitor and the detriment of Pathway. Pathway sued Nelson and the competitor, and moved for temporary and preliminary injunctive relief. Judge Campbell denied both motions.
Arizona courts determine the enforceability of a choice of law provision in a non-compete clause by applying Sections 177 and 188 of the Restatement (Second) of Conflicts of Laws. According to the court’s reading of those sections, the parties’ choice will be honored only if they “could have agreed in their contract to the same provisions that the chosen law would impose, and could have done so under the law of the state with the most significant contacts with the transaction.” Washington law differs from that of Arizona in the two respects described above. First, Arizona “requires that non-compete provisions be narrowly drafted and no greater than necessary to protect the employer’s legitimate interests,” whereas Washington enforces agreements “even if they are quite broad and last for long periods of time.” Second, in contrast to the law of Washington, Arizona “courts may not rewrite non-compete agreements to make them reasonable.”
The contract was negotiated and signed in Arizona, the state where Nelson lived and where he performed his duties both for Pathway and for its competitor. The court held that application of Washington law in this case would be contrary to the “fundamental policy” of Arizona law. The non-compete clause here had no express geographical limitations. Further, it applied to all Pathway customers including those with whom Nelson never had had contact. Finally, the phrases “divert or take away any customer,” and “attempt or assist” such diversion or taking away, were deemed to be unduly vague.
Employers who want to enforce non-compete agreements containing a choice of law provision must take care to select operative language that meets legal requirements not only of the chosen state but also those of the likely forum state if its law is different.