Contractual choice of law provisions often seek to apply the law of the state that, when applied by a court to the contract at issue, is most likely to result in favorable interpretations, application, and/or enforcement of those provisions in the contract most valued by the contracting parties. However, when the law chosen is of a state different than the state in which the contract appears to be headed for litigation, the parties to the contract may “race” to get their respective lawsuits on file and obtain a judgment in the jurisdiction that they perceive most favorable to their position.
Given the patchwork of laws from state-to-state concerning the enforceability of non-compete and non-solicitation agreements, choice of law provisions in agreements containing such clauses is often a significant strategic consideration.
The Ninth Circuit’s recent decision in Ruiz v. Affinity Logistics Corp., 2012 WL 388171 (9th Cir. February 8, 2012), likely will be applied in “race to judgment” cases to argue that the law of the state with the greatest connection to the negotiation, subject matter, and performance of the underlying contract should be applied to the issues in suit. In Ruiz, the Ninth Circuit held that a contractual choice of law provision calling for the application of Georgia law was unenforceable because California had a materially greater interest than Georgia in the outcome of the case. See Seyfarth’s One Minute Memo for a fuller description of Ruiz.
The Ruiz court analyzed five factors in determining whether California had a materially greater interest than Georgia in determining the issues in suit: (1) the place of contracting, (2) the place of negotiation for the contract, (3) the place of performance, (4) the location of the subject matter of the contract, and (5) the domicile, residence, nationality, place of incorporation, and place of business of the parties. The Ninth Circuit’s factors, which are somewhat reminiscent of a “minimum contacts” analysis used to determine personal jurisdiction, place an emphasis on tying the chosen law to the state where the parties actually spent most to their time creating, entering into, and performing the contract.
While only time will tell, it is likely that the five factors applied in Ruiz will be used by litigants in the Ninth Circuit to argue against the enforceability of choice of law clauses applying the law of a state where the functional connections set forth in Ruiz do not exist. Given this, parties may do well when drafting choice of law provisions to, where possible, choose the law of a state where the functional connections set forth in Ruiz may be satisfied.