Issues Raised Enforcing California Noncompete Clauses in Nevada Which are Against the Public Policy of California and Conflicts of Laws Issues
Posted by: Mark Albright on Thu, Nov 12, 2015Share this post
. LEGAL ANALYSIS
A. Frida Franco is not Subject to the Jurisdiction of the Nevada Courts,
As She Had No Contacts with Nevada Sufficient to Confer Jurisdiction
Nevada’s long-arm statute, NRS 14.065, is broadly written to effectuate jurisdiction,
“on any basis not inconsistent with the Constitution of this state or with the Constitution of the United States.” NRS 14.065(1). Accordingly, Nevada largely looks to the federal courts to determine the extent to which it may exercise jurisdiction over out-of-state defendants. See, e.g., Casentini v. District Court, 110 Nev. 721, 877 P.2d 535, 539 (1994): “Nevada has long construed its long-arm statute ‘to be broad enough to reach the outer limits of federal constitutional due process.’ Levison v. District Court, 103 Nev. 404, 406, 742 P.2d 1024, 1025 (1987).”
Jurisdiction may be exercised based upon a theory of either general or specific jurisdiction. As is shown by the Declaration of Defendant Frida Franco, attached herewith as Exhibit “1”, in this case neither prerequisite is met.
“General jurisdiction [exists] where a defendant is held to answer in a forum for causes of action unrelated to the defendant’s forum activities.” Trump v. District Court, 109 Nev. 687, 699, 857 P.2d 740, 748 (1993) (citations omitted). “General jurisdiction over the defendant ‘is appropriate where the defendant’s forum activities are so “substantial” or “continuous and systematic” that [the defendant] may be deemed present in the forum.’ ” Id. (citations omitted).
In this case, as shown by the Declaration of Frida Franco attached hereto as Exhibit A, Mrs. Franco is a lifelong resident of California. While working for BTI, all of Mrs. Franco’s communications and interactions were with merchants located in San Diego County, California. Mrs. Franco never communicated nor interacted with any merchants located in the State of Nevada. Mrs. Franco does not own any property in Nevada. She only goes to Las Vegas, Nevada a few times a year for entertainment. Mrs. Franco never went to Nevada or communicated with Nevada residents for any business purposes. Accordingly, none of Mrs. Franco’s contacts with the State of Nevada have been either “substantial” nor “continuous and systematic,” such that Nevada certainly has no general jurisdiction over Mrs. Franco.
Alternatively, Plaintiff must demonstrate that specific jurisdiction is appropriate. In order to establish specific jurisdiction over a defendant, it must first be established that the defendant “purposefully established ‘minimum contacts’ in the forum state ” by “conduct in connection with the forum state . . . such that he [or she] should reasonably anticipate being hailed into court there.” Burger King Corp. v. Rudzewicz, 471 U.S. 462, 474, 105 S. Ct. 2174, 2183, 85 L. Ed. 2d 528 (1985) (citing International Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S. Ct. 154, 158, 90 L. Ed. 95 (1945), and World-wide Volkswagen Corp v. Woodson, 444 U.S. 286, 295, 100 S. Ct. 559, 566, 62 L. Ed. 2d 490(1980)). In determining whether an out-of-state defendant can “reasonably anticipate” being hailed into a foreign forum, due process requires “ ‘some act by which the defendant purposefully avail[ed] itself of the privilege of conducting activities within the forum state, thus invoking the benefits and protections of its laws.’ ” Id., 471 U.S. at 475, 105 S. Ct. at 2183 (quoting Hansen v. Denckla, 357 U.S. 235, 253, 78 S. Ct. 1228, 1240, 2 L. Ed. 2d 1283 (1958)).
It must next be shown that the cause of action arose out of or is connected to the acts purposefully engaged in by the defendant in the forum state. See, e.g., Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 415–16, 104 S.Ct. 1868, 1872–73, 80 L.Ed.2d 404 (1984) (general jurisdiction based on continuous and systematic contacts must be found where claims do not arise out of and are not related to the defendant’s activities within the forum state); Munley v. Dist. Court, 104 Nev. 492, 496, 761 P.2d 414, 416 (1988) (where non-resident’s contacts are not significant or substantial, state lacks jurisdiction over a cause of action not directly related to contacts).
Finally, even if the first two requirements are met, it must still be determined “whether the assertion of personal jurisdiction would comport with [traditional notions of] ‘fair play and substantial justice.’ ” Burger King, 471 U.S. at 476, 105 S.Ct. at 2184 (quoting International Shoe, 326 U.S. at 320, 66 S.Ct. at 160). In Trump the court stated:
“Factors relevant to this [reasonableness] inquiry are: (1) the interstate judicial system’s interest in obtaining the most efficient resolution of controversies; (2) the forum state’s interest in adjudicating the dispute; (3) the plaintiff’s interest in obtaining convenient and effective relief; and (4) the interest of the several states in furthering substantive social policies.” World–Wide Volkswagen Corp., 444 U.S. at 292 [100 S.Ct. at 564.]
Trump, 109 Nev. at 701, 857 P.2d at 749.
In this case, while working for BTI, all of Mrs. Franco’s communications and interactions were with merchants located in San Diego County, California. Mrs. Franco never communicated nor interacted with any merchants located in the State of Nevada. Accordingly, the first prerequisite for establishment of specific jurisdiction over Mrs. Frnaco is not met.
Likewise, the next two prerequisite are also not met. Mrs. Franco has never engaged in any activity “in the forum state,” relating to the subject transaction, and the assertion of personal jurisdiction by Nevada over Mrs. Franco, who is California resident, for activities having to do with California merchants, would not comport with any notions of “fair play and substantial justice” but would merely be a means to cause undue expense and burden to Mrs. Franco.
It is overwhelmingly clear that Nevada has no grounds for asserting either specific or general jurisdiction over Mrs. Franco. Accordingly, this Nevada court lacks jurisdiction over Mrs. Franco and the Plaintiff’s Complaint must be dismissed against her.
B. The Choice of Law and Forum Selection Clause are Invalid
BTI will argue that the choice of law and forum selection clause in the Agreement grants personal jurisdiction to the Nevada courts over Mrs. Franco, who is a California resident.
1. The choice of law in the Agreement is invalid since the situs fixed by the agreement does not have a substantial relation with the transaction.
Under Nevada law, “parties are permitted to select the law that will govern the validity and effect of their contract.” Engel v. Ernst, 102 Nev. 390, 395, 724 P.2d 215, 216 17 (Nev. 1986). However, the following limitations are imposed on the right to choose the applicable law: “The parties are required … to act in good faith and not for the purpose of evading the law of the real situs of the contract. Additionally, the situs must have a substantial relationship to the transaction and the agreement must not be contrary to the public policy of the forum.” Id. ; see also Pentax Corp. v. Boyd, 111 Nev. 1296, 1298, 904 P.2d 1024, 1026 (Nev. 1995).
Here, both requirements are not met in the instant case. First, BTI acted in bad faith by attempting to evade the laws of California. Non-compete agreements are illegal in California. California Business and Professions Code § 16600 provides that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” Section 16600 invalidates agreements to preclude employment in a certain line of work. The section has also been construed by California courts as invalidating agreements that seek to prevent former employees from accepting work from any of the former employer’s clients. (Morris v. Harris (1954) 127 Cal.App.2d 476.) A former employee may also solicit employees from his or her former employer if unlawful means or acts of unfair competition are not used. (Diodes, Inc. v. Franzen (1968) 260 Cal.App.2d 244.)
Second, the law of Nevada does not have a substantial relationship to this dispute. Mrs. Franco resides in Chula Vista, California, and she initialed the Agreement at BTI’s San Diego office. While working for BTI, all of Mrs. Franco’s communications and interactions were with merchants located in San Diego County, California. Mrs. Franco never communicated nor interacted with any merchants located in the State of Nevada. Thus, California is the state with the dominant interest. Therefore, the choice of law clause in the Agreement is not enforceable.
2. The forum selection clause in the agreement is invalid and unenforceable since it is unreasonable and unjust based on overreaching by BTI.
While some forum selection clauses are sufficient to subject parties to the personal jurisdiction of out-of-state courts, not all forum selection clauses are enforceable. “Where such forum selection provisions have been obtained through ‘freely negotiated’ agreements and are not ‘unreasonable and unjust,’ their enforcement does not offend Due Process.” Burger King Corp. v. Rudzewicz, 471 U.S. 462, 472 n. 14, 105 S.Ct. 2174, 2182 n. 14, 85 L.Ed.2d 528 (1985). (Citation omitted.)
Forum selection clauses are prima facie valid, and are enforceable absent a strong showing by the party opposing the clause “that enforcement would be unreasonable or unjust, or that the clause [is] invalid for such reasons as fraud or overreaching.” The Bremen v. Zapata Off–Shore Co., 407 U.S. 1, 15, 92 S.Ct. 1907, 1915, 1916, 32 L.Ed.2d 513 (1972).
In Tandy Computer Leasing a Div. of Tandy Electronics Inc. v Terina’s Pizza Inc., 105 Nev. 841, 784 P.2d 7 (1989) the court stated that “[w]e cannot allow parties to bury important clauses in fine print, then spring the clause on unknowing litigants when it is time for litigation. Litigants, in effect, would be deprived of their day in court.” Id. 105 Nev. at 844, 784 P.2d at 8.
Here, the language of the Agreement supports Mrs. F’s argument of overreaching. Similar to Tandy, enforcement of this particular clause of the Agreement would be both “unreasonable and unjust.” Id. at 15, 92 S.Ct. at 1916. There was no notice of the forum selection clause in the Agreement. This clause was buried on the very bottom of page 10 of the Agreement, in very fine print, in a section labelled MISCELLANEOUS. The clause is not even in bold print.
Additionally, there were no negotiations over the forum selection clause. Mrs. F did not know the clause even existed. BTI’s President, Adam Friedman did not tell or advise Mrs. F that she should read the entire Agreement. Rather, Mr. Friedman told Mrs. F that she needed to “hurry up and initial all of the pages” of the Agreement, if she “wanted the job.” The clause was not “a vital part of the agreement,” where “the consequences of the forum clause [figured] prominently in their calculations.” The Bremen, 407 U.S. at 13, 15, 92 S.Ct. at 1916. In The Bremen, the forum selection clause “preceded the date and signature” and “could hardly be ignored.” Id. at 12–13, n. 14, 92 S.Ct. at 1914 n. 14.
BTI also had the sole authority to accept or reject any purchase or sale negotiated by Mrs. F, who had no authority to bind BTI in any manner. Additionally, while Mrs. Fwas to indemnify BTI for any negligence, a reciprocal agreement was not in place.
Likewise, Mrs. F was prohibited from competing with BTI for three years after the termination of the Agreement; however, nothing in the Agreement prohibited BTI from transacting any business with any third parties. At the time she initialed the Agreement, Mrs. F was an unsophisticated party. Mrs. F was very new to this industry and did not have much experience or knowledge, at all, in what she was getting into when she initialed the Agreement. Finally, at the time she initialed the agreement, Mrs. F was in desperate financial condition and Mr. Friedman was aware of Mrs. F’s severe financial problems.
These allegations and the provisions of the agreement itself show unequal bargaining power and overreaching. In fact, it appears there was no bargaining at all, but merely the presentation to Mrs. F of the Agreement, which she had to sign in order to do business with BTI. Bell Atlantic Tricon Leasing Corp. v. Johnnie’s Garbage Serv., Inc., 113 N.C.App. 476, 480–81, 439 S.E.2d 221, 224 (1994) ( “There was no bargaining over the terms of the contract between the parties, who were far from equal in bargaining power.”).
It is unrealistic for Mrs. F to expect to defend herself in Nevada under these facts. All of the transaction elements took place in California. While working for BTI, all of Mrs. F’s communications and interactions were with merchants located in San Diego County, California. Mrs. F never communicated nor interacted with any merchants located in the State of Nevada. Therefore, considering all the circumstances surrounding the Agreement, enforcement of the choice of law and forum selection provisions would be unreasonable and, compelling reasons have been shown against enforcement.
C. Delaware Would Reject the Attempt to circumvent California’s Strong Public Policy.
Principles of Delaware corporate law have often been cited by the Nevada Supreme Court and Nevada federal district court as persuasive authority in deciding open questions of Nevada corporate law. Consequently, Nevada practitioners often refer to Delaware corporate law or the decisions of the Nevada federal district courts for guidance in resolving open questions. See, e.g., Cohen v. Mirage Resorts, Inc., 62 P.3d 720 (Nev. 2003) (reasoning that Nevada courts will look to the jurisprudence of other states when construing Nevada statutes derived from those state’s laws); Brown v. Kinross Gold U.S.A., Inc., 531 F. Supp. 2d 1234, 1245 (D. Nev. 2008) (recognizing that the “Nevada Supreme Court frequently looks to the Delaware Supreme Court and Delaware Courts of Chancery as persuasive authorities on questions of corporation law”); Hilton Hotels Corp. v. ITT Corp., 978 F. Supp. 1342, 1347 (D. Nev. 1997) (finding Delaware authority persuasive in absence of Nevada law on point).
In Ascension Insurance Holdings, LLC v. Underwood et al., 2015 WL 356002, the Delaware Court of Chancery addressed whether a non-compete agreement entered into in California, and governed by Delaware law, could be enforced against a California-based employee competing against his employer in California. The court, concluding that California law (and not Delaware law) must be applied despite a Delaware choice-of-law provision, refused to enforce the non-compete agreement, and denied the former employer’s request for an injunction prohibiting the employee from competing
In Ascension, a limited liability company (Ascension) incorporated in Delaware, but with its principal place of business in California, acquired the assets of another company. As part of the transaction, Ascension entered into an asset purchase agreement with the seller, as well as an employment agreement with Underwood, a California employee. The employment agreement contained a non-compete restricting Underwood from competing against Ascension (and its subsidiaries) for five years after the acquisition.
In another agreement, the parties contractually agreed to both a Delaware venue (for any disputes) and Delaware choice of law. When Underwood began competing allegedly in violation of the non-compete agreement, Ascension sought an injunction seeking to enforce the non-compete against Underwood and his new employer in Delaware.
The Ascension court readily noted that Delaware, unlike California, has no public policy disallowing contractual non-competition agreements, and similarly recognized that upholding freedom of contract is a fundamental policy of the state. Furthermore, the court acknowledged that where parties to a contract have chosen the law that will govern the contract, a court will generally respect that selection. Notwithstanding, the Ascension court rejected the idea that it must automatically defer to the parties’ choice of law selection, and instead concluded that before it could apply Delaware law to the non-compete dispute, it first had to determine whether enforcement of the non-compete would conflict with a “fundamental policy” of California. If such a conflict existed, the court could only apply Delaware law if Delaware’s interest in the question of whether or not the non-compete at issue was enforceable was materially greater than that of California’s interest in upholding its policy against the enforcement of non-competes. The court resolved both questions in favor of applying California law, not Delaware’s.
With little discussion, the court acknowledged and upheld California’s strong public policy disallowing contractual agreements not to compete, underscoring that in California “a contracting party’s right to freely be employed (and to compete thereby with the parties with whom he has contracted) trumps his freedom to contract,” and that this public policy is “enshrined in statute,” Business & Professions Code §16600. It noted as well that, absent the parties’ agreement “to import Delaware law,” California law would apply to the question of whether the non-compete could be enforced. As a result, the court had no trouble concluding that the non-compete provision violated California’s fundamental public policy.
The court stated as follows:
The Restatement recognizes that allowing the parties to contract around that public policy would be an unwholesome exercise of freedom of contract. In other words, the Restatement is generally supportive of choice of law provisions, but recognizes that allowing parties to circumvent state policy-based contractual prohibitions through the promiscuous use of such provisions would eliminate the right of the default state to have control over enforceability of contracts concerning its citizens.
The court concluded that:
To protect those policy interests, and for reasons of comity, states embracing the Restatement approach recognize that necessary to the right of a jurisdiction to limit contractual ordering for its citizens is a limitation on the ability of contrating parties to choose the law of a foreign jurisdiction which does not impose that limitation, and which itself has little or no interest in the enforcement of the contract at hand.
For the convenience of the court, copy of the Ascension Insurance Holdings case is attached hereto as Exhibit “2.”
D. Even if the Court Were to Rule that Nevada had Jurisdiction Over any of the Moving Defendants, the Case Should Still be Transferred to a More Appropriate Venue on the Grounds of Forum Non Conveniens.
When deciding a motion to dismiss for forum non conveniens, a court must first determine the level of deference owed to the plaintiff’s forum choice. Pollux Holding Ltd. v. Chase Manhattan Bank, 329 F.3d 64, 70 (2d Cir.2003). Next, a district court must determine “whether an adequate alternative forum exists.” Lueck v. Sundstrand Corp., 236 F.3d 1137, 1142 (9th Cir.2001) (citing Piper Aircraft Co. v. Reyno, 454 U.S. 235, 254 n. 22 (1981)). If an adequate alternative forum does exist, the court must then weigh public and private interest factors to determine whether dismissal is warranted. Id. Dismissal for forum non conveniens is appropriate “only in exceptional circumstances when the factors weigh strongly in favor of another forum.” Eaton v. Second Judicial Dist. Court, 96 Nev. 773, 774–75, 616 P.2d 400, 401 (1980), overruled on other grounds by Pan, 120 Nev. at 228, 88 P .3d at 844.
Generally, a plaintiff’s choice of forum is entitled to great deference. Pollux Holding, 329 F.3d at 71. However, here, an adequate alternative forum exists. BTI would be allowed to litigate its breach of contract cause of action in a California court.
The Nevada Supreme Court in Eaton outlined several factors that the court must balance when deciding forum non conveniens issues in Nevada. The factors to be considered include (1) public and private interests; (2) access to sources of proof; (3) the availability of a view of the premises if necessary; (4) availability of compulsory process for unwilling witnesses; (5) the cost of obtaining testimony from willing witnesses; and (6) the enforceability of a judgment. See also, Gulf Oil Corp. v. Gilbert, 330 U.S. 501 (1947).
The public interest factors favor dismissal for forum non conveniens. Relevant public interest factors include the local interest in the case, the district court’s familiarity with applicable law, the burdens on local courts and jurors, court congestion, and the costs of resolving a dispute unrelated to the plaintiffs chosen forum. Lueck, 236 F.3d at 1147 (citing Piper Aircraft, 454 U.S. at 259–61).
As to the local interest in this case, a California forum has more interest in this matter than Nevada. BTI will argue that since it is incorporated and headquartered in Las Vegas, Nevada, it has an interest in this litigation. However, that does not mean that Nevada, or even Clark County, as a whole has an interest in this lawsuit. Additionally, no events related to this litigation occurred in Nevada. Thus, there would be only minimal local interest in this litigation. See Payne v. Eighth Judicial Dist Court, 97 Nev. 228, 229, 626 P.2d 1278, 1279 (1981), overruled on other grounds by Pan v. Eighth Judicial Dist. Court, 120 Nev. 222, 228, 88 P.3d 840, 844 (2004). Therefore, the burdens and costs of resolving this matter, which lacks any real connection to this state, support dismissal.
Moreover, the weight of these factors favoring dismissal is compounded by the fact that the parties continue to dispute whether personal jurisdiction is proper in Nevada. Where “personal jurisdiction is difficult to determine, and forum non conveniens considerations weigh heavily in favor of dismissal,” a court may properly dismiss a complaint for forum non conveniens without first deciding whether it has personal jurisdiction over the defendant. Sinochem Int’l Co. Ltd. v. Malaysia Int’l Shipping Corp., 549 U .S. 422, 436 (2007). Where a genuine dispute as to personal jurisdiction exists, a district court may properly consider this dispute in the forum non conveniens analysis. See id. at 435–36. Accordingly, here, the existence of this dispute weighs heavily in favor of dismissal for forum non conveniens.
The private interest factors also favor dismissal for forum non conveniens. Relevant private interest factors may include the location of a defendant corporation, access to proof, the availability of compulsory process for unwilling witnesses, the cost of obtaining testimony from willing witnesses, and the enforceability of a judgment. Lueck, 236 F.3d at 1145; see also Eaton, 96 Nev. at 774, 616 P.2d at 401.
Here, no parties or witnesses reside in Nevada, whereas all of the witnesses reside in California, and compulsory process is available throughout California. There are numerous witnesses from BTI’s San Diego office have personal knowledge of BTI’s failure to pay my full commission. These are all critical witnesses. Therefore, the ease of bringing witnesses and evidence to trial favor dismissal for forum non conveniens.
Moreover, any judgment obtained against Mrs. F in Nevada will ultimately need to be localized in California, once named, in order to enforce the same, since Mrs. F has no assets in Nevada and, execution proceedings will therefore not be able to commence in Nevada in any event. Indeed, under NRS 21.270(b) Mrs. F could not even be required to sit for a judgment debtor’s examination in Nevada since she is not residents of any county in this state. Therefore, taking all of the public and private interest factors together, the court should dismiss BTI’s complaint for forum non conveniens. Payne, 97 Nev. at 229, 626 P.2d at 1279.
The Nevada courts have stated that in addition to the factors discussed above, a district “court should also consider whether failure to apply the doctrine would subject the defendant to harassment, oppression, vexatiousness or inconvenience.” Eaton, 96 Nev. at 774, 616 P.2d at 401 (emphasis added). Thus, the courts have treated the issues of harassment, oppression, and vexatiousness as factors to be considered in the forum non conveniens analysis.
Here, litigating this matter in Nevada would harass, oppress, or vex Mrs. F. It is unrealistic for Mrs. F to expect to defend herself in Nevada under these facts. All of the transaction elements took place in California. While working for BTI, all of Mrs. F’s communications and interactions were with merchants located in San Diego County, California. Mrs. F never communicated nor interacted with any merchants located in the State of Nevada. Therefore, the motion should be grant since the factors weigh strongly in favor of another forum, i.e. California.
Nevada also lacks jurisdiction over Defendant F. The choice of law and forum selection clause is invalid. The choice of law in the Agreement is invalid since the situs fixed by the agreement does not have a substantial relation with the transaction. The forum selection clause in the agreement is invalid and unenforceable since it is unreasonable and unjust based on overreaching by BTI. Even if the court were to rule that Nevada had jurisdiction over any of Mrs. F, the case should still be transferred to a more appropriate venue on the grounds of forum non conveniens. For the foregoing reasons, Plaintiff’s Complaint must be dismissed against F.
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