Variations in non-compete law from state to state can be frustrating for employers with multi-state workforces. A restriction that works in one state might be invalid in another.
A common fix is to include a choice-of-law clause designating a state that favors enforcement of non-competes, but the enforceability of such clauses also varies widely in different jurisdictions. That’s why the Northern District of Illinois’ recent PCM Sales, Inc. v. Reed decision enforcing an Ohio choice-of-law clause against an Illinois employee is a big win for employers.
Employee Had No Connection to Ohio Except Through Employer’s Corporate Parent
At first blush, the case does not seem a good one for the enforcement of an Ohio choice-of-law clause. Defendant worked for plaintiff as a salesman from an office in Illinois and covered an 8-state territory. He had left plaintiff’s employ to work for a competitor in Wisconsin. There was no evidence in the record that defendant made any sales in Ohio for plaintiff. Nor was there any evidence plaintiff had any employees in Ohio.
The connection to Ohio was through plaintiff’s corporate parent. The parent corporation’s human resources department was based in Ohio and 20% of the workforce employed by the parent and its subsidiaries worked in Ohio.
Court Nevertheless Finds a “Substantial Relationship” & Enforces Ohio Law Clause
This was enough for the court. The fact that Illinois non-compete law differs greatly from Ohio law did not sway the court. By virtue of the parent corporation’s connections to Ohio, there was enough of a “substantial relationship” to that state to allow for enforcement of the Ohio choice-of-law clause – and, along with it, enforcement of the non-compete against defendant.
The way defendant handled his resignation presumably did not help him with the court. He emailed confidential customer information to his personal email before resigning and blatantly violated the prohibition on soliciting customers. This case may thus be an example of bad facts making bad law (or good law depending on your point of view).
Questions Remain About Choice-of-Law Clauses
Although this case gives them a boost, choice-of-law clauses remain of questionable enforceability in some jurisdictions. California in particular has long been hostile to such provisions and recently passed a law prohibiting employers from using choice-of-law clauses with California employees in most circumstances.
Another option for employers to consider is a venue clause requiring disputes to be heard before a court located in the employer’s home state (except in California, where such provisions are barred). Although plaintiff prevailed here, the applicability of Ohio law – and enforcement of the non-compete – would have been more certain before an Ohio court.
James Komie is an attorney with Howard & Howard in Chicago, IL. He regularly writes and speaks on new developments and trends in the law regarding non-competes and trade secrets, as well as issues relating to the financial services industry.