A new decision from the U.S. Court of Appeals for the 6th Circuit reminds us how important choice-of-law can be in non-compete agreements. In this case, the choice of law clause was likely the difference between success and failure for an employer seeking an injunction enforcing its non-compete.
Employee Moves to California After Signing Ohio Law Non-Compete
For nearly twenty years, Chad Altbaier, a California resident, worked for Down-Lite International, Inc., a closely-held corporation organized under Ohio law. Altbaier formed a company hoping to partner with Down-Lite, and resigned his employment.
The relationship broke down and Down-Lite filed suit in Ohio to enforce a non-competition provision in the parties’ shareholder agreement. This agreement specifically provided for application of Ohio law, which proved crucial for Down-Lite.
District Court Grants Injunction Applying Ohio Law
The federal district court granted Down-Lite a pared-down preliminary injunction prohibiting Altbaier from soliciting directly or indirectly or otherwise diverting the sale of down insulation to companies who were Down-Lite’s existing outdoor clothing customers. On appeal, Altbaier argued that the federal court erred in finding Ohio law, rather than California law, was applicable.
The court of appeals pointed out that Altbaier wished to have California law apply because of “California’s hostility towards covenants not to compete.” Altbaier had a reasonable argument for applying California law. Altbaier worked for Down-Lite from his home in California since 2003, and developed significant accounts in California.
Appeals Court Finds Ohio Had As Great an Interest As California in Dispute
Even so, the appeals court could not say that California had a materially greater interest in determining the dispute than Ohio. The court observed that Down-Lite is a close corporation organized under Ohio law and the shareholder agreement was designed to protect Down-Lite’s Ohio shareholders. Additionally, Altbaier’s work extended beyond the borders of California while he worked for Down-Lite.
While California had a meaningful interest in protecting Altbaier from Down-Lite’s effort to restrict competition, that interest was not materially greater than Ohio’s interest in protecting one of its closely held businesses, which also operated in the global economy.
The appeals court quoted the Ohio Supreme Court, which has found it fundamental to Ohio’s commercial interests to grant parties the right to contract freely with the expectation that their bargain will endure according to the terms they have agreed on. The appeals court said, “we will not summarily brush aside the clear and unambiguous terms of the parties’ agreement to adjudicate this dispute under Ohio law.”
Drafting Tip: Choice of Law Clause Can Save the Day
The case is a reminder to state in an agreement which state’s law will govern interpretation or enforcement of the agreement. It is refreshing that a court was willing to hold the parties to their bargain. Had the court been willing to apply California law it is doubtful the agreement would have been enforced.
Down-Lite International, Inc. v. Altbaier (6th Cir. 2020).
by Michael R. Lied