Pennsylvania Superior Court Upholds Pennsylvania Choice-of-Law Provision in Restrictive Covenant Dispute Involving California Employee

In Synthes USA Sales, LLC v. Peter Harrison and Globus Medical, Inc., No. 12 EDA 2013, the Superior Court of Pennsylvania applied a Pennsylvania choice-of-law provision in an employment agreement containing confidentiality and non-solicitation provisions in a dispute over an employee who worked in California. In Pennsylvania, so-called “restrictive covenants” and “non-competes” are enforceable if they are incident to an employment relationship, reasonably necessary to protect the employer’s legitimate interests, reasonably limited in duration and geographical scope, and supported by adequate consideration. California law, in contrast, is notoriously hostile to restrictive covenants, with a statute rendering most employment restrictive covenants unenforceable.

Based on the parties’ choice-of-law and forum-selection clause in the employment agreement, the employer (headquartered in Pennsylvania) brought suit in Pennsylvania against the former employee (a resident of California) and his new employer (also headquartered in Pennsylvania). The subject choice-of-law provision stated, “This agreement will be governed by Pennsylvania law applicable to contracts entered into and performed in Pennsylvania.” The trial court found that, because the applicable employment agreement was performed in California, the foregoing provision requiring application of Pennsylvania law did not apply. The trial court then applied Section 187(2)(b) of the Restatement (Second) of Conflicts of Laws and determined that California law should apply because Pennsylvania law would be contrary to a fundamental policy of California, which has a materially greater interest in the dispute than Pennsylvania. The trial court, therefore, granted in part and denied in part the employer’s motion for preliminary injunction.

The appellate court reversed, holding that under a “sensible grammatical construction” of the agreement, Pennsylvania law was intended to apply. According to the appellate court, the trial court had misconstrued the choice-of-law provision as being applicable to contracts performed in Pennsylvania only. In addition, the appellate court found that Section 187(1) of the Restatement applied because the particular issue in dispute — the employee’s right to solicit the former employer’s customers — “could have” been and, in fact, was explicitly addressed in the agreement. Because Section 187(1) applied, the choice-of-law provision had to be applied as written, and none of the concerns expressed in Section 187(2) — such as conflict with a fundamental policy of California — came into play.

The Superior Court remanded the case to the trial court for a determination whether a preliminary injunction should be entered in accordance with Pennsylvania law.

This case shows the importance of carefully drafting and considering all contract provisions in the employment agreement, especially the choice-of-law and forum-selection provisions. The case also shows that, at least in states which follow the Restatement, a well-crafted forum-selection clause can allow an employer to avoid California’s law and strong public policy against employment restrictive covenants.

William G. Frey is a Director in the Gibbons Business & Commercial Litigation Department.
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