Forum Selection Clauses in Noncompete Agreements
As discussed in our past Noncompete News articles, the enforceability of restrictive covenants lies, in large part, on which state’s law will be applied to the covenants. One way to influence which state’s law will control is through a forum selection clause.
A forum selection clause (“FSC”) identifies the state and location where the parties to an agreement have agreed to handle any dispute arising out of the agreement. In Rode and Biotronick, Inc. v. St. Jude Medical S.C., Inc., the Northern District of Georgia recently had the opportunity to address a FSC contained in a noncompete agreement.
Rode was a salesman who worked for St. Jude selling cardiac rhythm management devices (“CRMDs”). Rode signed an employment agreement with St. Jude that contained certain restrictive covenants. The agreement also contained a FSC requiring any action or proceeding “relating to this Agreement [to] be tried and litigated only in the Minnesota State or Federal Courts located in Ramsey County, Minnesota. Employee submits to the exclusive jurisdiction of these courts for the purpose of any such action or proceedings, and this submission cannot be revoked.”
When Rode resigned, he and Biotronick filed a lawsuit against St. Jude in the Northern District of Georgia, seeking to have the Georgia Court declare the restrictive covenants unenforceable under Georgia law. St. Jude responded by asking the Court to transfer the lawsuit to Minnesota, under the agreement’s Minnesota FSC.
The Court first outlined the principles for consideration of whether a case should be transferred to another jurisdiction pursuant to a FSC. Following precedent, the Court reasoned that if a FSC is “freely and fairly negotiated by experienced business professionals” in the absence of “fraud, duress, misrepresentation, or other misconduct that would bar the clause’s enforcement,” it would be enforceable. Rode and Biotronick argued that the FSC was unenforceable because, if the action was transferred to Minnesota, a Minnesota court “undoubtedly” would apply Minnesota law to the dispute. Therefore, they argued, enforcing the FSC in effect would be like enforcing a Minnesota choice of law provision. And that, they argued, is contrary to Georgia law because Georgia courts will not apply another state’s law when doing so would subject an employee to law that is less favorable than the law of Georgia.
The Court rejected Rode’s and Biotronick’s argument. While it recognized that the restrictive covenant provisions at issue likely would be unenforceable in Georgia and, conversely, subject to enforcement in Minnesota through Minnesota’s blue pencil doctrine, it held that there was no clear understanding which law (Georgia or Minnesota) a Minnesota court would apply. Simply put, the Court, following Georgia state court precedent, recognized the “viability of a forum selection clause in an employment contract that contains a noncompetition covenant.”
In the end, the Court transferred the case to a Minnesota court. While there was no clear understanding what law the Minnesota court would apply, the mere transfer of the case to Minnesota breathed life into restrictive covenants that were unenforceable in a Georgia court. The decision left open the issue of what a Georgia federal court would do when faced with a foreign FSC and a provision requiring that another state’s law – less favorable for an employee than Georgia law – be applied to an agreement. In the meantime, the decision reinforces the principle that a company may be able to control the outcome of an agreement’s enforceability by including a forum selection provision.