Many employers have national and international workforces. When entering into contracts with employees, inclusion of a choice-of-law provision is important for determining what jurisdiction’s laws will apply if one of the parties breaches the agreement. While Massachusetts generally honors contracting parties’ choice as to which law will govern their relationship, there are exceptions to that general rule. In NuVasive, Inc. v. Day, the U.S. Court of Appeals for the First Circuit enforced a Delaware choice of law provision against a Massachusetts employee and rejected his arguments that one of Massachusetts’s recognized exceptions should apply. The decision provides employers with guidance on drafting enforceable choice-of-law provisions in employment agreements.
Background
In NuVasive, a Massachusetts employee and an employer incorporated under the laws of the State of Delaware entered into a restrictive covenant agreement that contained, among other provisions, a nonsolicitation clause. Under that clause, the employee agreed not to solicit the employer’s customers for “any purpose other than for the benefit of the” employer during his employment and for one year after his employment ended. The agreement also provided that it would be “interpreted and enforced in accordance with Delaware law, without giving effect to its laws pertaining to conflict of laws.”
Approximately one year later, the employee resigned. After a brief stint working as an exclusive distributor for the employer, but still well within the one-year nonsolicitation period, he began working for a competitor and soliciting business from his former employer’s customers. When the former employer learned of this, it sued the employee in federal district court in Massachusetts to obtain, among other things, a preliminary injunction enforcing the agreement’s nonsolicitation clause.
Applying Delaware law pursuant to the choice-of-law provision, the district court held that the former employer had “shown a reasonable likelihood of success” on its claim that the employee had breached the agreement’s nonsolicitation clause. The employee appealed that determination to the First Circuit.
The First Circuit’s Decision
On appeal, the employee argued that “Massachusetts’ usual choice-of-law rule, which is that the law of the state that a contract’s choice-of-law clause selects is the law that controls, [did] not apply” and that under Massachusetts law, the employer could not satisfy the “likelihood-of-success requirement” for obtaining injunctive relief. In support of his argument, the employee “relie[d] on two exceptions to the usual choice-of-law rule under Massachusetts law.”
Applying the first exception, that the choice-of-law provision should not apply because the law of Delaware “has no substantial relationship to the parties or the transaction and there is no reasonable basis for the parties’ choice,” the First Circuit found that Delaware was sufficiently related to the dispute because it was the employer’s “place of incorporation.”
Turning to the second exception, the First Circuit considered whether applying Delaware law undermined a “fundamental policy” of Massachusetts, which, according to the employee had “a materially greater interest than” Delaware in the resolution of the parties’ dispute. The First Circuit again disagreed and found that, even if it were to assume that Massachusetts had a “materially greater interest” in the dispute than Delaware, the two Massachusetts’ policies identified by the employee did not apply.
The first policy identified by the employee was the Massachusetts Noncompetition Agreement Act (MNCA). Under the MNCA, noncompetition agreements entered into on or after October 1, 2018, must meet certain requirements that the agreement at issue allegedly did not satisfy. However, the First Circuit held that the MNCA was irrelevant because the employee signed the agreement before October 1, 2018, and, in any event, the Act does not apply to nonsolicitation agreements.
The second Massachusetts policy that the employee identified was the “material change” doctrine, which provides that a restrictive covenant, such as a nonsolicitation clause, “may be deemed void if there are material changes in the employment relationship between an employee and the employer.” The employee argued that his resignation (or the “termination” of his employment relationship with the employer) was a material change that voided the nonsolicitation clause. The First Circuit found that argument unavailing because courts have applied the material change doctrine to “changes in the conditions of employment of an employee who continued to be employed by the same employer,” not to a termination of employment (at least where the employee initiated that termination). As a result, the First Circuit enforced the choice-of-law provision in the employee’s agreement and upheld the district court’s decision to enjoin the employee from soliciting his former employer’s customers.
Key Takeaways
Whether a court will honor a choice-of-law provision in a contract is a fact-specific inquiry. However, NuVasive makes three points clear regarding choice-of-law provisions in employment agreements:
- An employer’s place of incorporation generally is sufficient to establish the requisite nexus between that jurisdiction’s laws and the employer’s restrictive covenants with its employees.
- Neither the text of, nor the policies embodied in, the MNCA apply to choice-of-law provisions in nonsolicitation agreements or noncompetition agreements entered before October 1, 2018. (However, employers may want to review their noncompetition agreements, including any choice-of-law provisions they might contain, for compliance with the Act.)
- An employee’s decision to resign voluntarily is not a material change to the conditions of employment that voids the employee’s obligation under a covenant not to solicit his or her former employer’s customers. (If there are concerns that a material change has occurred in the terms of employment, employers may want to review the agreement and determine whether a new one is required.)
