Judge: Daniel S. Murphy, Case: 23STCV13360, Date: 2024-08-21 Tentative Ruling

Case Number: 23STCV13360    Hearing Date: August 21, 2024    Dept: 32

BACKGROUND

            On May 29, 2024, Plaintiff Andrew McClave filed this action for declaratory relief and unfair competition against Defendants Lockton Companies, LLC – Pacific Series, and Lockton Investment Advisors, LLC.

            Plaintiff filed this action to establish that he may freely compete against Defendants by soliciting clients from his former employment for Defendants, despite restrictive covenants contained in agreements between the parties. Plaintiff alleges that the covenants are void and unenforceable under California law. Plaintiff also alleges that the forum selection provisions are unenforceable because they violate California’s public policy.

            On July 15, 2024, Defendants filed the instant motion to dismiss based on forum selection clauses within the applicable contracts. Plaintiff filed his opposition on August 8, 2024. Defendants filed their reply on August 14, 2024.

LEGAL STANDARD

“When a court . . . finds that in the interest of substantial justice an action should be heard in a forum outside this state, the court shall stay or dismiss the action in whole or in part on any conditions that may be just.” (Id., § 410.30, subd. (a).) “The court may dismiss without prejudice the complaint in whole, or as to that defendant, when dismissal is made pursuant to Section 418.10.” (Id., § 581, subd. (h).)

“[C]ourts possess discretion to decline to exercise jurisdiction in recognition of the parties’ free and voluntary choice of a different forum.” (Smith, Valentino & Smith, Inc. v. Superior Court of Los Angeles County (1976) 17 Cal.3d 491, 495.) Where “a plaintiff has freely and voluntarily negotiated away his right to a California forum,” the forum selection clause may be given effect “in the absence of a showing that enforcement of such a clause would be unreasonable.” (Id. at pp. 495-96.)

JUDICIAL NOTICE

            Defendants’ request for judicial notice of Exhibits 1 through 6 is granted. (See Evid. Code, § 452(d).)

DISCUSSION

I. Legal Framework

Courts generally enforce forum selection clauses unless “(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties choice, or (b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue . . . .” (Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459, 465.) “The party opposing enforcement of a forum selection clause ordinarily bears the substantial burden of proving why it should not be enforced.” (Verdugo v. Alliantgroup, L.P. (2015) 237 Cal.App.4th 141, 147.) “That burden, however, is reversed when the claims at issue are based on unwaivable rights created by California statutes. In that situation, the party seeking to enforce the forum selection clause bears the burden to show litigating the claims in the contractually designated forum will not diminish in any way the substantive rights afforded under California law.” (Ibid.)

Here, the agreements at issue contain choice-of-law provisions stating that any dispute is to be resolved in Missouri court. Missouri has a reasonable relationship to the case because Defendants are Missouri companies. The primary issue is whether applying Missouri law would contravene fundamental California policy.

II. Application to the Instant Case

            a. Burden Shifting

Under California law, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” (Bus. & Prof. Code, § 16600.) This is a nonwaivable statutory right. (Weber, Lipshie & Co. v. Christian (1997) 52 Cal.App.4th 645, 659.) Therefore, Defendants bear the burden of showing that litigation in Missouri “will not diminish in any way the substantive rights afforded under California law.” (Verdugo, supra, 237 Cal.App.4th at p. 147.)

            Defendants argue that the burden does not shift to them under Verdugo because that case involved a Labor Code statute with an express anti-waiver provision. (Verdugo, supra, 237 Cal.App.4th at p. 150, citing Lab. Code, §§ 219(a), 1194(a).) While Business and Professions Code section 16600 does not include its own anti-waiver provision like the one found in the Labor Code, Civil Code section 3513 provides that “a law established for a public reason cannot be contravened by a private agreement.” This is an express anti-waiver provision that applies to any law established for a public reason, including Business and Professions Code section 16600. (Weber, supra, 52 Cal.App.4th at p. 659.) In that sense, Section 16600 is a “statute[] the Legislature enacted and specifically made unwaivable to protect California residents.” (See Verdugo, supra, 237 Cal.App.4th at p. 151.) The claims at issue “are based on statutory rights the Legislature has declared unwaivable.” (Ibid.) That the legislative declaration comes from the Civil Code rather than the Business and Professions Code does not change the conclusion. Civil Code section 3513 is as much an express legislative declaration as any other.

The cases cited by Defendants do not stand for the proposition that the burden only shifts when the statute being litigated contains its own anti-waiver provision. (See Olinick v. BMG Entertainment (2006) 138 Cal.App.4th 1286; Ryze Claim Solutions LLC v. Superior Court (2019) 33 Cal.App.5th 1066.) “A court's opinion is not authority for a proposition not considered in it.” (People v. Anderson (2015) 232 Cal.App.4th 1259, 1275.) Olinick and Ryze “do[] not affect our analysis because [they] do[] not address the issue of who carries the burden of proof in determining whether to enforce a mandatory forum selection clause.” (Verdugo, supra, 237 Cal.App.4th at p. 153.) Ultimately, Business and Professions Code section 16600 is a nonwaivable statute. Therefore, “the claims at issue are based on unwaivable rights created by California statutes.” (Id. at p. 147.) “Enforcement of the contractual forum selection and choice of law clauses would be the functional equivalent of a contractual waiver” of these unwaivable rights. (See America Online, Inc. v. Superior Court (2001) 90 Cal.App.4th 1, 5.) Accordingly, Defendants “bear[] the burden to show litigating the claims in the contractually designated forum will not diminish in any way the substantive rights afforded under California law.” (Verdugo, supra, 237 Cal.App.4th at p. 147.)

b. Satisfying the Burden

“[A] defendant can meet its burden only by showing the foreign forum provides the same or greater rights than California, or the foreign forum will apply California law on the claims at issue.” (Verdugo, supra, 237 Cal.App.4th at p. 157.)

1. Same or Greater Rights

Unlike California law, Missouri law favors noncompete clauses. (See, e.g., Schott v. Beussink (Mo. Ct. App. 1997) 950 S.W.2d 621, 625 [“Missouri courts recognize that public policy approves employment contracts containing restrictive covenants”].) Defendants do not point to any Missouri statutory provision similar to Business and Professions Code section 16600.

Defendants argue that Plaintiff’s rights would be the same in either forum because courts in both California and Missouri will apply the same choice-of-law analysis. In particular, Defendants contend that the internal affairs doctrine will mandate Missouri law in either forum. “The internal affairs doctrine is a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation’s internal affairs.” (State Farm v. Sup. Ct. (2003) 114 Cal.App.4th 434, 442.) “States normally look to the State of a business’ incorporation for the law that provides the relevant corporate governance general standard of care.” (Vaughn v. LJ Internat., Inc. (2009) 174 Cal.App.4th 213, 223.) However, an exception exists “where, with respect to the particular issue, some other state has a more significant relationship … to the parties and the transaction.” (Lidow v. Superior Court (2012) 206 Cal.App.4th 351, 359.)

Section 16600 reflects California’s strong public policy against restrictive covenants. (Application Group v. Hunter Group (1998) 61 Cal.App.4th 881, 900.) “The interests of the employee in his own mobility and betterment are deemed paramount to the competitive business interests of the employers,” including out-of-state employers. (Id. at pp. 900-01.) “California has a correlative interest in protecting its employers and their employees from anticompetitive conduct by out-of-state employers,” such as the enforcement of restrictive covenants. (Id. at p. 901.) Thus, in Application Group, California had a greater interest in enforcing section 16600 than Maryland did in enforcing a restrictive covenant, despite Maryland’s interest in “preventing recruitment of employees who provide ‘unique services,’ and the misuse of trade secrets.” (Ibid.)

Here too, California arguably has a greater interest in enforcing section 16600 than Missouri does in enforcing the restrictive covenants. Accordingly, a California court may find that the internal affairs doctrine requires the application of California law to the dispute. Thus, Defendants have not shown that the choice-of-law analysis would lead to the same result in both forums. In other words, Defendants have not shown that a Missouri forum would provide the same or greater rights than a California forum.

                        2. Apply California Law

Defendants have also not proven that a Missouri court would apply California law. In fact, Defendants concede that a Missouri court would apply Missouri law. (See Reply 9:12-13.) Defendants argue that courts in either forum would apply the same choice-of-law analysis to decide which law to apply. However, that is not the standard. Unless the law of the foreign forum provides the same or greater rights than California law (which it does not here), a defendant can only satisfy its burden by showing that “the foreign forum will apply California law on the claims at issue.” (Verdugo, supra, 237 Cal.App.4th at p. 157.) Because Defendants admit that a Missouri court will not apply California law, Defendants have failed to satisfy their burden.  

III. Plaintiff’s Residence

Defendants argue that Plaintiff has no interest in asserting rights under section 16600 because he resides in Oregon. However, as the court in Application Group made clear, “California has a strong interest in protecting the freedom of movement of persons whom California-based employers . . . wish to employ to provide services in California, regardless of the person's state of residence or precise degree of involvement in California projects.” (Application Group, supra, 61 Cal.App.4th at pp. 900-01.) Due to modern technological advancements, “an employee need not reside in the same city, county, or state in which the employer can be said to physically reside.” (Id. at p. 901.) “[T]he enforceability of [a] noncompetition covenant does not turn on whether the recruited employee physically resides in California. The concept of ‘employment in California’ is broader than that.” (Id. at p. 905.)

Here, Plaintiff seeks to work for a California employer. Thus, Plaintiff seeks employment “in California” for purposes of section 16600 regardless of Plaintiff’s physical location. Defendants argue that Application Group is limited to out-of-state residents who intend to relocate to California. The court in Application Group stated no such thing, nor would such a limitation make sense in the context of the court’s holding. As discussed above, the court expressly acknowledged the realities of modern employment and therefore concluded that non-California residents are equally entitled to the protections of section 16600 regardless of their physical location. Defendants cite a footnote where the court clarified that its “statement of the issue encompasses . . . employees who may relocate from out of state to become California residents during the period of noncompetition.” (See Application Group, supra, 61 Cal.App.4th at p. 895, fn. 9.) However, the court did not state that its holding was limited to that group of individuals. Therefore, Plaintiff is entitled to enforce section 16600 despite his Oregon residence.    

IV. Exception Under Section 16602.5

            Defendants also argue that Section 16600 has no bearing at all because this case falls under Section 16602.5. Section 16602.5 is an exception to the general rule enumerated in Section 16600. Section 16602.5 provides that “[a]ny member may, upon or in anticipation of a dissolution of, or the termination of his or her interest in, a limited liability company . . . agree that he or she or it will not carry on a similar business within a specified geographic area where the limited liability company business has been transacted, so long as any other member of the limited liability company, or any person deriving title to the business or its goodwill from any such other member of the limited liability company, carries on a like business therein.”

            However, the restrictive covenants at issue are not limited to a “specific geographic area” as required under section 16602.5. There is no indication that a Missouri court would “blue pencil” in a geographic limitation to render it compliant with section 16602.5. While Defendants cite examples of California courts inserting geographic limitations, Defendants provide no examples of a Missouri court doing so. Defendants argue that a federal court in Kaufman v. Lockton inserted a geographic limitation by limiting the noncompete clause to 79 customer accounts. (See Def.’s RJN, Ex. 6, pp. 20-21.) This does not show the court imposing a geographic limitation. The court limited the clause to 79 specific customers with whom Kaufman had personal involvement. (Ibid.) There was no mention of geographic scope.    

In any case, the application of exceptions such as Section 16602.5, including whether a geographic limitation may be “blue penciled,” is a substantive matter to be resolved at trial. It does not affect the procedural determination of where the case should be litigated. The case implicates the nonwaivable statutory right to be free from restrictive covenants even if an exception may apply.

In sum, the claims at issue implicate a nonwaivable statutory right, and Defendants have not satisfied their burden of demonstrating that a Missouri forum “will not diminish in any way the substantive rights afforded under California law.” (Verdugo, supra, 237 Cal.App.4th at p. 147.) Therefore, the Court declines to enforce the forum selection clause.

V. Stay

            Defendants alternatively request a stay pending the Supreme Court’s resolution of the issue in EpicentRx v. Sup. Ct., S282521. The request is denied. No trial date will be set, but discovery may continue.   

CONCLUSION

            Defendants’ motion to dismiss or stay is DENIED.