By Gavin Fleming

In competitive industries, where businesses expend considerable resources building confidential and proprietary information to vie for the same pool of customers, non-competition agreements restricting the competitive activity of former employees are standard.  The rationale for such provisions is to protect the information that the business has spent hundreds of thousands or millions of dollars creating from being stolen or misused by a competitor.  The interest of the business, however, is always weighed against the ex-employee's right to work.  Consequently, the enforceability of non-compete provisions varies widely from state to state.  To ensure predictable results, almost all agreements contain choice-of-law provisions that provide for the application of a certain state's law to any dispute arising out of the contract.  Unfortunately, these clauses may not be enforceable and as a result, in these challenging economic times, competitors may gain an unfair advantage.

Indeed, in many states, Courts are not bound to follow these provisions and can choose the law of the state that has the most "contact" with the dispute.  In the case of an employee who lives and works out of state and never visits the home office in Michigan, the choice-of-law clause may not survive.

The results can be devastating.  Take for example, an employee residing and working in the state of Wisconsin.  In Wisconsin, choice-of-law provisions are scrutinized, especially if the employee lives and works in the state and spends little time in the employer's state of residence.  And if Wisconsin law is held to apply to the dispute, if any part of the non-compete clause is found to be unreasonably restrictive, the entire contract is deemed void.

The recent case of Smith Barney, Inc. v. Darling, 2009 WL 1544756 (E.D. Wis. June 3, 2009) vividly illustrates this problem.  In Darling, the United States District Court for the Eastern District of Wisconsin struck down an entire contract because the non-compete provision sought to stop a former stockbroker from not only soliciting any customer the broker served, but also any customer the broker "learned of" while employed at Smith Barney.  The Court found the "learned of" language to be completely unreasonable and thus voided the entire agreement, permitting the broker to solicit customers in violation of the contract.

Had the Darling case been decided in Michigan, a Michigan Court could have reformed the offending language and enforced the language it deemed reasonable.  The approach in Michigan obviously seeks to strike a balance between competing interests as opposed to imposing harsh results on the employer.

The lesson of Darling is simple: review employment and independent contractor agreements for compliance with the law of the state in which your employees work and reside on a regular basis.  In these economic times, it is simply not worth betting that a court will enforce a seemingly benign choice-of-law clause.