Welcome to Texas Business Matters! This is our sixth blog in a ten-part series on non-competes. In our last blog, we addressed the special rules for non-compete agreements for physicians.  In this blog, we will discuss which state’s law applies to a non-compete agreement when the employer and the employee reside in different states.

Many employers have employees based in more than one state. When an employer must enforce a non-compete agreement against one of its employees who is in another state, one initial question is which state’s law will be used to analyze the agreement. This can be a critical question and can be the deciding factor in whether the employee can be bound by the non-compete agreement. For example, while non-compete agreements generally are enforceable in Texas, they are not enforceable in California, as we mentioned in the first blog in this series.

In most cases, non-compete agreements and other employment agreements contain a “choice of law” provision in which the parties agree that a particular state’s law will govern any legal questions related to the agreement. Where the employer and the employee are in the same state and the choice of law provision requires the law of that same state, courts typically enforce the choice of law provision and analyze the non-compete agreement under the law of the chosen state.

The analysis becomes more complicated when the employer and employee reside in different states, since the dispute may relate to each state in one way or another. Although courts generally enforce the parties’ choice of law, courts may disregard that choice in certain instances. Under Texas law, even if a non-compete agreement contains a choice of law provision that requires the application of another state’s law, a court may disregard that provision and apply Texas law if: (1) Texas has a more significant relationship to the parties and the transaction than the other state does, (2) Texas has a materially greater interest in enforcing the agreement than the other state does, and (3) application of the other state’s law would be contrary to the fundamental policy of Texas.

Multi-state employers must know the law of the state in which they are based as well as the law of each state in which any of their employees resides or works. An employment attorney can survey each state’s law and craft non-compete agreements that best protect the employers’ interests in each of these states.

In our next blog, we will discuss some examples of how this choice of law issue may be analyzed when either the employer or employee is in Texas and the other is in California.