Welcome to Texas Business Matters! This is our seventh blog in a ten-part series on non-competes. In our last blog in this series, we addressed which state’s law applies to a non-compete agreement when the employer and the employee reside in different states.  In this blog, we will discuss how this choice of law issue may be analyzed by Texas courts when, for example, either the employer or employee is in Texas (where non-compete agreements are generally enforceable) and the other is in California (where non-compete agreements are not enforceable).

As we discussed in our last blog, most employment agreements contain choice of law provisions that specify which state’s law will apply to any legal questions regarding the agreement.  Texas courts typically uphold and enforce such provisions, but courts may disregard them under certain circumstances where another state’s law may be more appropriate.

Example:  a California-based employer seeks to enforce a non-compete agreement, which contains a Texas choice of law provision, against a Texas-based employee.  A Texas court will enforce that provision unless one or both parties challenge the provision and request the application of another state’s law.  Since non-compete agreements are not enforceable under California law, the employee will want California law (rather than Texas law) to apply to the agreement and may ask the court to disregard the choice of law provision and apply California law.

In that case, a Texas court will first determine whether California has a materially greater interest than Texas in the enforcement of the non-compete agreement.  If California does not have a greater interest, the court will apply Texas law to the agreement.  However, if California does have a greater interest, the court will next determine whether the application of Texas law would be “contrary to a fundamental policy” of California.  If so, the court will apply California law to the non-compete agreement.  If no such fundamental policy is violated, then the court will apply Texas law.

The analysis is much easier where a Texas employer seeks to enforce a non-compete agreement against a California-based employee.  Under California law, contracts entered into or modified on or after January 1, 2017, cannot contain choice of law provisions that apply another state’s law as a condition of employment for an individual who primarily resides in California.  Thus, only California law may be applied to the non-compete agreement of the California-based employee.

As this example shows, when an employment relationship crosses state lines, differences in the laws of those states can lead to vastly different outcomes where there is a dispute over a non-compete agreement.  It is essential for every employer to know and understand the law of any state in which it operates.

In our next blog, we will discuss how improperly written non-compete agreements may be reformed.