The following article is a guest contribution by Benjamin Haynes, Esq. Haynes is a former Division 1 Basketball Player at Oral Roberts University and currently practices law in the State of Florida.
The “Choice of Law” issue will undoubtedly play a major role in determining the outcome of the first Aaron Mintz v. Priority Sports lawsuit. According to the Employment Agreement that Mintz entered into with Priority Sports back in 2001, there was a “Choice of Law” clause drafted stating that Illinois law would govern the Agreement and any disputes arising under it.
There is also a clause in the Employment Agreement which states that for 2 years after termination of employment, Mintz will not “directly or indirectly, on behalf of himself or others either as an employee, consultant, owner, or in any capacity whatsoever…disclose Confidential business information to persons not affiliated with the company, including company competitors.” This is a non-competition covenant.
Here is the dilemma: Illinois does not have a law banning covenants to not compete. California has public policy, specifically California Business and Professions Code Statute 16600, which states, “Every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” In layman’s terms, it is against public policy in California to enforce noncompetition covenants.
Mintz is stating that California law should apply, and Priority Sports is stating Illinois law should apply.
The result of this case could very well depend on whether Illinois or California law is applied.
I personally am an advocate of the concept of “Freedom to Contract.” Here, the parties both mutually agreed to sign the Employment Agreement and adhere to the terms within the Agreement. However, lets look at what precedent in the State of California says.
In Hughes Electronics Corp. v. Citibank Delaware, the court held that “If one of the parties to a contractual choice of law provision resides in the chosen state, the parties have a reasonable basis for their choice.” Hughes Electronics Corp. v. Citibank Delaware (App. 2 Dist. 2004) 15 Cal.Rptr.3d 244, 120 Cal.App.4th 251. I agree with the court’s reasoning. I believe that one of the parties should have substantial contact, or minimum contacts if you will, within the state they choose for their choice of law. Here, Priority Sports undoubtedly has their place of business in Illinois – a valid choice of law based on the above referenced criteria.
Also in the Hughes case, the court held that the “Enforcement of contractual choice of law provisions is determined by whether 1) The chosen state has a substantial relationship to the parties or their transaction, or 2) Any other reasonable basis exists for the parties’ choice of law; if either test is met, the choice of law provision WILL be enforced….” (emphasis added). There is no doubt a substantial relationship between Illinois and Priority sports, as well as there is a reasonable basis for Priority Sports’ choice of law given that their main office is located in said state.
When you read that case and applications of the case’s facts, you would think that it is an open and shut issue.
However, the Hughes (once again), and a separate Frame case will have something to say about that.
While Hughes lists the two separate criteria stated above regarding Choice of Law applications and their validity, at the end of the criteria the case states that “if either test is met, the choice of law provision will be enforced UNLESS the chosen state’s law is contrary to a fundamental public policy of California” (emphasis added).
In the Frame case, the court held that the choice-of-law question is not foreclosed by the existence of an applicable California statute where another state has substantial contacts with the transaction of the parties, if no attempt to evade California law appears, HOWEVER, agreement designating applicable law will not be given effect if it would a violate strong California public policy. Frame v. Merrill Lynch, Pierce, Fenner & Smith Inc. (App. 1 Dist. 1971) 97 Cal.Rptr. 811, 20 Cal.App.3d 668. (emphasis added).
So, the Choice of Law provision will be held valid as long as it does not violate fundamental public policy in California. The question to be answered will be, whether or not the California Business and Professions Code Statute 16600 is considered fundamental public policy. This remains to be seen.