Originally published by Zach Wolfe.
When a company sues a former employee in Texas for violating a non-compete, will Texas law—or some other state’s law—determine whether the non-compete is enforceable? It sounds like a question only a law school professor would love, but it is hardly academic. In non-compete law, there are significant distinctions between Texas and other states, so determining which state’s law applies can make all the difference. This was the issue in the recent case ADP, LLC v. Capote in federal court in the Western District of Texas.[1]
Texas Choice of Law for Non-Competes: The Short Answer
Based on ADP and the Texas cases it cites, the short answer is this: If the employee is now working in Texas, then Texas law will probably apply to enforceability of the non-compete. If the employee worked for the company in Texas and is now working in Texas, then Texas law will almost certainly apply. This will be true even if the non-compete says that some other state’s law applies. On the other hand, if the employee did not work for the company in Texas and/or is not working in Texas now, some other state’s law may apply.
If this short answer satisfies you, then feel free to skip the rest of this post, and I’ll see you back here next week. But if you’re curious to see a step-by-step analysis of how I get to this short answer, read on.
Texas Choice of Law for Non-Competes: The More Detailed Answer
Determining whether Texas law applies to a non-compete in a Texas lawsuit has several steps. Let’s assume for example that the other state at issue is New York. Applying the analysis from ADP v. Capote,[2] here is how the issue breaks down:
A. If the non-compete does not have a choice of law clause, the court will apply the “most significant relationship” test to determine whether Texas or New York law applies.
In determining which state has the “more significant relationship,” Texas courts examine (a) the place of contracting, (b) the place of negotiation of the contract, (c) the place of performance, (d) the location of the subject matter of the contract, and (e) the domicile, residence, nationality, place of incorporation and place of business of the parties. In non-compete cases, “place of performance”–the place where the employee worked–will typically be the most important factor.
B. If the non-compete has a clause stating that Texas law applies, then as a practical matter a Texas court is going to apply Texas law as long as the case has some reasonable connection to Texas. (You didn’t have to study any case law to figure that out.)
C. If the non-compete has a clause stating that New York law applies, then it gets more complicated. In that case the court will still apply Texas law if:
1. The chosen state has “no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice.” If the employer is located in the chosen state, that will be sufficient to show a “substantial relationship” or “reasonable basis” for the choice.
OR
2. Each prong of this three-pronged test is met:
a. Texas has a “more significant relationship” with the parties and the transaction at issue than New York. One way this prong will be satisfied is if the employee signed the non-compete in Texas, worked in Texas, and managed a sales territory in Texas.
AND
b. Texas has a “materially greater interest” than New York in the enforceability of the non-compete. One way this prong will be satisfied is if the employee has left a Texas job for employment with a competing Texas business.
AND
c. Texas has a fundamental policy that would be contravened by the application of New York law. This one is easy. If the issue is enforceability of a non-compete, Texas courts have already held that Texas law on enforceability of a non-compete is a fundamental policy of the great State of Texas. But note that this rule only applies if the agreement at issue is truly a non-compete. In Exxon Mobil Corp. v. Drennen, the Texas Supreme Court held that this rule did not apply to a clause the court categorized as a forfeiture provision rather than a non-compete.[3]
Applying these principles, the court in ADP v. Capote held that Texas law applied to the enforceability of a non-compete where the employee worked for a New Jersey company in Texas and left to work for a competitor in Texas, even though the agreement had a clause stating that New Jersey law applied.[4]
What if the employee in ADP had worked for the company in New Jersey and then left to work for a competitor in Texas? That would be a slightly harder case, but I would expect most Texas judges would still apply Texas law, because of the Texas interest in competition occurring in the state.
What if the employee worked for a New Jersey company in Texas and then left to work for a competitor in New Jersey, or some other state? Then the choice of law issue would get difficult. If the employee is no longer working in Texas and the parties chose some other state’s law, in most cases I would expect the judge to enforce the parties’ choice of law.
But the real question in that situation would be, why would anyone want to leave Texas?
Zach Wolfe practices business litigation with Fleckman & McGlynn, PLLC, a Texas law firm with offices in Austin, Houston, and The Woodlands.
These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.
[1] ADP, LLC v. Capote, No. A-15-CA-714-SS, 2016 WL 3742319 (W.D. Tex. July 7, 2016).
[2] Id. at *2, citing DeSantis v. Wackenhut Corp., 793 S.W.2d 670 (Tex. 1990), and Cardoni v. Prosperity Bank, 805 F.3d 573 (5th Cir. 2015).
[3] Id., citing Exxon Mobil Corp. v. Drennen, 452 S.W.3d 319, 327-29 (Tex. 2014).
[4] ADP v. Capote at *3-6.
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