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California Labor Code Section 925: A Word of Caution for Out-of-State Employers of California Employees
Tuesday, March 29, 2022

Employers faced with an apparent trade secret misappropriation by former employees must decide what jurisdiction to bring suit in.  For an employer headquartered outside of California who employs California residents  working primarily in California, choice of law and forum selection clauses favoring states other than California may be ineffective against them unless they had counsel who negotiated the provisions on their behalves.  (Cal. Lab. Code § 925.)  A recent California Court of Appeal decision highlighted this point, and found that where a California employee is sued by the employer for trade secret misappropriation in a separate state based on an out-of-state forum selection clause, the employee may separately sue in California to void the provision, despite the ongoing litigation in a sister state (See LGCY Power, LLC v. The Superior Court,  75 Cal. App. 5th 844 (2022).)

With the ever increasing move towards remote working, more and more out-of-state employers may find themselves in a California court pursuing or defending against claims that arose from an employment agreement that was ostensibly supposed to be litigated outside of California. Therefore, these employers should consider filing their offensive claims, such as those for misappropriation of trade secrets or breach of contract, in California to avoid the cost and risk of inconsistent results that may arise from simultaneous overlapping litigation in their home state and that of related employee claims in California.

Cal Labor Code § 925

Labor Code section 925, subsection (a), affects employment agreements entered into after January 1, 2017.  Under Section 925, an employer cannot require an employee who primarily resides and who primarily works in California, as a condition of employment, to agree to adjudicate a claim arising in California outside of California.  The employer also cannot deprive that employee of the protection of California law for claims arising in California.  Furthermore, any provision of an employment agreement that violates subsection (a) is voidable by the employee, and if voided, the dispute “shall be adjudicated in California and California law shall govern the dispute.”

However, the California Legislature did carve out an exception to subsection (a).  Choice of law and forum selection clauses favoring states other than California will be valid if the employee was independently represented by counsel when he or she negotiated the terms of the employment agreement, including the choice of law and forum selection clauses.  (Cal. Lab. Code § 925(e).)

LGCY Power, LLC v. Superior Court

LGCY Power, LLC, a Utah headquartered limited liability company specializing in the sales of residential solar energy systems, sued seven employees who left to form a competing solar company.  The gravamen of LGCY’s claims was that the employees misappropriated LGCY’s trade secrets in violation of the Utah Uniform Trade Secrets Act and breached the noncompetition, non-solicitation, and confidentiality provisions of their employment agreements.  Each of the agreements contained Utah choice of law and forum selection clauses.

All of the employees answered the complaint and four of the seven employees filed a cross-complaint against LGCY for breach of their employee agreements.  However, Sewell, a California resident who worked primarily in California as a sales representative, chose to instead initiate a separate legal action in California, alleging the same claims as his fellow employees in their cross-complaint, notwithstanding that he had answered the Utah complaint and was proceeding with his defense therein.

Despite the court finding Sewell’s claims related to the same transaction or occurrence as the LGCY’s case in Utah (the employment agreement), and despite Sewell having already answered that complaint, the California Superior Court overruled LGCY’s demurrer to dismiss Sewell’s action, and the Court of Appeal affirmed.  The court first held that even though Sewell signed his employment agreement prior to Labor Code Section 925 taking effect, the court reasoned the employment agreement had been orally modified thereafter, and therefore the statute governed the agreement.  The court further held Labor Code Section 925 provided for an exception to California’s compulsory cross complaint rules and Sewell did not need to bring his claims as a cross-complaint in the Utah action.  Lastly, the court held an employee can request the contract be rendered void even after the employer has initiated litigation and the employee’s compulsory claims would have otherwise been due.

Takeaways From LGCY Power, LLC

Simultaneous litigation in two states can be costly for out-of-state employers of California residents who may find themselves doing a lot of commuting, needing two different counsels, and possibly subjecting themselves to the cost of two different trials.  Therefore, especially with more out-of-state employers hiring California employees who can work remotely, employers should consider initiating any claims they against an employee in a California court to avoid the headache of a multi-state state action.  Experienced counsel should be consulted ahead of any such decisions.

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