Critics Question Contracts That Shift Job Disputes Out of State

San Francisco Daily Journal, May 30, 2007

By Laura Ernde

San Francisco - When a Mill Valley man suffering from multiple sclerosis challenged his firing last year, his employer told him he would have to travel to Florida to settle the dispute.

Matthew Dwyer is claiming disability discrimination because his supervisors told him he wasn't physically able to do the job he was hired for, teaching real estate seminars in California for the Orlando-based Dynatech Corp.

Attorney David A. Lowe, who is challenging the legality of Dwyer's employment contract in San Francisco federal court, said the case is one example of how some companies may be trying to skirt California employee-friendly laws.

As long as a company has some connection to another state, it is free to try to bind its employees - event those working in California - to the other state's laws.

"Employers are simply trying to do an end run around California law by substituting the law in other states," said Lowe, a partner at Rudy, Exelrod & Zieff in San Francisco. "With the stroke of a pen, you can impose on your California workforce these agreements. And for the most part they're upheld by the courts."

Dynatech's lawyer declined to comment, but lawyers who represent companies say there are legitimate reasons to put out-of-state venue or choice-of-law provisions in employment contracts.

Appellate courts have been slowly addressing the myriad legal questions that arise with employment contract disputes. Because there remains a great deal of legal gray area, lawyers on both sides often advise their clients to tread cautiously.

Several big decisions may have unintentionally emboldened companies to seek the protection of employer-friendly laws in other states, employment attorneys said.

In 2002, the California Supreme Court said that for reasons of "judicial constraint and comity" it would not block an out-of-state attempt to enforce a noncompete contract. Advanced Bionics v. Medtronic, 29 Cal.4th 697.

The 2nd District Court of Appeal followed last year with a decision that said the same principle applies even when an enforcement action has not yet been filed. Biosense Webster Inc. v. Superior Court, 135 Cal.App.4th 827.

David H. Raizman, a partner at Bryan Cave in Los Angeles, said he recently warned a client he couldn't guarantee that a foreign state forum-selection clause would be enforceable.

The client instructed him to put it in the agreement anyway.

"What employers and lawyers are gambling on is that they can get these disputes before a foreign court that will take a view that that state's law ought to apply to the dispute or will otherwise give a friendlier reading of California law," he said.

Jennifer Redmond, a partner in the labor and employment group at Sheppard, Mullin, Richter & Hampton in San Francisco, said one practical effect of the legal uncertainty has been to limit employee mobility.

One of her clients, an insurance company, declined to hire a San Diego broker simply because he had agreed in writing that he wouldn't take his clients with him if he left his brokerage firm.

Such noncompete agreements aren't legal in California, but they're fine in New York, where his firm is based, and the broker's contract called for all employment disputes to be resolved under the state's law.

Even though the agreement's enforceability is legally questionable, the prospective employer decided it wasn't worth the cost of finding out.

"Ultimately, the prospective employer decided that the broker's book of business wasn't big enough to risk litigation in two jurisdictions," Redmond said. "It's a huge stumbling block to mobility."

Tracey Merwise, co-chair of the labor and employment group at Severson & Werson in San Francisco, said many employers have good-faith reasons for selecting another's state's law.

Courts are likely to uphold such agreements as long as the employer has a legitimate connection to the other state and doesn't put anything in the contract that represents an egregious violation of public policy, such as erasing an employee's pension if they leave, she said.

"I think the courts are going to decide it on a case-by-case basis, and it's not as if there's any clear precedent either way that will allow employers to absolutely get around it or not," Merwise said.

Lowe said it disturbs him that these choice-of law and forum-selection provisions are finding their ways into all kinds of employment contracts, expanding from specialized jobs such as senior executives and scientists to rank-and-file employees like truck drivers and salespeople.

While Lowe agrees that such contracts may be appropriate at times, he believes that employees in California should have a choice.

As co-chair of the legislative committee of the California Employment Lawyers Association, Lowe is pushing for legislation that would bar employers from forcing workers to sign contracts that contain choice-of-law provisions for another state or require California employees to travel out of state to resolve their employment disputes.

The bill, AB 1043, passed the state Assembly last week 44-32.

"It's desperately needed to protect the integrity of California law and to protect workers." said San Francisco employment lawyer Cliff Palefsky.

Opponents say the bill is unnecessary and the first step toward outlawing all choice of law clauses in contracts.

"We don't want to start down that proverbial slippery slope, casting any kind of policy disfavor on choice-of-law clauses," said Kim Stone, legislative director for the Civil Justice Association of California.

Some states have developed specialties in dealing with complex areas of the law, for example Delaware with corporations law and Connecticut with insurance law. California residents should be able to benefit from that, she said.

Out-of-state companies that want to litigate all disputes in their home state for convenience and uniformity should be allowed to do so, she said.

The California Chamber of Commerce opposes the bill, characterizing it as a flat prohibition of standard choice-of-law or forum provisions in employment contracts.

Lowe said the current state of affairs puts California businesses at a competitive disadvantage because it's harder for them to recruit.

"A Minnesota employer is able to tap the California labor market but isn't held to California law", he said.

When Dynatech hired Dwyer to teach real estate seminars in California, the company offered a take take-it-or-leave-it contract that Lowe argues would be illegal in California.

"Under California law, a place and manner provision found in an adhesive arbitration agreement is substantively unconscionable if it requires the weaker party to travel to a geographically distant venue to resolve a dispute," Lowe argues in the suit, filed earlier this month in U.S. District Court in San Francisco.

The suit also argues that Dwyer's disability makes it "extremely burdensome" for him to travel to Florida to sort out the matter.

Thomas Hockel of the San Francisco-based firm of Kelly, Herlihy and Klein is representing Dynatech. He declined to comment because he only recently got the case.

Lowe acknowledges that under a 1991 federal appeals court ruling employers can make employees travel as far away as Saudi Arabia to litigate their disputes.

The 9th U.S. Circuit Court of Appeals said forum selection clauses should not be set aside unless the employee can show that enforcement is unreasonable or the clause is fraudulent. Spradlin v. Lear Siegler Management Services Co. Inc, 926 F 2nd 865.

Tolbert Dean Spradlin had sued the defense contractor after he was fired from his job in Saudi Arabia five months after he had moved there with his wife and children.

Employers got another victory in 2005, when a California appeal court upheld a noncompete and arbitration agreement that had originated in New Jersey, said James Pooley, an intellectual property litigator with Morrison & Forester's Palo Alto office.

The state Supreme Court denied review in that case, Jones v. Humanscale, 130 Cal.App.4th 401.