“Choice of law” is an important element of all contracts. This refers to the choice of state law applicable when addressing any disputes under the contract. If you are a New York resident dealing with a New York business, you might assume any contract is governed by New York law. That is not always the case. If the contract contains a choice of law clause designating, say, Florida law as controlling, then that state law generally applies, even if the case is tried in a New York court.
But choice of law is not an absolute right. New York courts may refuse to enforce another state's law if it is found to “violate some fundamental principle of justice, some prevalent conception of good morals, some deep-rooted tradition of the common weal.” This is known as the “public policy” exception to the choice of law. This does not mean a New York judge can refuse a contract merely because he or she disagrees with the other state's laws; instead, the New York Court of Appeals has explained the exception “should be reserved for those foreign laws that are truly obnoxious.”
Brown & Brown, Inc. v. Johnson
The Court of Appeals recently addressed the public policy exception in relation to employment contracts. This case involved a woman terminated by her employer, a Florida-based insurance company that maintains a subsidiary in New York. As a condition of employment, the woman signed a contract that included a “restrictive covenant.” This covenant said she could not solicit or perform any work for the insurance company's customers for a period of two years after her employment ended. The employment agreement itself contained a choice of law provision applying Florida law.
A month after her termination, the woman began working for another insurance company, where she dealt with former customers of her ex-employer. The insurance company sued to enforce the restrictive covenant. Both the Supreme Court and the Appellate Division held the choice of law provision of the employment contract unenforceable, as Florida law governing restrictive covenants violated New York public policy.
The Court of Appeals agreed with the two lower courts. In aJune 11 opinion, the Court explained while Florida law only requires an employer demonstrate a “legitimate business interest” to enforce a restrictive covenant, New York law also requires proof the restrictions are “no greater than is required” for protection of said interest. Furthermore, New York will not enforce a restrictive covenant if it “imposes undue hardship on the employee” or injures the public.
Essentially, the Court of Appeals said, Florida law focuses almost exclusively on protecting employer's interests, while New York law balances “the interests of employer, employee and general public.” It would therefore violate New York public policy to enforce Florida's law to the facts of this case. That said, the restrictive covenant may still be partially enforceable under New York law. The Court of Appeals returned the case to the Supreme Court for further proceedings on that issue.
Leveling the Playing Field
The Court of Appeals expressed concern the insurance company in this case may have “used coercive dominant bargaining power to obtain the restrictive covenant.” That is to say, the employee did not fully appreciate what she was getting herself into when she signed her employment contract. She apparently did not have a chance to consult with an attorney. That is often a red flag in any contract situation. Before you enter into any legally binding contract, it is always a good idea to work with a qualified New York business attorney. Contact our offices today if you would like to speak with an attorney about your situation.