Business Law Journal

However, in 2017, the California Labor Code section 925 went into effect.  This law makes any forum selection clause in an employment contract voidable by an employee who primarily resides and works in the State of California if it “(1) [r]equire[s] the employee to adjudicate outside of California a claim arising in California,” or “(2) [d]eprive[s] the employee of the substantive protections of California law with respect to a controversy arising in California.”  In other words, under California law, forum selection clauses in employment contracts with California based employees are rarely effective and enforceable.  

But what happens when an employer files suit against an employee in a State that does not honor California Labor Code section 925?  And what jurisdiction should hear claims the employee may raise against the employer in response to the employer’s lawsuit?  That is the issue the California Court of Appeal addressed this month in LGCY Power, LLC v. The Superior Court of Fresno County, —Cal.Rptr.3d—-, 2022 WL 601805 (2022).

In this case, LGCY, a Utah based company, filed suit in Utah State Court against seven California based former executives who had formed a competing company in violation of non-competition, non-solicitation, and confidentiality provisions permitted under Utah law.  Each of the Defendant executives asserted claims against LGCY for breach of their employment agreements and failure to pay wages and commissions.  The executive’s claims were “compulsory cross-complaints” under both California and Utah state law.  If a compulsory cross-complaint is not filed in the original lawsuit, the defendant waives their right to bring those claims. Most of LGCY’s former executives followed the compulsory cross-complaint rules and filed claims against LGCY in the same lawsuit originally brought by LGCY. However, one of the former executives, Michael Sewell, chose to file his own lawsuit against LGCY in California rather than join his claims in the Utah action.

LGCY asked the California Court to dismiss Sewell’s complaint, arguing that his claims were barred by both California’s and Utah’s compulsory cross-complaint statutes because they were not brought in response to the Utah action.  However, the trial court denied this request, finding that Labor Code section 925 created an exception to the compulsory cross-complaint rules when the original claim is not brought in the state of California.  LGCY filed a writ of mandate with the Court of Appeal challenging this order.

The Court of Appeal identified two critical issues:  (1) does Labor Code Section 925 provide an exception to California’s compulsory cross-complaint statute; and (2) if the case pending in the sister state (here, Utah) was filed first, is California required to apply the sister state’s compulsory cross-complaint statute?

As to the first question, the Court concluded that Section 925 does serve as an exception to California’s compulsory cross-complaint statute.  The Court recognized that Section 925 does not address or even reference the compulsory cross-complaint statutes, but reasoned that deciding to the contrary would violate the intent of Section 925:

We recognize that section 925 does not reference Code of Civil procedure section 426.30 [California’s compulsory cross-complaint rule], nor does it otherwise expressly state that it operates as an exception to the compulsory cross-complaint rules.  However, section 925’s language conveys that it is intended as an exception to Code of Civil Procedure section 426.30, subdivision A…

This language [of Section 925(b)] clearly evinces a legislative intent that all cases and controversies that fall within section 925’s purview be litigated in California.  Consistent with this interpretation is the fact that section 925 provides no exceptions to its applicability, even for instances in which the employer has already filed a pending action against the employee in another state. 

Regarding the second issue, the Court concluded that it was not required to honor the compulsory cross-complaint statutes of sister states.  The Court reasoned that the United States’ full faith and credit clause requires California Courts to give effect to judgments rendered by other states, but it does not require a Court to substitute its own State’s statute for one of a sister state.  In other words, the other state’s compulsory cross-complaint rule is not entitled to the same deference as a final judgment entered by the Court of another state.  And because the other state’s law is contrary to California’s policy, California courts are not required to give effect to that statute.

What does this mean for businesses going forward?

First, despite Section 925, a business with employees in California may be able to enforce a forum selection clause in an employment agreement by bringing suit for damages in that other state.  If you are an employer with employees in California but want to litigate in a foreign state, it is critical that you be careful when drafting forum selection clauses in a contract.  If you decide to use a forum selection clause to bring a claim against a California employee in a different state, you must also consider the potential expenses and risks of being forced to litigate in two jurisdictions concurrently if the employee decides to file their own complaint in California. 

Second, if you are a California employee being sued in a different state, one of the first decisions you must make is whether to litigate claims you may have against your employer in the other state, or if you would be better served by bringing those claims to a California Court.

Third, because the California Courts will give effect to judgments issued by courts in other states, if an employer files suit in a different state and an employee files their claims in California, it is critical that the litigation in your preferred jurisdiction resolve quickly and before the litigation in the other jurisdiction so that the decision by the Court with the most favorable law has preclusive effect on the other case. 

AALRR has a team of litigation attorneys well-versed in the intersection between contract and employment disputes.  If such issues arise, it is important to contact counsel as soon as possible so that you and your business are put in the best position to succeed.

This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process.  

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