The BUSKLAW August Newsletter: This Single-Sentence Contractual Provision Can Save - or Ruin - Your Day!
When it comes to business contracts, some provisions are more important than others. And it's true that some of these critical clauses are buried deep within a contract, so by the time you get to them, your eyes are glazed over, and you gloss over them. But that could be unfortunate.
One such provision is what lawyers call the choice of law and forum selection clause (for convenience, "COLFS"). That clause typically reads as follows:
The validity, interpretation, and construction of this agreement are governed by the laws of the State of [INSERT STATE], and any and all claims hereunder shall be brought in [SPECIFY NAME OF COURT AND COUNTY].
A recent decision by Kent County Circuit Court Judge Christopher Yates underscores the importance of a COLFS provision in an employment contract between OtterBase, a Grand Rapids, MI-based staffing firm, and two of their former employees, Carrie Rogers and Emily Reed. Rogers and Reed had experience in the staffing services industry in southern California, and OtterBase wanted to expand its business to that area. In 2013, OtterBase entered into an employment contract with Rogers and Reed that included provisions restricting them from competing with OtterBase and soliciting OtterBase clients during and after the term of the contract. The contract included a COLFS provision stating that Michigan law governs the contract, and any claims between the parties could only be decided in Kent County Circuit Court.
The contract ended badly in 2016. Contrary to the contract, Rogers and Reed started a new company in California that competed with OtterBase and apparently solicited OtterBase clients. OtterBase sued Rogers and Reed in Kent County Circuit Court, and they asked Judge Yates to throw out the suit on the basis that the COLFS provision was unenforceable.
At stake here was more than the inconvenience of Rogers and Reed having to come to Michigan to defend the lawsuit, but whether the non-compete and non-solicitation provisions were enforceable. Simply stated, Michigan law recognizes the validity of these restrictions (if carefully drafted), but California law does not. California law states that "any contract by which anyone is restrained from engaging in a lawful provision, trade, or business of any kind" is void. So, if the Judge Yates upheld the COLFS provision, it was "game over" for Rogers and Reed.
The criteria for the validity of COLFS provisions are well-established. Judge Yates reviewed them and determined that:
- Michigan had a substantial relationship to the contracting parties because OtterBase is headquartered in Grand Rapids, and the purpose of the contract was to have Rogers and Reed extend its business to California.
- OtterBase does business in several states, and it has a legitimate purpose in having a Michigan COLFS provision to avoid confronting a crazy quilt of laws that require different treatment of employees working in different states.
- Rogers and Reed were free to negotiate the COLFS provision.
- Michigan public policy favors the enforcement of COLFS provisions.
- The COLFS provision may stand despite the fact that Michigan law recognizes restrictive covenants in employment contracts but California law does not. The two states' different views on that subject aren't enough to invalidate the COLFS provision.
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