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Court combines choice of law, forum clauses

The validity of a choice of law clause is a prerequisite to determining the validity of a choice of forum clause, the Wisconsin Court of Appeals held on May 12.

Accordingly, the court invalidated a provision in an employment contract that named Ohio as the exclusive forum for the resolution of any disputes.

In October 2000, David Beilfuss, a Wisconsin resident, was hired as national sales manager, fixture & display assembly for Huffy, an Ohio Corporation. Beilfuss signed an employment agreement that included restrictive covenants governing confidential information and noncompetition.

Section 12 of the agreement provided, “This Agreement shall be governed and construed according to the laws of the State of Ohio without giving effect of any choice or conflict of law provision or rule (whether of the State of Ohio or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Ohio. EMPLOYEE hereto irrevocably submit(s) to the jurisdiction of the federal or state courts located in the State of Ohio over any dispute arising out of or relating to this agreement. EMPLOYEE irrevocably agrees that all claims in respect of such dispute or proceeding may be heard and determined in such Courts.

EMPLOYEE hereby irrevocably waives, to the fullest extent permitted by applicable law, any objection which he or she may now or hereafter have to the laying of venue of such dispute brought in such court or any defense of inconvenient forum in connection therewith.”

Beilfuss worked for Huffy until May 2002, when he was hired by National Marketing Services (NMS) as vice-president, sales new customer development. In February 2003, Huffy notified NMS and Beilfuss that Beilfuss was in violation of his employment agreement with Huffy.

In response, Beilfuss filed a declaratory judgment action in Wisconsin state court, seeking a declaration that the restrictive covenants in the employment agreement were unenforceable. Huffy moved to dismiss, contending that the employment agreement required any dispute to be resolved by the application of Ohio law in Ohio courts.

Waukesha County Circuit Court Judge Lee S. Dreyfus granted Huffy’s motion. Beilfuss appealed, and the court of appeals reversed in a decision by Judge Daniel P. Anderson.

What the court held

Case: Beilfuss v. Huffy Corp., No. 03-2006.

Issue: Is a valid choice of law provision a prerequisite to a valid choice of forum provision?

Can Wisconsin’s restrictions on employee covenants not to compete be circumvented by adoption of another state’s law?

Holding: Yes. The validity of the two provisions are inextricably bound.

No. Wisconsin’s long-standing public policy controlling covenants not to compete cannot be circumvented with a choice of law provision.

Counsel: Mark G. Blum, Waukesha; Lori J. Fabian, Waukesha, for appellant; Lawrence T. Lynch, Milwaukee; Michael P. Kohler, Milwaukee, for respondent.

The court found that the agreement was neither ambiguous nor unconscionable, concluding “it is not unreasonable for a large multinational corporation to draft an employment contract requiring litigation to take place in its home state.”

The court found the choice of forum clause unenforceable, nonetheless, after phrasing the issue as follows: “Section 12 embodies both a choice of law clause and a choice of forum clause and presents us with the classic conundrum: ‘Which came first, the chicken or the egg?’ Should we construe each clause separately and, if so, in what order? Or, should we construe the clauses together?”

The court found guidance in a California decision, Hall v. Superior Court, 150 Cal.App.3d 411 (Cal.App. 4 Dist.1983). In Hall, two California investors exchanged their interests in a California limited partnership in return for stock in a Utah corporation. Although all of the parties were California residents, they met at an airport in Nevada to consummate the transaction. The contract contained both a forum selection clause and a choice of law clause identifying Nevada as the selected forum and governing law.

The court held that California law nevertheless applies, stating, “In our view … these considerations are inextricably bound up in the question of the validity of the choice of law provision; and a determination as to the validity of the choice of law provision is prerequisite to a determination of whether the forum selection clause should be enforced.”

The court then found two reasons to invalidate the choice of law provision: California’s policy to protect the public from fraud and deception in securities transactions; and a California securities statute expressly rendering such a contract provision void.

Adopting the approach in Hall, the Wisconsin court of appeals held, “Determining the validity of the choice of law provision requires that we pay close attention to public policy considerations. As such, the validity of the choice of law provision is a precondition to determining the enforceability of the forum selection provision.”

The court found important public policy was at issue in the case, citing the Wisconsin Supreme Court’s holding in Bush v. National School Studios, Inc., 139 Wis.2d 635, 643, 407 N.W.2d 883 (1987), in which the court expressly listed covenants not to compete as an example of a contract provision likely to violate public policy:

“A precise delineation of those policies which are sufficiently important to warrant overriding a contractual choice of law stipulation is not possible. In general, however, statutes or common law which make a particular type of contract enforceable, e.g., usury
laws, or which make a particular contract provision unenforceable, e.g., laws prohibiting covenants not to compete, or that are designed to protect a weaker party against the unfair exercise of superior bargaining power by another party, are likely to embody an important state public policy.”

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Case Analysis

The court then noted that Ohio and Wisconsin law differ in the handling of non-compete covenants. Section 103.465 renders any overbroad restriction void in Wisconsin, even as to so much of the covenant as would be a reasonable restraint. Ohio, on the other hand, permits selective enforcement or judicial modification of an unreasonable covenant not to compete so as to enforce that part of the covenant deemed reasonable.

Accordingly, the court reversed the circuit court’s enforcement of the choice of forum provision: “we hold the choice of law provision in the employment agreement violates the public policy of this state and reverse the circuit court’s conclusion that it is enforceable. Further, we hold that because the choice of law provision is invalid, the enforcement of the forum selection would be unreasonable.”

The court added, “There is also a very practical reason why enforcement is unreasonable. It is logical to have a court familiar with Wisconsin’s statutory and common law covering covenants not to compete apply the law rather than a court in another forum which is unfamiliar with Wisconsin’s law or public policy supporting the law.”

Nevertheless, the court concluded that the balance of the agreement was enforceable, pursuant to a severability clause, and remanded the case to the circuit court to interpret the balance of the agreement.

Click here for Case Analysis.

David Ziemer can be reached by email.

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