THE ADR LOOPHOLE TO RESTRICTIVE NON-COMPETE AGREEMENTS.

• Author: Itani, Jad

INTRODUCTION I. ALTERNATIVE DISPUTE RESOLUTION II. CALIFORNIA III. NORTH DAKOTA IV. OKLAHOMA A. Which approach should Oklahoma follow? CONCLUSION INTRODUCTION

In many business practices, a common form of protection for the business is implementing a non-compete agreement in the business' employment contracts. Black's Law Dictionary defines non-competes as clauses in an agreement that would deny an employee from conducting a similar business in a specific area for a specific period of time. (1) The common law of England first recognized a non-compete agreement as early as 1414, but did not strictly enforce it. (2) However, a few centuries later, a shift finally seemed to occur; in 1711, Mitchel v. Reynolds arose as a landmark decision where an English court first recognized the possible need for reasonable restraint on trade. (3) The trend continued spiraling toward permitting the use of non-competes and even touched the United States. In 1889, the Supreme Court of South Carolina first stated that a non-compete agreement is enforceable and may be appropriate depending on location and circumstances. (4) Since then, many American courts have continued to form and develop the evolution of non-compete agreements in today's society. (5) Currently, a majority of states have shifted over and now permit the use of non-compete agreements. (6) However, the following select states strongly regulate or prohibit them altogether: (1) California; (2) Oklahoma; and (3) North Dakota. (7)

As evidenced by custom business practices, non-compete agreements are typically included in employment contracts. (8) Non-compete agreements in an employment contract are a means for employers to affirmatively protect trade secrets and to prevent competitors from stealing such trade secrets. (9) Non-compete agreements in employment matters are more recently treated in a restrictive manner as a form of public protection. (10) From the aforementioned restrictive states, California offers, by far, the most restrictive reading of non-compete agreements due to public policy concerns. (11) The Supreme Court of California stated that the inclusion of a non-compete agreement creates a significant public policy harm insofar as:

Every individual possesses as a form of property, the right to pursue any calling, business, or profession he may choose. A former employee has the right to engage in a competitive business for him-self and to enter into competition with his former employer, even for the business of those who had formerly been the customers of his former employer, provided that such competition is fairly and legally conducted. (12) States like California, which adopt a restrictive reading of non-compete agreements, skeptically view a non-compete agreement that prohibits a former employee from working with a similar company within a certain distance from the employer's company. (13)

This Comment considers a key question: do employers have a strategy to protect themselves if these restrictive states are restricting corporations from protecting their self-developed trade secrets? In doing so, Part II will discuss an approach that may allow employers to potentially circumvent the restrictive states. This can be achieved by requiring an employee to undergo private arbitration in a dispute with an employer--a strategy that has gained validity in light of the United States Supreme Court's holding that upholds arbitration clauses even where significant public policy concerns exist. (14) Specifically, an employer in a restrictive state could potentially enforce an arbitration through a choice of law clause that would provide the employer an opportunity to follow another state's more lenient approach for non-compete agreements.

Then, this Comment will discuss two competing approaches to this problem of strict prohibition of non-compete agreements and a possible guideline for the third state to follow since no Legislative or Judicial action has addressed this maneuver. Accordingly, in Part III, this Comment will delve into the first approach based on California's non-compete policy. California, pursuant to its Business and Professional Code [section] 16600, states that "[e]xcept as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." (15) Consequently, any non-compete agreement that restricts an employee to work with a rival business would be void and any employee will be permitted to work for a competitor or even begin a similar practice of his or her own. Previously, employers attempted to be crafty in attempting to evade these restrictions through an arbitration clause in a non-compete agreement; however, legislatures caught on to their sly circumvention. As of December 1, 2017, the legislature enacted a Labor Code that would prevent potential employers from attempting to circumvent these restrictive clauses. (16)

Next, in Part IV, this Comment will discuss North Dakota's approach to a non-compete agreement. While North Dakota, like California, restricts non-compete agreements, its approach includes two exceptions where non competes are valid. (17) Chapter 9-08 Section 6 of the North Dakota Century Code states that:

Every contract by which anyone is restrained from exercising a lawful profession, trade, or business of any kind is to that extent void, except:

1. One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business within a specified county, city, or a part of either, so long as the buyer or any person deriving title to the goodwill from the buyer carries on a like business therein.

2. Partners, upon or in anticipation of a dissolution of the partnership, may agree that all or any number of them will not carry on a similar business within the same city where the partnership business has been transacted, or within a specified part thereof. (18)

Of the two exceptions, the first arises when a person sells his or her business. (19) The seller may agree not to start another similar business within the respective area. (20) This agreement is voluntary and understanding, but the agreement is strictly limited to competing within a specific location. (21) The second exception arises when partners dissolve their preexisting partnership. (22) A defecting partner is then no longer permitted to carry on a similar business in the same area. (23) In reading the North Dakota Century Code, it appears that the North Dakota legislature strategically permitted some protection for employers by enforcing the use of non-compete agreements. This Comment will consider whether, given these exceptions, an arbitration clause could potentially assist in circumventing a state's prohibition on non-compete agreements, other than the two exceptions listed in the Code. (24)

Then, in Part V, this Comment will analyze Oklahoma's restrictive non-compete statute and determine if the legislature, or the courts, have discouraged any attempt to circumvent the restrictions on these clauses. (25) Title 15, Chapter 5 Section 219A of Oklahoma's non-compete statute states that:

1. A person who makes an agreement with an employer, whether in writing or verbally, not to compete with the employer after the employment relationship has been terminated, shall be permitted to engage in the same business as that conducted by the former employer or in a similar business as that conducted by the former employer as long as the former employee does not directly solicit the sale of goods, services or a combination of goods and services from the established customers of the former employer.

2. Any provision in a contract between an employer and an employee in conflict with the provisions of this section shall be void and unenforceable. (26)

   Like California, Oklahoma provides no exceptions and claims that any non-compete agreement signed into a contract is unenforceable. (27) The Oklahoma statute states that even if...