Can a worldwide non-compete agreement be enforced? Typically the answer is no because, in deciding, Courts consider whether the geographic scope and duration of non-compete clauses are reasonable. An agreement that forbids competition worldwide, of course, has no geographic limitation and, therefore, is usually considered unreasonable and unenforceable.
But in Estee Lauder Companies, Inc. v. Batra, 430 F.Supp.2d 158 (S.D.N.Y. May 4, 2006), the New York district court enforced an agreement that prohibited a former executive from competing anywhere in the world. The plaintiff, Estee Lauder, sells skin care, makeup, fragrances and hair care products throughout the world. The defendant, Shashi Batra, was the Global Brand Manager and the General Manager of the Estee Lauder brands “Rodan & Fields” and “Dauphin” and had access to many of the Plaintiff’s trade secrets.
Batra signed an employment agreement with Estee Lauder that contained confidentiality, non-solicitation and non-competition provisions. The non-competition provision prohibited him from working for an Estee Lauder competitor for twelve months following termination in any geographic area for which he had work-related responsibility during the preceding twelve months.
Batra resigned from Estee Lauder and disclosed his new position as Worldwide General Manager of Perricone, a competitor of Estee Lauder. Even though the non-compete had a forum selection clause of New York, Batra reportedly told Estee Lauder that he did not believe the restrictions were enforceable in California, where his office had been located. Batra filed a declaratory judgment action in California asking the court to hold the agreement unenforceable. Estee Lauder, in turn, filed a temporary restraining order and preliminary injunction in New York to enforce the agreement and to prevent Batra from working for Perricone.
California has strong statutory and common law policies against enforcing restrictive covenants and California courts have, in the past, refused to enforce choice of law provisions that apply other states’ laws regarding non-competition. Application Group, Inc. v. Hunter Group, Inc., 61 Cal.App. 4th 881 (Cal. App. Ct. 1998).
Although the agreement between the parties said that New York law would govern, Batra argued that California law should apply due to the presence of significant contacts in California and California’s strong public policy against the enforcement of non-competition agreements. Batra resided in San Francisco at the time of the suit and throughout his employment with Estee Lauder and he carried out many of his responsibilities from California.
Regardless, in the New York Court’s opinion, that did not overcome the fact that the work he performed was not “centered” in California. Batra’s responsibilities for Estee Lauder covered all of North America for one brand and the entire world for the other brand and many of the significant functions for both brands were located in New York and involved employees and management that were predominately New York-based.
The Court also noted that New York, as the “financial capital of the world,” had an interest in protecting companies doing business in the state. The Court concluded that California’s interest in protecting its employees was not greater than New York’s interest in protecting companies by enforcing non-competition agreements that are reasonable in geographic scope and duration.
The Court recognized that the geographic restriction constituted a worldwide prohibition. While the court noted that under some circumstances such a widespread restriction would be unreasonable, it found it to be reasonable in this case given Batra’s responsibilities and the international scope of Estee Lauder’s business. Moreover, the Court reasoned that the impact of the worldwide geographic scope on Batra was negligible since Estee Lauder had contracted to pay Batra his salary during the non-competition period.
However, the Court found the duration of the restriction, twelve months, to be unreasonable where Estee Lauder had previously waived enforcement of the full term of other similarly situated employees and had offered to reduce Batra’s restrictive period to four months if he remained with Estee Lauder for a month. As a result, the Court reduced
the period of enforcement to five months.
This decision is a good reminder that clients with key employees in California should take proactive measures to guard against the state’s strong public policies. Before entering into restrictive covenants in any state, employers and employees alike should seek legal advice on forum selection and enforceability.
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