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Nuvasive, Inc. v. Miles

Court of Chancery of Delaware

August 26, 2019

NUVASIVE, INC., a Delaware Corporation, Plaintiff,
v.
PATRICK MILES, an individual, ALPHATEC HOLDINGS, INC., a Delaware Corporation, and ALPHATEC SPINE, INC., a California Corporation, Defendants.

          Date Submitted: July 16, 2019

          Philip Trainer, Jr. and Aaron P. Sayers, of ASHBY & GEDDES, Wilmington, Delaware; OF COUNSEL: Rachel B. Cowen, Michael J. Sheehan, and Emory D. Moore, Jr., of MCDERMOTT WILL & EMERY, Chicago, Illinois; Christopher W. Cardwell, of GULLET, SANFORD, ROBINSON & MARTIN, Nashville, Tennessee, Attorneys for Plaintiff.

          Philip A. Rovner and Jonathan A. Choa, of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; OF COUNSEL: Micha Danzig, Eric J. Eastham, and Paul M. Huston, of MINTZ LEVIN COHN FERRIS GLOVSKY & POPEO, P.C., San Diego, California, Attorneys for Defendant Patrick Miles.

          MEMORANDUM OPINION

          GLASSCOCK, VICE CHANCELLOR

         Parties in jurisdiction "A" contract for services to be performed in jurisdiction "A", but provide for the contract to be construed under the laws of jurisdiction "B." Will such a contractual choice be respected? The motivations of the parties may be as benign as importing a well-developed body of commercial law into their agreement, or may be as problematic as an attempt to contract around a fundamental public policy of the jurisdiction in which they operate. In either event, the question involves issues of freedom of contract, public policy, and comity.

         Delaware is well known as having a well-developed body of business law; for this reason, perhaps, this Court has had occasion to address this question several times. Generally, our courts respect the parties' choice of law, as they do other contractual choices agreed to, as binding on the parties. Repeatedly, however, the issue has been one of Delaware's respect for an individual's freedom to contract, and other jurisdictions' policy determination that the benefits of such freedom are outweighed by freedom to pursue a trade or manner of earning a living. In other words, this jurisdiction will-within reason-allow individuals to contract away the right to pursue a trade or occupation, post-employment; in other jurisdictions- notably California-such attempts are void. Where parties see a contractual advantage to employing a non-compete or a non-solicitation agreement in California, they may attempt to import Delaware law by contract. That is the case in the matter now before me.

         Delaware has adopted the rationale of the Restatement (Second) of Conflict of Laws, under which, if the other jurisdiction's law would apply absent the parties' contractual choice of Delaware Law, and where the application of Delaware law would frustrate a fundamental policy of the other jurisdiction, the court must weigh the interests involved. If the other jurisdiction's interest materially outweighs that of Delaware, the court must apply that jurisdiction's law, notwithstanding the parties' contractual choice of law. Such is the case, this Court has found, with respect to post-employment non-compete provisions, in light of California policy. In an earlier bench decision in this case I found, consistent with our case law, that such non-compete provisions are generally against fundamental California policy, and that California's policy interest materially exceeds Delaware's interest in freedom of contract; consequently, I applied California law, under which the non-compete provision is void.[1]

         Remaining in this case is a related issue, on which the Defendant seeks summary judgment. The employment contract between Plaintiff NuVasive, Inc. ("NuVasive") and Defendant Patrick Miles, which purports to import Delaware law into a California employment relationship, prohibits not only post-employment competition with the employer, but solicitation of customers and employees as well. Are these post-employment non-solicitation contractual provisions so inimical to California policy that Delaware must refrain from enforcing them, despite the parties' stated choice of the application of Delaware law? I conclude the answer is yes, as described below.

         I. BACKGROUND

         The relevant factual background is short. The facts in this matter are laid out in more detail in my Memorandum Opinion in this matter issued on September 28, 2018.[2]

         A. Miles' Employment Agreement

         On September 11, 2016, Miles entered into an employment agreement (the "Agreement") with NuVasive, a Delaware corporation doing business in California.[3]The Agreement contained a non-compete covenant and a non-solicitation covenant.[4]According to the non-solicitation covenant, "for a one year period following the termination of [Miles'] employment for any reason," he would "not hire or solicit, directly or indirectly, any former or current employees of NuVasive, its subsidiaries and/or distributors, or solicit the business of any customers, clients, medical partners . . . of NuVasive, its subsidiaries and/or distributors."[5] In other words, it was both an employee and customer non-solicitation covenant. The Agreement had a Delaware choice of law provision and a Delaware choice of forum provision.[6] Miles left NuVasive on October 1, 2017 and on October 2 he joined a purported competitor.[7] NuVasive filed its Complaint in this Court on October 10, 2017, [8] which alleged, among other things, that Miles had breached the non-compete and non-solicitation covenants of the Agreement.

         B. Procedural History

         Miles brought a Motion for Partial Summary Judgment on March 6, 2018, in which he reasoned that California law should govern the non-compete and non-solicitation covenants, under which, per Miles, both were unenforceable.[9] In a September 28, 2018 Memorandum Opinion, I denied the Motion as it related to summary judgment on the Plaintiff's claims on breach of the non-compete covenant.[10] I applied this Court's analysis in Ascension Insurance Holdings, LLC v. Underwood[11] of the Restatement (Second) of Conflict of Laws to the non-compete covenant in the Agreement.[12] I found that enforcement of the covenant would not violate the fundamental policy of California because this particular covenant appeared to fit into a statutory exception to California's general prohibition on non-compete covenants, under which non-compete clauses in employment contracts negotiated by counsel for the employee were enforceable.[13] I assumed, without deciding, that Miles' counsel had negotiated the agreement.[14] The Delaware choice of law provision in the Agreement was therefore not inconsistent with California policy, and enforceable.[15] I did not, however, in the September 28, 2018 Memorandum Opinion make a determination on the non-solicitation covenant because it appeared, at that point in time at least, that California law was unclear on the enforceability of non-solicitation covenants.[16]

         On February 6, 2019, Miles filed a Renewed Motion for Summary Judgment and pointed to persuasive evidence of record that he had not been represented by counsel during negotiation of the Agreement, and that therefore the statutory exception in California law to California's general prohibition on non-compete covenants had not in fact been implicated.[17] In a Bench Ruling on June 7, 2019, I returned to the Ascension analysis with that factual clarification, found that the Delaware choice of law provision was unenforceable and that California law should apply, and granted the Renewed Motion as it pertained to the Plaintiff's claims related to Miles' alleged breach of the non-compete covenant.[18] Miles had also renewed his initial Motion as to the non-solicitation claims brought by the Plaintiff, arguing that the law had been clarified as to California's public policy. I requested supplemental briefing on only that issue.[19] Supplemental briefing was completed on July 16, 2019 and I considered the matter submitted for decision as of that date.

         II. ANALYSIS

         The Restatement (Second) of Conflict of Laws analysis performed in Ascension is, I find, the proper lens with which to view the non-solicitation covenant in the Agreement, [20] and whether the Delaware choice-of-law provision in the Agreement is enforceable as to that covenant. The Restatement, as explained in Ascension, requires the following analysis in determining choice of law. If (1) California law would apply absent the Delaware choice of law provision, and if (2) enforcement of the non-solicitation covenant would conflict with California fundamental policy, and if (3) California has a materially greater interest in enforcement of the covenant than does Delaware, California law would apply to the Agreement here, despite the Delaware choice of law provision.[21] As I explained in my September 28, 2018 Memorandum Opinion, California has the strongest contacts to the Agreement and absent the choice of law provision, California law would apply.[22] I must then consider whether enforcement of the non-solicitation covenant would conflict with the "fundamental policy" of California, and, if so, whether California has a materially greater interest in enforcement of the Agreement than Delaware.

         A. The Fundamental Policy of California on Non-Solicitation Covenants

         The non-solicitation covenant in the Agreement covers a one year post-employment period. It bars Miles' solicitation of both NuVasive's employees and customers. The parties appear to agree that the fundamental policy of California regarding non-solicitation covenants (if any) is reflected in California's Business and Professions Code Section 16600 ("Section 16600"), as interpreted and applied in California case law.[23] Section 16600 reads "[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."[24] That provision, as explained above, prohibits covenants not to compete. I find, based on California precedent, that it applies to non-solicitation provisions as well.

         1. Customer Non-Solicitation Covenants Conflict with the Fundamental Policy of California

         In its supplemental briefing, NuVasive fails to address customer non-solicitation covenants.[25] Miles, helpfully, points to the California Supreme Court's 2008 decision in Edwards v. Arthur Anderson LLP, holding that customer non-solicitation covenants are restraints on individuals' engagement in their lawful profession, and thus prohibited by Section 16600.[26] Therefore, I find that customer non-solicitation covenants conflict with California fundamental policy.

         2. Employee Non-Solicitation Covenants Conflict with the Fundamental Policy of California

         The California Supreme Court in Edwards wrote that "[u]nder [Section 16600's] plain meaning . . . an employer cannot by contract restrain a former employee from engaging in his or her profession, trade, or business unless the agreement falls within one of the exceptions to the rule."[27] The court in Edwards was not, however, presented with a covenant prohibiting solicitation of the employer's employees.[28] NuVasive points to three California Federal District Court opinions which upheld employee non-solicitation covenants post-Edwards.[29] Miles, however, points to a subsequent California Court of Appeal's decision, which holds that employee non-solicitation covenants are generally void under Section 16600.[30]That case, AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., was decided by the California Court of Appeal on November 1, 2018, [31] after I issued my September 28, 2018 Memorandum Opinion (which noted that California law appeared unclear on the enforceability of non-solicitation covenants). Miles further points to California Federal District Court cases decided post-AMN Healthcare, which rely on AMN Healthcare for the proposition that employee non-solicitation covenants are generally void under Section 16600.[32]

         In AMN Healthcare, the individual defendants worked as "travel nurse recruiters" for the plaintiff, that is they recruited healthcare professionals to work on a temporary basis at medical care facilities throughout the United States.[33] The recruited healthcare professionals were "deemed to be [employees] of [the plaintiff] while on temporary assignment through [the plaintiff]."[34] The defendant recruiters had, as a condition of employment with the plaintiff, agreed for a period of time after their termination not to solicit employees of the plaintiff to leave plaintiff's employ.[35] Nonetheless, the defendant recruiters left the plaintiff for a competitor and allegedly contacted healthcare professionals they had previously recruited, employed by the plaintiff, and solicited those healthcare professionals to join them at their new employer.[36]

         The California Court of Appeal in AMN Healthcare found that the non-solicitation provisions were void. The AMN Healthcare court noted that California had long ago split with the common law of other states, which allowed for "reasonable" restraints on trade, in favor of a broad prohibition on restraints, with certain limited exceptions.[37] According to the California Court of Appeal, "Section 16600 expresses California's strong public policy of protecting the right of its citizens to pursue any lawful employment and enterprise of their choice."[38] The court then grappled with its own precedent.

         In Loral Corp. v. Moyes, [39] a 1985 decision by the California Court of Appeal, a "noninterference" covenant that prevented a former executive from "raiding" his former employer was found on its face not to be void under Section 16600 after the court applied a reasonableness standard and found the restraint to be no more significant "than a restraint on solicitation of customers or disclosure of confidential information."[40]Moyes was decided before Edwards, and the California Court of Appeal in AMN Healthcare expressed doubt on "the continuing viability of Moyes post-Edwards," because the California Supreme Court in Edwards found the language of Section 16600 to be unambiguous in its use of the word "restrain."[41] The Edwards court wrote that "if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to ...


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