Tag: choice of law

New York’s Public Policy On Construction Dispute Venue Trumps Illinois Forum-Selection Clause – IL 2d Dist.

Dancor Construction, Inc. v. FXR Construction, Inc., 2016 IL App (1st) 150839 offers a nuanced discussion of forum selection clauses and choice-of-law principles against the backdrop of a multi-jurisdictional construction dispute.

The plaintiff general contractor (GC) sued a subcontractor (Sub) in Illinois state court for breach of a construction contract involving New York (NY) real estate.  The contract had a forum selection clause that pegged Kane County Illinois (IL) as the forum for any litigation involving the project.  

The trial court agreed with the Sub’s argument that the forum-selection clause violated NY public policy (that NY construction litigation should be decided only in NY) and dismissed the GC’s suit.  Affirming, the Second District discusses the key enforceability factors for forum-selection clauses when two or more jurisdictions are arguably the proper venue for a lawsuit.

Public Policy – A Statutory Source

The Court first observed that IL’s and NY’s legislatures both addressed the proper forum for construction-related lawsuits.  Section 10 of Illinois’ Building and Construction Contract Act, 815 ILCS 665/10, voids any term of an IL construction contract that subjects the contract to the laws of another state or that requires any litigation concerning the contract to be filed in another state.

NY’s statute parallels that of Illinois.  NY Gen. Bus. Law Section 757(1) nullifies construction contract terms that provide for litigation in a non-New York forum or that applies (non-) NY law.

Since a state’s public policy is found in its published statute (among other places), NY clearly expressed its public policy on the location for construction litigation.

Forum Selection and Choice-of-Law Provisions

An IL court can void a forum-selection clause where it violates a fundamental IL policy.  A forum-selection clause is prima facie valid unless the opposing side shows that enforcement of the clause would be unreasonable.

A forum-selection clause reached by parties who stand at arms’ length should be honored unless there is a compelling and countervailing reason not to enforce it. (¶ 75)

A choice-of-law issue arises where there is an actual conflict between two states’ laws on a given issue and it isn’t clear which state’s law governs.  Here, IL and NY were the two states with ostensible interests in the lawsuit.  There was also a plain conflict between the states’ laws: the subject forum-selection clause was prima facie valid in IL while it plainly violated NY law.

Which Law Applies – NY or IL?

Illinois follows Section 187 of the Restatement (Second) of Conflicts of Laws (1971) which provides that the laws of a state chosen by contracting parties will apply unless (1) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice, or (2) application of the law of the chosen state would violate a fundamental policy of a state that has a materially greater interest than the chosen state on a given issue.

The Court found the second exception satisfied and applied NY law.  

Section 757 of NY’s business statute clearly outlaws forum-selection clauses that provide for the litigation of NY construction disputes in foreign states.  As a result, the contract’s forum clause clearly violates NY’s public policy of having NY construction disputes decided in NY.

The question then became which state, NY or IL, had the greater interest in the forum-selection clause’s enforcement?  Since NY was the state where the subcontractor resided, where the building (and contract’s finished product) was erected and the contract ultimately performed, the Court viewed NY as having a stronger connection.  Since allowing the case to proceed in IL clearly violated NY’s public policy, the Court affirmed dismissal of the GC’s lawsuit.

Afterwords:

Forum selection clauses are prima facie valid but not inviolable.  Where a chosen forum conflicts with a public policy of another state, there is a conflict of laws problem.  

The Court will then analyze which state has a more compelling connection to the case.  Where the state with both a clear public policy on the issue also has a clearer nexus to the subject matter of the lawsuit, the Court will apply that state’s (the one with the public policy and closer connection) law on forum-selection clauses.

 

Court Can Shorten Overly Broad Non-Compete In Recruiting Business Dispute – IL Court (Applying Md. Law)

blue pencilIn TEKsystems, Inc. v. Lajiness, 2013 WL 3389062 (N.D.Ill. 2013), the Northern District of Illinois, applying Maryland law (due to a contractual choice of law provision), upheld a 50 mile/18 month restrictive covenant in a recruiter’s employment contract. 

The plaintiff employer sued one of its former recruiters for violating a non-compete provision contained in a written employment contract when the recruiter went to work for a competitor.  The employment contract provided that Maryland law would govern (Maryland was where plaintiff was headquartered), and precluded the defendant from competing with plaintiff in the job placement business for a period of 18 months and within a 50-mile radius post-employment. 

The contract contained some drafting precision: it only prevented the recruiter defendant from working for a competitor who engages in any aspect of plaintiff’s business for which defendant specifically performed services or about which defendant obtained confidential information.  2013 WL 3389062, *4.   In other words, the restriction didn’t entirely ban the defendant from working in any capacity for a competitor. If the recruiter’s job duties while at the plaintiff employer differed qualitatively from his duties at the competitor, this wouldn’t violate the non-compete. 

The defendant filed a 12(b)(6) motion to dismiss on the basis that the restrictive covenant was facially overbroad.  The Northern District denied the motion and held that the restrictive covenant was reasonable in terms of time and space under Maryland law.

Q: Why?

A: The Court first validated the Maryland choice of law provision since, under Illinois conflicts of law principles, Maryland had a definite connection to the lawsuit since plaintiff was headquartered there.  There were also no public policy concerns triggered by applying Maryland law.

The Court then applied Maryland restrictive covenant law.  In Maryland, restrictive covenants spanning 50 miles and more than 18 months had been upheld and that this particular non-compete was narrowly drawn only to prevent defendant from competing on matters “about which [he] gained specialized or confidential knowledge while employed at [TEKsystems].”  2013 WL 3389062, *4-5.  The court also stated that even if the plaintiff’s non-compete clause was overbroad, Maryland courts routinely “blue-pencil” such non-compete clauses, paring them down to shorter time and space limits.  Id. at * 5.

In finding that TEKsystems stated a colorable breach of contract claim, the Court found that it sufficiently alleged defendant had access to and contact with plaintiff’s confidential information and customers and was now working in a similar position for a competitor.  Accordingly, for purposes of a 12(b)(6) motion – which accepts as true all facts alleged in a complaint -plaintiff sufficiently stated a breach of contract claim premised on defendant’s violation of the non-compete provision in the TEKsystems employment agreement.

The Court did dismiss plaintiff’s equitable accounting claim on the basis that plaintiff had an adequate remedy at law.  Maryland equitable accounting law (like Illinois) posits that an adequate legal remedy (i.e., a breach of contract claim) will defeat an equitable accounting claim.  Here, since the employment contract contained detailed formulas to compute plaintiff’s lost profits and sales in the event an employee breached the contract, this was a clear legal remedy (i.e., a breach of contract suit) for the plaintiff.

Take-away:  Definitely a pro-employer case.  It upholds a 18 month/50-mile restrictive covenant and makes clear that even if the restriction was too broad, a Maryland court (and likely an Illinois court, too), could simply edit and narrow down the scope of the non-compete. This ability to adjust the non-compete’s reach strikes a balance between the two competing interests that lie at the heart of non-compete and trade secrets cases: protecting the employer’s legitimate business interests while at the same time allowing an employee to earn a living in his chosen field.