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A Choice of Law Provision in a Non Compete Agreement Does Not Always Control


Cabela’s LLC v. Highby, et al - Third Circuit Court of Appeals


Facts:  (Note, in this short five page opinion, the Court of Appeals did not provide a lot in the way of facts.)

In short, Cabela’s LLC (“Cabela’s”) is a registered Delaware entity.  Cabela’s sought a temporary injunction to enjoin Matthew Highby, Molly Highby, and Highby Outdoors, LLC (“the Highbys”) from alleged violations of a non compete and non solicitation agreement.   (There was a non compete and non solicitation agreement in place which included a Delaware choice of law provision.  However, the Highbys were located in Nebraska and sought to have Nebraska law apply.  Nebraska non compete laws are stricter than Delaware’s.)  The district court denied the request from Cabela’s and Cabela’s appealed to the Third Circuit Court of Appeals.

Holding:  Under Nebraska law, a non compete may restrain competition by improper and unfair methods, but may not contain ordinary competition.  Delaware law differs, however, by allowing a non compete to prohibit ordinary competition so long as it is not oppressive to an employee.  Cabela’s argued that the Restatement (Second) of Conflict of Laws stipulated that a choice of law provision should control in any conflict of laws dispute.  However, the Third Circuit Court of Appeals pointed out that the Restatement only requires a court to presume the contracting parties and/or relevant transactions have a significant material relationship with Delaware.  The Restatement does not require a court to presume that no other forum has a significant and more material interest in its law being applied.

The Court of Appeals held that the district court correctly identified a conflict of laws between Delaware’s policy in upholding the freedom of contract and Nebraska’s fundamental policy of not enforcing contracts that prohibit ordinary competition.  In this case, the non competes were executed in Nebraska between Nebraska citizens, the alleged breaches of the agreements occurred in Nebraska, and Cabela’s claims were partially based upon Nebraska law.  Consequently, the Court of Appeals recognized that Nebraska had a materially greater interest in applying its laws to the dispute.

The non competes themselves were therefore found to constrain ordinary competition because they prohibited the Highbys from using the general skills and training that they acquired while employed at Cabela’s in any other retail space that sold hunting, fishing, and other outdoor products with a reach outside Nebraska.

Judgment:  The Third Circuit Court of Appeals affirmed the denial of a temporary injunction sought by Cabela’s on the grounds that a Delaware choice of law provision in a non compete agreement did not apply as it was contrary to a fundamental policy of Nebraska.

The Takeaway:  This case serves as a good reminder that just because a choice of law provision is included in a contract/agreement/non compete/etc., that does not definitively mean that state’s law will apply.  As the Third Circuit Court of Appeals spelled out here, while the non compete would be valid under Delaware law, when looking at the facts, Nebraska law should control.  This case should provide employers and employees alike with a reminder that the enforceability of a contract or provision, while lawful in some states or jurisdictions, will not necessarily produce the same result elsewhere.

Majority Opinion Judge:  Judge McKee

Date:  April 14, 2020

Opinion:  http://www2.ca3.uscourts.gov/opinarch/191423np.pdf


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