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US Commercial Contracts: Navigating the Importance of State Law
In HBO’s television series Silicon Valley, there is a climatic scene where the protagonists score a victory when an arbitrator rules in their favor by declaring an employment contract void because it contains a non-compete clause. The series takes place in California and the premise is that California law completely voids any employment contracts that contain such a clause. It may come as a surprise that while the showrunners have used a bit of creative licensing, it is accurate the Californian law is famously hostile to non-compete clauses in employment contracts. While it is unlikely that the inclusion of such a clause would mean that the whole contract is void, Section 16600 of the California Business and Professions Code would likely make any such clause unenforceable.
Theatrics aside, UK viewers of the series may be somewhat surprised by this example of the extent to which the laws of one state can differ from the rest of the US. Unlike in California, non-compete clauses are generally enforceable in the rest of the US provided they are reasonable in duration, geography, and scope. For those who are considering doing business in the US, the scene in Silicon Valley would hopefully trigger careful consideration of the governing law clause in their contract with a US counterparty.
Parties to a contract are generally free to agree between themselves which country’s laws will govern a dispute over that contract. Choosing between which of the three UK governing laws (England and Wales, Scotland, Northern Ireland) rarely requires a comparison of which would be best suited for the subject matter of the contract. However, as dramatized in Silicon Valley, the same cannot be said of the US. It is therefore worth examining some of the practical differences between some of the more common states used for a governing law clause.
New York: The International First Choice for Commercial Contracts
For parties to a commercial contract with an international dimension, New York law is often the preferred choice. This is because New York law has a reputation for predictability and stability. It can generally be expected to honour the commercial bargain struck by the parties. Accordingly, it is seen as less interventionist than the laws of other states.
Additionally, New York is more permissive than most states when it comes to allowing its laws to be chosen as the governing law clause. For the parties to a commercial contract to choose a governing law clause of a state or country, there generally needs to be a connection between the subject matter of the contract and the jurisdiction of choice. New York doesn’t require such a connection. However, it does require that the contract involves at least $1 million.
Delaware: Corporate Structure
For those parties entering into agreements that are better described as corporate than commercial, Delaware is often seen as an ideal option. This is, in part, because the Delaware Court of Chancery is viewed internationally as having unique expertise in corporate disputes and litigation.
Parties entering into corporate structure agreements such as shareholder agreements or share purchase agreements should consider selecting Delaware law as the governing law clause to their contract.
California: Technology and IP
California occupies a unique position within the US commercial landscape.
Because of the concentration of technology and media companies in California, many software, licensing, intellectual property, and entertainment contracts use California law. However, somewhat paradoxically, California is known for comparatively interventionist legal policies when compared to, for example, New York. This could create difficulties for some companies electing for a Californian governing law clause, but who also expect to agree broad confidentiality obligations and post-employment restrictions (including perhaps a non-compete clause).
As a result, California law may be attractive where innovation and technology regulation are central concerns, but less attractive where parties seek maximum contractual enforceability and predictability.
When entering into a contract that is to be governed by US law, it is important to carefully consider exactly which state’s laws will govern the contract. Simply elected for one or another without considering the commercial context or the content could lead to avoidable upset should a dispute arise. The differences between each states laws should not be ignored, and while Silicon Valley exaggerates these differences for comedic effect, disappointed parties to a dispute would find these no laughing matter.
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This article does not constitute legal advice and should not be relied upon for business or legal decisions.