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Most contracts contain a choice of law provision.

Typically, a choice of law provision identifies the law of a particular state that will govern the interpretation and enforcement of the contract. This provision is one of the most important and neglected provisions contained in a contract. By choosing the law of one state over another, the parties are, in effect, placing terms in their contract that are invisible to them at the time the contract is signed (unless the party has received advice from his attorney) but that will become quite apparent if the parties become involved in a dispute that ends up in some court. Indeed, this provision can have decisive consequences in a lawsuit.

It should be noted that a party in a lawsuit can challenge a choice of law provision in the contract. However, this article is not about how to make such a challenge. Rather, this article is about the importance of such a contract provision in a contract and, therefore, why a sales representative should not neglect it during the negotiation of a contract with a principal.

Let’s assume that a principal-sales representative relationship has ended or is about the end. The contract contains a non-compete provision that will prevent the sales representative from replacing the old line with a new line for some time after termination, perhaps a year or two, wherever the principal does business (which is nationwide). Naturally, the sales representative will wonder whether such a provision is enforceable and, if so, whether it is enforceable exactly as it is written or in some more reasonable and less onerous way.

Obviously, the answers to these questions do not appear in the contract itself. The answers to these questions will be determined by the state law applicable to the interpretation and enforcement of the contract, which is anything but uniform. Such law varies by state. For example, a few states do not enforce non-competes or only enforce them under very limited circumstances. California is an example of such a state. However, almost all states will enforce non-competes if the court believes them to be reasonable to protect the legitimate interests of the principal. These states not only have their particular factors to determine what is reasonable and their individual case law history, but they differ in what a court will do if the non-compete is found to be unreasonable. One group of states will enforce the reasonable non-compete but will strike the entire covenant not to compete if it contains unreasonable terms. Another group of states will enforce the reasonable non-compete but will strike the unreasonable terms in the non-compete while enforcing the remainder of the terms contained in it (if this is possible). Another group of states will enforce the non-compete after “reforming” the non-compete by rewriting it in a way that the court finds to be reasonable. Ohio is an example of such a state.

Thus, the sales representative cannot determine his or her rights and obligations about post-termination competition with his or her former principal under the contract by reading the contract. The real terms of his or her rights and obligations do not appear in black and white in the contract and in that sense they may well have been written in invisible ink. As a result, the sales representative will need to contact his or her attorney and receive the attorney’s advice about whether or not the non-compete can be enforced by the principal and, if so, to what extent. Obviously, that advice will start by considering the choice of law provision contained in the contract. The choice of law provision may then have a decisive effect on what the sales representative may or may not be able to do after termination of the relationship and contract with the principal in general and in its particulars. Thus, the choice of law provision in a contract is critical to understanding post-termination competition rights and obligations. Obviously, given the importance of these rights and obligations to the business of the sales representative post-termination, the sales representative should consider and negotiate the choice of law provision before entering into the contract. Otherwise, he or she will need to adapt his business to it or challenge it in court.

When the principal and sales representative have a dispute that ends up in a lawsuit that involves the sales representative representing a new and competitive line, a principal may claim that the sales representative should not be permitted to represent the new line, whether or not the contract contains a post-termination non-compete, because the sales representative was given or has taken trade secrets and confidential information from the principal and its customers and has disclosed them to the new line or actually used them in representing the new line, or there is a threat that the sales representative will do so.

The contract may contain a post-termination non-compete or not, but, like most contracts, the contract does contain a provision that declares that the sales representative will be receiving trade secrets and confidential information of the principal and its customers and prohibits the sales representative from disclosing them or using them outside of performing the contract. Thus, the sales representative is prohibited from disclosing or using trade secret and confidential information learned during his or her representation of the prior principal in his new ventures.

However, the question arises whether these non-disclosure and non-use of trade secret and confidential information prohibitions can be used by the principal to prevent the sales representative from entering into a new relationship with a principal who competes with the prior principal without fear of a dispute or lawsuit from the prior principal separately and independently from any non-compete provision that may or may not be contained in the principal-sales representative contract. The answer to this question will depend upon the choice of law provision in the contract and the state law that applies to the trade secret/confidential information claim.

However, in addition to differences that may exist about general legal matters, like what constitutes a trade secret or confidential information and what a principal must do to guard information to maintain its protected status, some states recognize a doctrine called the inevitable disclosure doctrine. Ohio is one of these states. The inevitable disclosure doctrine indicates that, based upon some factors, it is inevitable that the person will disclose and use the trade secret information he or she gained in prior work in a new venture and therefore a court may enjoin the person not only from disclosing or using the trade secret information, but also from performing similar duties in a new venture and, in some cases, from even joining a new venture, where the “inevitable” disclosure and use will occur. Other states reject this doctrine. California is one of these states. These states reject the inevitable disclosure doctrine for a variety of reasons, not the least of which is that a plaintiff can use the inevitable disclosure doctrine as an after-the-fact basis to enforce a non-compete against a defendant that was not part of the contract between the parties. Once again, the sales representative cannot determine his or her rights and obligations about post-termination conduct and competition with the former principal under the contract by reading the contract. Attorney advice is necessary to understand what the terms of the contract are and how they will be enforced. Once this occurs, the sales representative will either have to adapt to these terms or challenge them in court.

A choice of law provision in a contract is important and is often neglected in the negotiation of the contract between the sales representative and the principal. Since this provision can affect what rights and obligations a sales representative has under its contract, even though these rights and obligations are not set forth in the black and white of the contract, the sales representative should consider and negotiate this term of the contract before entering into the contract with the principal.

MANA welcomes your comments on this article. Write to us at [email protected].