International Bus. Machines Corp. v. Bajorek

• Decision Date: 09 June 1998
• Docket Number: No. 97-16424,No. 97-16438,97-16424,97-16438
• Citation: 191 F.3d 1033
• Parties: (9th Cir. 1999) INTERNATIONAL BUSINESS MACHINES CORPORATION, Plaintiff-Appellant, v. DR. CHRISTOPHER H. BAJOREK, Defendant-Appellee. CHRIS BAJOREK, Plaintiff-Appellee, v. INTERNATIONAL BUSINESS MACHINES CORPORATION, Defendant-Appellant
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1033

191 F.3d 1033 (9th Cir. 1999)

INTERNATIONAL BUSINESS MACHINES CORPORATION, Plaintiff-Appellant, v. DR. CHRISTOPHER H. BAJOREK, Defendant-Appellee.

CHRIS BAJOREK, Plaintiff-Appellee, v. INTERNATIONAL BUSINESS MACHINES CORPORATION, Defendant-Appellant.

No. 97-16424 No. 97-16438

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Argued and Submitted June 9, 1998--San Francisco, California

Filed September 14, 1999

[Copyrighted Material Omitted]

Peter T. Barbur, Cravath, Swaine & Moore, New York, New York, for the plaintiff-appellant and defendant-appellant.

Thomas M. Peterson, Brobeck, Phleger & Harrison, San Francisco, California, for the defendant-appellee and plaintiff appellee.

Jesse M. Brill (briefed), National Association of Stock Plan Professionals, Concord, California, for the amicus.

Appeals from the United States District Court for the Northern District of California; Ronald M. Whyte, District Judge, Presiding. D.C. Nos. CV-97-20204-RMW(PVT), CV-96-20806-RMW.

Before: J. Clifford Wallace, Thomas G. Nelson, and Andrew J. Kleinfeld, Circuit Judges.

KLEINFELD, Circuit Judge:

This case primarily involves choice of law questions.

FACTS

IBM issued stock options to its executive employee, Dr. Bajorek, that were worth more than $900,000 when he exercised them. His option agreements included a promise that if he worked for a competitor within six months after he exercised his options, he would return any profits from the stock options. He left, and immediately went to work for a competitor. IBM therefore notified him that his stock options were cancelled.

Dr. Bajorek sued IBM in California for a declaratory judgment that he was in compliance with his agreements and that IBM was not entitled to cancel his stock options. IBM sued Dr. Bajorek in New York for breach of contract, on the theory that he broke his promise not to go to work for a competitor for six months. IBM's complaint also alleged fraudulent misrepresentation, on the theory that when Dr. Bajorek certified upon exercise of his stock options that he was in compliance, he knew full well that he did not intend to comply. Each case was filed in state court and removed to federal court. The stock option agreements said that disputes were to be resolved according to the law of New York. The New York case was transferred to California and consolidated with the California case.

The district court granted judgment on the pleadings for Bajorek. It addressed Bajorek's declaratory judgment action first and dismissed IBM's damages suit. The district court did not apply New York law, despite the parties' agreement to do so. Its theory was that application of New York law would violate strong California policies against restraining people from engaging in their lawful trade, and against employers collecting from employees wages they had already paid them. Those doctrines of California law, as the district court viewed them, made unenforceable the provision of the stock options requiring reimbursement if Dr. Bajorek went to work for a competitor within six months.

Because Dr. Bajorek prevailed on the pleadings, we determine whether, if IBM could prove what it pleaded, it would be entitled to relief. Thus the facts are stated as IBM pleaded them, and have not yet been proved.

Bajorek is a resident of California. IBM is a New York corporation with its principal place of business in New York. Bajorek worked for IBM for 25 years, mostly in California, but also for a few years in Minnesota and New York. IBM periodically issued various incentives in the nature of stock options to selected employees, including Bajorek, to induce them to remain with IBM. Dr. Bajorek's stock option agreements provided that, upon exercise, he would certify that he was in compliance with a cancellation clause, which prohibited him from working for a competitor, and that if he violated that clause during the six months after exercise, then he had to pay back to IBM his gains and payments from exercise of the options. Most importantly for this case, the stock options provided that the plan and all determinations made pursuant to it would be governed by the law of New York. Dr. Bajorek exercised his stock options, but went to work part-time for a competitor during his last week at IBM. He then went to work full time with the competitor as a senior executive immediately upon leaving IBM. IBM notified him that it was rescinding his stock options and demanded the money due upon cancellation, but Dr. Bajorek refused to pay it.

Dr. Bajorek made $928,538.74 from exercise of the stock options. IBM argues that he took almost a million dollars for not working for a competitor, yet did just that, so he has to pay the money back. Dr. Bajorek argues that under California law, an employer cannot take back the money it pays to employees, and cannot restrict an employee from going to work for a competitor, so he was not bound by these parts of the agreement. New York law does not have provisions like these. Thus the question is whether Dr. Bajorek is bound by his agreement to application of the law of New York.

ANALYSIS

We review judgment on the pleadings de novo. ¹ We review a district court's decision on enforcement of a choice of law provision for abuse of discretion, except as to purely legal questions, which we review de novo.²

I. Which state's choice of law rules?

IBM argues that because the substantive lawsuit was filed in New York, the court should have used New York choice of law principles, despite the case having been transferred to California. Generally where a defendant in a diversity case obtains a transfer, "the transferee district court must be obligated to apply the state law that would have been applied if there had been no change of venue." ³ This rule prevents a party who removed a diversity case from obtaining a different result in federal court, because of a transfer, than it would have obtained in state court.⁴ There should not be "a change of law as a bonus for a change of venue." ⁵ We have previously held that in a transferred case, the choice of law rules of the transferor state apply.⁶

The rule that in a transferred case, the transferor state's choice of law rules apply, means that New York choice of law principles apply to the New York case. IBM filed its breach of contract and fraud case in New York, and the transfer to California does not displace the choice of law rules of the original forum, New York, for that case. Because Bajorek filed his declaratory judgment action in California, in the absence of other considerations California choice of law rules would apply to the declaratory judgment action.

In this case, we need not decide whether the district court abused its discretion⁷ by dismissing the New York case and proceeding on the California case. If it made a difference which case was dismissed, the difference would be in the choice between New York and California law. As we explain below, both parties have argued the case on the basis of Restatement (Second) Conflict of Laws section 187. IBM has argued that this is the choice of law rule followed for cases such as this by New York, and Bajorek that it is the California rule. Thus we need not resolve the question, on which the Seventh Circuit and Federal Circuit disagree, whether a district court must exercise its discretion to dismiss a declaratory judgment action, even though earlier filed, where the substantive action anticipated by the declaratory judgment action is pending.⁸ Though the parties disagree on whether to apply California or New York choice of law principles, the briefs set out no difference between them, so we need not decide, and can proceed to application of the principles in Restatement (Second) Conflict of Laws section 187.

II. Restatement (Second) Conflict of Laws S 187.

Though we are persuaded by IBM's argument that New York choice of law principles apply, IBM's brief does not tell us much about what they are. It says, citing an intermediate New York appellate court decision, that New York applies section 187 of the Restatement (Second) Conflict of Laws.⁹ Bajorek also says that New York applies this Restatement provision. There are indications that New York may have a stronger policy of enforcing contractual choice of law provisions than that Restatement section,¹⁰ but because IBM argues only that the district court erred in its application of section 187, subsection 2, of the Restatement, that is the only argument we analyze.

The Restatement provision relied upon says that a contractual choice of law provision controls unless the chosen state has no substantial relationship and no reasonable basis for application, or application of the chosen state's law would violate a fundamental policy of a state with a materially great interest, the law of which would apply in the absence of the choice of law provision:

The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either

(a) 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

(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of S 188 [Law Governing in Absence of Effective Choice by the Parties], would be the state of the applicable law in the absence of an effective choice of law by the parties.¹¹

New York has a substantial relationship to the transaction and to the parties. IBM has its headquarters there. Bajorek chose to work for IBM. He voluntarily entered into contracts with IBM. The parties have a reasonable basis for choosing...