Taxes Inc. (“Taxes”) is a tax preparation business incorporated in State A, where it has its corporate headquarters. Taxes operates five tax preparation offices in the “Two Towns” metropolitan area, which straddles the border between State A and State B. Three of the Taxes tax preparation offices are located in Salem, State A; the other two are in Plymouth, State B.
A woman, a recent college graduate, was hired by Taxes and trained to work as a tax preparer in one of its offices in Salem, State A. The woman and Taxes entered into a written employment contract in State A that included a noncompete covenant prohibiting her from working as a tax preparer in the Two Towns metropolitan area for a period of 24 months after leaving Taxes’s employ. The employment contract also provided that it was “governed by State A law.”
After working for Taxes for three years, the woman quit her job with Taxes, moved out of her parents’ home in State A (where she had been living since her college graduation), and moved into an apartment she had rented in Plymouth, State B. Two weeks later, she opened a tax preparation business in Plymouth.
Taxes promptly filed suit against the woman in the federal district court for State A, properly invoking the court’s diversity jurisdiction. The complaint alleged all the facts stated above, claimed that the woman was preparing taxes in violation of the noncompete covenant in her employment contract, and sought an injunction of 22 months’ duration against her continued preparation of tax returns for any paying customers in the Two Towns metropolitan area.
Taxes delivered a copy of the summons and complaint to the home of the woman’s parents in State A (the address that she had listed as her home address when she was employed by Taxes). The process server left the materials with the woman’s father.
Each state has service-of-process rules identical to those in the Federal Rules of Civil Procedure.
Under State A law, covenants not to compete are valid so long as they are reasonable in terms of geographic scope and duration. The State A Supreme Court has previously upheld noncompete covenants identical to the covenant at issue in this case. When determining whether to give effect to a contractual choice-of-law clause, State A follows the Restatement (Second) of Conflict of Laws.
Under State B law, covenants not to compete are also valid if they are reasonable in scope and duration. However, the State B Supreme Court has held that noncompete covenants are unreasonable and unenforceable as a matter of law if they exceed 18 months in duration. While State B generally gives effect to choice-of-law clauses in contracts, it has a statute that provides that choice-of-law clauses in employment contracts are unenforceable. When there is no effective choice-of-law clause, State B follows the lex loci contractus approach to choice of law in contract matters.
Rather than file an answer to Taxes’s complaint, the woman filed a motion pursuant to Rule 12(b)(6) to dismiss the action for failure to state a claim upon which relief can be granted. The woman’s motion argued that the noncompete covenant is invalid and unenforceable as a matter of law. Two days after filing the motion to dismiss, and before Taxes had responded to the motion, the woman filed an “amended motion to dismiss.” The amended motion sought dismissal on the same basis as the original motion (failure to state a claim), but also asked the court to dismiss the action for insufficient service of process.
- 1. Should the court consider the woman’s motion to dismiss for insufficient service of process? Explain.
2. If the court considers the woman’s motion to dismiss for insufficient service of process, should it grant that motion? Explain.
3. In ruling on the woman’s motion to dismiss for failure to state a claim, which state’s choice-of-law approach should the court follow? Explain.
4. Which state law should the court apply to determine the enforceability of the noncompete covenant? Explain.