Negotiation Guide

How to Negotiate Governing Law

Strategic approaches to negotiating governing law clauses, including neutral state options, home court advantages, and protecting against unfavorable jurisdictions.

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🎯 Understanding the Stakes

Governing law negotiations are often treated as boilerplate, but the choice can have significant practical consequences:

  • If you have employees in California: Non-compete and non-solicitation provisions are largely unenforceable there, regardless of what governing law you choose.
  • If you're the receiving party: You generally want a jurisdiction with strong receiving-party protections and limited enforcement of restrictive covenants.
  • If you're the disclosing party: You generally want a jurisdiction with strong trade secret protections and willingness to enforce restrictive covenants.
  • If it's mutual: A neutral jurisdiction acceptable to both parties is often the best outcome.

🏠 Neutral State Options

When parties can't agree on whose home state to use, these neutral jurisdictions are commonly accepted:

Delaware

The most commonly suggested neutral jurisdiction for commercial agreements.

Advantages
  • Sophisticated business courts (Court of Chancery)
  • Predictable, well-developed commercial law
  • Widely accepted as neutral
  • Adopted UTSA for trade secrets
Considerations
  • May be unfamiliar to parties in other states
  • Moderate on non-compete enforcement
  • Small state with limited court resources

New York

Preferred for financial and commercial transactions with international elements.

Advantages
  • Commercial Division for complex cases
  • Extensive case law on commercial disputes
  • International recognition and acceptance
  • Adopted UTSA in 2021
Considerations
  • Court backlogs in some counties
  • Higher litigation costs
  • Complex procedural rules

Illinois

Good middle-ground option, especially for Midwest-based parties.

Advantages
  • Well-developed commercial law
  • Reasonable on non-compete enforcement
  • Central location for Midwest companies
  • Adopted UTSA
Considerations
  • Requires adequate consideration for non-competes
  • Less internationally recognized

What to Say When Proposing Neutral Ground

"Rather than either party's home state, let's use Delaware as a neutral jurisdiction. Delaware has sophisticated courts experienced with commercial disputes and a well-developed body of law that provides predictability for both parties. This is standard practice for agreements between companies in different states."

💰 Negotiation Tactics

1

Carve Out Employee Restrictive Covenants

If the NDA includes non-solicitation or non-competition provisions, the governing law for those should be where employees are located. Courts in many states apply their own law to employee restrictions regardless of what the contract says.

This Agreement shall be governed by the laws of [Their State] , provided that the enforceability of any non-solicitation or non-competition provisions applicable to individuals shall be governed by the laws of the state in which such individual is principally employed.

What to Say

"We can agree to [Their State] law generally, but we need a carve-out for employee restrictions. Courts regularly apply local law to these provisions anyway, and structuring it this way avoids uncertainty. If you have employees in California, for example, those provisions need to comply with California law regardless of what we put in this agreement."

2

Preserve Venue Objections

Aggressive clauses waive all venue objections, including forum non conveniens. Push back to preserve your right to contest inconvenient venues.

Each party irrevocably waives any objection to venue, including forum non conveniens consents to personal jurisdiction in the courts of [State], provided that such consent does not waive any defense based on inconvenient forum.

What to Say

"We can consent to jurisdiction, but we can't waive our right to object if a particular forum is genuinely inconvenient or unfair. Forum non conveniens exists for good reason - it prevents abuse of the court system. A mutual carve-out protects both parties."

3

Preserve Emergency Relief Flexibility

Exclusive venue clauses can prevent you from getting emergency injunctions where you need them most. Ensure you can seek emergency relief in any appropriate jurisdiction.

Notwithstanding the foregoing venue provisions, either party may seek temporary restraining orders, preliminary injunctions, or other emergency equitable relief in any court of competent jurisdiction where such relief is necessary to protect such party's rights or property.

What to Say

"If there's an imminent breach happening in another jurisdiction, we need to be able to get an emergency TRO from a local court that can actually stop it. An exclusive venue clause that prevents emergency relief defeats the purpose of having injunction rights at all. This carve-out protects both parties' ability to respond to actual emergencies."

4

Address International Considerations

For cross-border agreements, consider practical enforcement issues. A governing law that works on paper may be difficult to enforce internationally.

🌐 International Considerations

  • EU parties: May require compliance with GDPR and local employment laws regardless of US governing law
  • UK parties: Consider English law as a neutral option with strong contract enforcement
  • Asian parties: Singapore and Hong Kong are common neutral venues for Asian transactions
  • Enforcement: Consider whether judgments from the chosen jurisdiction are enforceable where the other party has assets

What to Say

"Given that we're both in different countries, we need to think about practical enforcement. [Proposed jurisdiction]'s judgments are readily enforceable in both our countries, and choosing it avoids questions about which country's mandatory laws apply. This gives both of us a realistic path to enforcement if needed."

5

Resist "Their Law for Everything" Clauses

Some aggressive clauses apply their law to "all matters," including trade secret definitions, damages calculations, and employee restrictions. Push back on this overreach.

The laws of [Their State] shall apply to all matters arising under or relating to this Agreement, including without limitation trade secret definitions, restrictive covenant enforceability, and damage calculations the interpretation of this Agreement, provided that federal law (including the Defend Trade Secrets Act) shall apply to federal claims, and the law of an individual's employment state shall apply to restrictive covenants applicable to such individual.

What to Say

"We can't agree to blanket application of your state's law to everything. Federal trade secret law provides a uniform standard that should apply to federal claims. And employee restrictions need to comply with local law regardless of what we agree to here - courts in those states will apply their own law anyway. Let's focus the governing law on contract interpretation and leave specialized areas to appropriate law."

6

Push Back on Jury Trial Waivers

Jury trial waivers are often bundled with governing law clauses. While sometimes appropriate, they tend to favor the larger, better-resourced party. Consider whether to accept them.

⚠ Jury Trial Waiver Considerations

Jury trial waivers are generally enforceable but favor parties with more resources and litigation experience. They may be appropriate for purely commercial disputes but are more problematic when individual employees or smaller companies are involved. Consider your position and resources before agreeing.

What to Say

"We're not comfortable waiving our constitutional right to a jury trial. If there's a dispute, both parties should have access to the same procedural options. Jury trial rights are fundamental and shouldn't be waived lightly, especially in a mutual NDA where both parties may need them."

📝 Negotiation Checklist

  • Is the governing law from a familiar jurisdiction with predictable rules?
  • Are employee restrictive covenants carved out for local law?
  • Is there flexibility to seek emergency injunctive relief where needed?
  • Are venue objections (including forum non conveniens) preserved?
  • Does federal law (DTSA) apply to federal trade secret claims?
  • Is the clause mutual (same rules for both parties)?
  • Have you considered jury trial waiver implications?
  • If international, are judgments enforceable where the other party has assets?
  • Is the governing law jurisdiction's trade secret definition acceptable?
  • Do you have counsel familiar with the governing law jurisdiction?

✅ Acceptable Compromise Positions

✓ Fair Middle Ground

These compromise positions demonstrate good faith and are generally acceptable:

  • Neutral state: Delaware, New York, or another mutually acceptable jurisdiction
  • Employee carve-out: Restrictive covenants governed by employment state
  • Federal law preservation: DTSA applies to federal trade secret claims
  • Emergency relief flexibility: Either party can seek TROs/injunctions where needed
  • Preserved defenses: Forum non conveniens and personal jurisdiction defenses maintained
  • Conflict of laws exclusion: Chosen state's law applies without conflict analysis

🔗 Related Resources