Overbroad Forum Selection Clause Dooms Effort to Enforce Noncompete

February 16, 2012
By Scott Holt on February 16, 2012 4:41 PM |

Many businesses include Delaware choice-of-law and forum-selection clauses in their contracts to take advantage of Delaware law and the Court of Chancery’s strong reputation for reliable and well-balanced decision-making. However, in order to take advantage of Delaware’s judicial system, the forum selection clause must be drafted so that it confers personal jurisdiction over all of the parties. In a recent ruling, the Court of Chancery struck down a plaintiff’s attempt to enforce a noncompete agreement in Delaware because of a poorly worded forum selection clause.

In the case of Georgia-Pacific Consumer Products LP v. Jadczak, C.A. 6695-VCL, the plaintiff brought suit in Delaware to enjoin its former employee from working for a competitor in violation of his employment agreement. In addition to various restrictive covenants, the defendant’s employment agreement included the following personal jurisdiction provision:

Employee consents to and waives any objection to personal jurisdiction and venue in any federal and state courts having jurisdiction in any dispute arising out of the terms of this agreement.

Defense counsel moved to dismiss the case for lack of personal jurisdiction, arguing that the clause was over broad. They emphasized that the employee worked in Georgia when employed by Georgia-Pacific, and later accepted a job with a competitor in Kentucky. By contrast, the clause would allow him to be sued anywhere in the United States. In response, plaintiff’s counsel argued that Georgia-Pacific is a national company whose financial interests could be impacted in any state.

After lengthy arguments, the Court granted the motion to dismiss, providing three reasons for its decision. First, the Court noted that while parties may contractually accept the jurisdiction of Delaware’s courts, any such agreement must be clear and express. The Court found the language used by Georgia-Pacific to be ambiguous in its second use of the term “jurisdiction,” and therefore concluded that it did not meet the standard of a clear and express agreement.

Second, the Court found the provision to be so broad as to be unreasonable. Indeed, the Court noted that the language is not even limited to the United States, but could include any country that has a system of state and federal courts. The Court concluded that “a provision this general gives the employee insufficient notice of where the employee could be sued.”

Finally, the Court relied on issues of comity. In other words, the Court was hesitant to impose its will where other states had a much stronger interest in the outcome of the case. Noting that “Delaware does not have a significant interest in this dispute,” the Court instead deferred to the “paramount interests” of Georgia and Kentucky. Vice Chancellor Laster opined that “it risks giving offense to other states and it risks overstepping Delaware’s role in our federal system for Delaware to take ownership of this type of dispute involving an employee.”

This decision reinforces the need for companies to have well-drafted venue selection provisions, particularly if they wish to have their noncompete agreement enforced in Delaware. For Delaware choice of venue provisions, companies should also consider taking advantage of Delaware’s choice of law / venue statute, 6 Del. C. § 2708, which provides that the parties “shall conclusively be presumed to be a significant, material and reasonable relationship with this State and [the agreement] shall be enforced whether or not there are other relationships with this State.”