Delaware Chancery Court Blocks Former Exec’s Effort to Invalidate Noncompete in a Massachusetts Court

When litigation involving the same dispute and parties has been commenced in two different venues, many courts adhere to the “first-filed rule” which provides that the litigation should be confined to the forum in which it is first commenced. This often results in a race to the courthouse by litigants seeking to have the dispute heard in their preferred choice of venue.

Delaware courts, as a general matter, have followed this common law rule and allow judges broad discretion to grant a stay when there is a prior action pending in another state and involving the same parties and issues. There is, however, one important exception to this rule.

In cases where contracting parties have expressly agreed to a legally enforceable forum selection clause, the Delaware Supreme Court has held that courts must honor the parties’ contract and enforce the clause, even if, absent any forum selection clause, the first-filed rule might otherwise require a different result.  As a result, a party’s effort to avoid a Delaware forum selection clause by commencing suit in a different state can be defeated if the proper steps are taken. A recent proceeding in case pending in the Delaware Court of Chancery provides guidance.

A former executive for a national provider of post-settlement funding services filed suit in Massachusetts state court seeking to have the noncompete provision in his employment agreement invalidated and an injunction barring future enforcement actions of the agreement. After the complaint was filed, the executive sought and obtained a date for an emergency hearing from the Massachusetts court. Not so fast, said the national provider.

The employment agreement contained a Delaware choice of law provision and required that all disputes arising out of the agreement be brought in Delaware state courts. The day prior to the scheduled hearing in Massachusetts, the provider filed a complaint in the Delaware Court of Chancery seeking, among other things, a temporary restraining order to enjoin the former executive from moving forward with his claims in the Massachusetts court.

In a hearing held on the same date the complaint was filed, Chancellor Bouchard of the Delaware Court of Chancery granted the national provider’s motion for a temporary restraining order and enjoined the former executive from any further prosecution of his case in Massachusetts. In granting the motion, the Chancellor found that the provider had shown a colorable claim since the forum selection clause had broad language covering any claims “arising under or relating to” the employment agreement. The Chancellor also found a strong claim for irreparable harm, since, if the executive were allowed to proceed in Massachusetts, the provider would be deprived of the benefits of having the forum selection clause and there would be a risk of inconsistent judgments. Finally, the Chancellor found that the balance of hardships favored the provider, since it faced the potential of having to litigate the same dispute in two courts – something the venue provision was designed to prevent.

This recent proceeding shows the importance of having a well drafted choice of venue provision in your agreements. It also demonstrates the Court of Chancery’s willingness to move quickly to enforce a venue selection provision, despite a party’s effort to avoid it by filing in another venue.

 

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