Recently in Choice of Venue and Forum Category

January 16, 2014

Young Conaway Publishes Bloomberg BNA Series on Noncompetes

bloomberg.pngPartners Scott Holt, Barry Willoughby, and William Bowser recently co-authored Bloomberg BNA's Corporate Practice Series on Noncompetition Agreements. The publication provides an in-depth review of the use and enforcement of noncompetition agreements, including practical tips for prosecuting and defending noncompete cases.

The publication is available through the Bloomberg BNA web site

February 16, 2012

Overbroad Forum Selection Clause Dooms Effort to Enforce Noncompete

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.”

October 5, 2011

Chancery Court Decision Provides Insight Into Drafting Enforceable Forum Selection Clauses

The Delaware Court of Chancery is nationally respected for its consistent and conscientious decisions in cases involving complex business issues. As a result, many legal practitioners recommend that contracting parties include a forum selection clause requiring that any disputes arising from a given contract be heard by a court of competent jurisdiction in the State of Delaware, including the Court of Chancery. A recent case in the Delaware Court of Chancery provides insight into the effective enforcement of a forum-selection clause.Delaware

In the daintily-named case of ASDC Holdings, LLC v. The Richard J. Malouf 2008 All Smiles Grantor Retained Annuity Trust, two parties entered into an agreement regarding the sale of equity in a Texas business. The agreement contained both an arbitration and a Delaware forum-selection clause which provided that any actions “with respect to any claim or cause of action arising under or relating to this Agreement” must be brought in a Delaware state or federal court with jurisdiction.

After the deal was executed, both parties became unhappy and sought legal relief: Plaintiff initiated an arbitration proceeding, and Defendant brought suit in a Texas court. Plaintiff thereafter filed papers in the Delaware Court of Chancery, seeking a preliminary injunction to prohibit the Texas action from moving forward in violation of the forum-selection clause.

The first question before the Court was whether it had jurisdiction to grant a preliminary injunction. The Court of Chancery is a court of limited jurisdiction—it does not have jurisdiction where there is an adequate remedy at law for the damages alleged. Defendant asserted that Plaintiff had an adequate remedy at law because it could assert the forum selection clause as an affirmative defense in the Texas action. Rejecting this argument, the Court held that where the underlying forum-selection clause is valid and broad enough to arguably reach the underlying claims, litigating the applicability of the forum-selection clause in another state deprives the parties of the benefit bargained for and does not constitute an adequate remedy at law.

Having established that it had jurisdiction, the Court moved on to address the Plaintiffs’ Motion for Preliminary Injunction. In order to obtain a Preliminary Injunction, the moving party must show (1) a reasonable probability of success on the merits, (2) an imminent threat of irreparable injury, and (3) that the balance of the equities favors the issuance of the requested relief. Defendant raised several arguments as to Plaintiff’s probability of success. First, it argued that several defendants in the Texas action are not signatories of the contract at issue, and therefore may not invoke the forum selection clause. The Court noted that, as wholly-owned subsidiaries, officers, and directors of the contract signatory, the third-party defendants are closely related to the signatories and may invoke the clause. Regarding the remainder of Defendant’s contentions, the Court concluded that the forum-selection clause was broad enough to give rise to a colorable argument that all of the claims raised in the Texas action fall within the scope of the clause.

As to the second element of Plaintiff’s claim, the Court held that proceeding on a claim in an unwarranted forum constitutes irreparable harm. Finally, the Court concluded that the balance of the equities favored Plaintiff, although the Court did not elaborate.

The Court’s opinion raised two key points to drafting a forum selection clause that may be successfully enforced through a Motion for Preliminary Injunction. First, the forum selection clause at issue must be valid. This means that the clause must permit claims to be brought in the appropriate Delaware Court.  A clause requiring that any claim be brought in the Court of Chancery, regardless of whether the Court has subject matter jurisdiction, may not be enforceable. 

Second, the clause should be drafted as broadly as possible, to ensure that any claims raised in a foreign jurisdiction will be governed by the clause, and subject to dismissal under the forum-selection clause. If the causes of action are not arguably within the ambit of the forum-selection clause, the party seeking to enforce it may not be entitled to a preliminary injunction. The language used by the parties in this case—governing “any claim or cause of action arising under or relating to this Agreement”—was found to be sufficiently broad enough to cover the claims at issue.

September 28, 2010

Chancery Court Stays Effort Of Company to Haul Ex-Employee Into Delaware

Vice Chancellor Chandler recently stayed, sua sponte, an action commenced in Delaware's Court of Chancery by a company seeking a declaratory judgment against a former employee.  The decision reiterates the importance of bargaining for consent to the jurisdiction of Delaware's Court of Chancery in any contract. 

Online Resources Corp. sought a declaration regarding the meaning of a severance agreement with a former employee.  The employee, however, commenced an action against Online Resources Corp. in a Virginia trial court, alleging that the company breached the agreement and wrongfully terminated him.  Online Resources Corp. sought to have the Virginia action dismissed because of the pending Delaware Court of Chancery Action, and because the claims raised by the employee in his Virginia action arose from the same facts and circumstances as those set forth in the company's Delaware Court of Chancery action.

The subject of Vice Chancellor Chandler's opinion was whether the employee's motion to dismiss the company's Delaware action should be granted.  After fully briefing the issue for the Virginia court, that court rejected Online Resources Corp. arguments and sua sponte stayed the case indefinitely in favor of allowing the case to proceed in Virginia. 

The Court cited several important key factors in support of its decision.  First, it found there were no important or novel issues of Delaware corporate law raised in Online Resources Corp.'s action.  Second, based upon the Virginia court's decision, there is no question that Online Resources Corp. would be required to defend the wrongful termination action in Virginia.  Finally, because the Virginia action was still pending, the Court found that Online Resources Corp. could bring its declaratory judgment claims in the Virginia litigation.  As a result, the Court stayed Online Resources Corp.'s Delaware action, citing the interests of comity and judicial economy.

Vice Chancellor Chandler did, however, agree to consider lifting the stay if Online Resources Corp. is unable to assert as a counterclaim in the Virginia action its claims involving the severance agreement or if the Virginia action is not prosecuted diligently by the employee.

The lesson from this short opinion is that, as we have previously posted, to the extent a party wants to ensure that it can sue a nonresident in Delaware based on a contract, it should bargain for consent to jurisdiction in Delaware's courts in the contract. This includes including Delaware’s statutory choice of law and venue provision in employment and severance agreements.

By Maribeth Minella

August 27, 2010

Computer Misuse Statutes Playing Bigger Role In Non-Compete and Trade Secret Cases

I n today’s technology driven workplace, departing employees often leave with more than a few notepads and office supplies. Most companies have a wealth of information available by electronic means that proves to be too tempting for some who have designs to unfairly compete connected redwith their former employer.

The latest trend among noncompete law practitioners has been the assertion of various computer theft statutes to reign in this activity. On the federal level, the Computer Fraud and Abuse Act, 18 U.S.C. § 1030 et seq. (CFAA), is being brought with more frequency in noncompetition enforcement and trade secret cases. The statute requires a showing of intentional access to a protected computer without authorization or beyond authorization that results in damages. It also provides for attorneys’ fees if the plaintiff is successful in proving its case.

Delaware has its own version of the CFAA, yet its scope is distinctly broader. The Misuse of Computer System Information Statute, 11 Del. C. § 935 et seq., makes it a crime to knowingly access a computer system without authorization. The statute prohibits not only the unauthorized copy and disclosure of electronic data, but the knowing deletion of data from a computer system.

Section 941 of the Delaware Code also has a civil component to this law which allows an aggrieved party to bring an action in the Delaware Court of Chancery for injunctive relief, restitution, and the appointment of a receiver. The Court has authority under 11 Del. C. § 941 to award treble damages for willful and malicious conduct as well as other relief as it may deem appropriate in equity. The Court of Chancery also is required to award reasonable attorney's fees to an aggrieved person who prevails under the statute.

To fall within the jurisdiction of the Court of Chancery under this law, the misuse of computer system must have occurred in Delaware, or at the there must have been some form of unauthorized access within the State.

July 16, 2010

Civil Conspiracy May Open the Door For Jurisdiction Over Non-Resident Defendants

Much of the non-compete litigation occurs in Delaware because the parties (usually the former employee and his/her former employer) have consented to the jurisdiction of Delaware courts in the underlying contract. But in many of these cases, obtaining personal jurisdiction over third parties such as the former employee’s new employer may pose difficulties. If there’s evidence of a conspiracy between the defendants, however, one consideration is using the Conspiracy Theory to establish personal jurisdiction over the non-resident defendant.

When determining if it has personal jurisdiction over a non-resident defendant, a Delaware court conducts a two-part analysis. First, it considers whether the defendant’s conduct satisfies the state’s long-arm statute. Second, it considers whether the exercise of personal jurisdiction would violate the Fourteenth Amendment’s due process clause. The Conspiracy Theory is used to satisfy the long-arm statute when one defendant has engaged in conduct within the State that satisfies the long-arm statute, but the other defendant has not. In other words, the Conspiracy Theory is used to impute one defendant’s conduct to the other, thereby obtaining jurisdiction over both.

The standard for establishing personal jurisdiction using this theory not easy. A plaintiff must demonstrate that: (1) a conspiracy existed; (2) the defendant was a member of that conspiracy; (3) a substantial act or substantial effect in furtherance of the conspiracy occurred in the forum state; (4) the defendant knew or had reason to know of the act in the forum state or that acts outside the forum state would have an effect in the forum state; and (5) the act in, or effect on, the forum state was a direct and foreseeable result of the conduct in furtherance of the conspiracy.

This method of establishing jurisdiction was recently asserted in the case of LeCroy Corp. v. Hallberg, 2009 Del. Ch. LEXIS 178. In that case, Hallberg left his employment with LeCroy to work for a competitor, in violation of the non-competition provisions of his employment contract with LeCroy. The competitor was incorporated in Delaware, so the courts had jurisdiction over it, but the Hallberg had never lived or worked in Delaware. In order to obtain jurisdiction over Hallberg, the employer tried to establish a conspiracy between Hallberg and his new employer, in order to impute the employer’s tortious conduct in Delaware to Hallberg.

In this case, the tortious conduct on which LeCroy’s claim of conspiracy was based was the competitor’s decision to dissolve a predecessor business established in Colorado, and reincorporate the business in Delaware in order to hide the competitor’s connection with several of LeCroy’s former employees, all of whom were subject to non-competition agreements. However, the Court found that LeCroy failed to prove conspiracy because it could not demonstrate element (4), above. The Court held that Hallberg was hired after the competitor reincorporated in Delaware, thus there was no reason to assume that Hallberg knew of the reincorporation in Delaware. Based on its holding, the Court ordered that Hallberg be dismissed as a defendant for lack of personal jurisdiction.

As the Halberg case suggests, obtaining jurisdiction over a non-resident defendant using the Conspiracy Theory has its challenges. It is narrowly construed and will require more exacting factual allegations to withstand a motion to dismiss. Still, the theory can be a viable alternative for establishing personal jurisdiction where the facts suggest a conspiracy between the defendants, and where one or more defendants lacks contacts with Delaware.

June 14, 2010

Contract Language Key to Obtaining Jurisdiction Over Non-Residents

Any party wishing to litigate a dispute in Delaware involving a non-resident defendant must establish that the court has personal jurisdiction. If jurisdiction is challenged, the court will apply a two part analysis in determining whether there is basis for personal jurisdiction. First, the Court considers whether there is a basis for jurisdiction under Delaware's long-arm statute, 10 Del. C. § 3104. Next, the court must determine whether there are minimum contacts sufficient to satisfy the Due Process Clause of the Fourteenth Amendment.

For enforcement actions against non-residents with non-compete agreements, the personal jurisdiction requirement is usually met when the agreement contains a provision consenting to the jurisdiction of the Delaware courts. It is important to ensure that the language of the agreement unambiguously confers exclusive jurisdiction to the courts of Delaware in order to avoid a battle over venue. A case from the Court of Chancery illustrates why.

In Mobile Diagnostic Group Holdings, LLC v. Suer, 972 A.2d 799 (Del. Ch. 2009), the Court of Chancery dismissed an action to enforce a noncompete agreement after finding it had no personal jurisdiction over the defendant, a resident of California. In that case, the plaintiffs had negotiated a non-competition provision with one of its sales executives as part of a purchase agreement.

Continue reading "Contract Language Key to Obtaining Jurisdiction Over Non-Residents" »

May 18, 2010

Delaware Statute Reinforces Choice of Law and Venue Provisions

Well-drafted restrictive covenants include "choice-of-law" provisions that define which state's law will be used to interpret the agreement and forum selection provisions that specify where the parties will litigate breaches of the contract.

In 1993, the Delaware General Assembly enacted 6 Del. C. § 2708 which authorizes the parties to a contract that involves $100,000.00 or more to include a Delaware choice-of-law provision in their contracts, and states that the inclusion of such written provisions in an agreement "shall conclusively be presumed to be a significant, material and reasonable relationship with this State and shall be enforced whether or not there are other relationships with this State."

In the synopsis of the Bill passing this law, the General Assembly noted that the statute "is designed to give maximum effect to the principle of freedom of contract and the enforceability of such provisions in contracts previously made and to be made, and to provide the parties to such agreements with the certainty that courts sitting in Delaware will enforce such choice of law provisions. The Bill is intended to supersede all Delaware common law limitation on the enforceability of Delaware choice of law provisions (including any restrictions contained in the Restatement (Second) Conflict of laws), as well as limitations on contractual consent to jurisdiction or service of process."

The Court of Chancery has cited this statute repeatedly as support for the proposition that choosing Delaware law amounts to a substantial relationship with Delaware, even in cases where the parties have no operations or sales in the state.