Recently in Decisions Category

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

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" »

June 11, 2010

Employees Exiting with Trade Secrets May Open the Door for Civil Conspiracy Claim

A mass exodus of employees from a company often results in the employees joining a competitor or starting up a competing business. Often the employees do not leave empty handed, and involve a concerted effort to use the company's confidential or proprietary information to obtain an unfair competitive advantage. Such acts may give rise to a common law claim of civil conspiracy.

To be successful on a civil conspiracy claim, a plaintiff must usuallys show that two or more persons engaged in an unlawful act done in furtherance of the conspiracy and some form of actual damages. The court will require that there be some underlying wrongful act, such as a tort or a statutory violation. In Delaware, a breach of contract is not an underlying wrong that can give rise to a civil conspiracy claim.

One of the advantages of a civil conspiracy claim is it provides recourse against parties who may not have participated in the initial wrongful act, but nonetheless participated in the conspiracy. This is significant since each conspirator is jointly and severally liable for the acts of co-conspirators committed in furtherance of the conspiracy.

Civil conspiracy claims have led to the award of injunctive relief in the Court of Chancery. Most recently, in Zrii, LLC v. Wellness Acquisition Group, Inc., the Court of Chancery awarded a preliminary injunction against various individuals after finding a their former employer had a reasonable likelihood of success in proving the existence of an unlawful act in furtherance of the alleged conspiracy.

Continue reading "Employees Exiting with Trade Secrets May Open the Door for Civil Conspiracy Claim" »

June 5, 2010

Injunction not Necessary when Damages Calculated under "Head-Start" Rule

Injunctive relief is normally awarded when the court finds there is no adequate remedy at law. In enforcement actions involving noncompetes, injunctions are usually sought since damages are often difficult, if not impossible, to caculate.

Damages for misappropriation of trade secrets, on the other hand, are often based on lost profits and in many cases can be sufficiently quantified to be awarded. A recent case illustrates that the Court of Chancery may look to novel damage theories to forego the necessity of an injunction.

Agilent Technologies brought suit against three former employees alleging the group had misappropriated its trade secrets. The parties competed in the business of producing high performance liquid chromatography columns used to separate and analyze complex mixtures of gasses, liquids and dissolved substances.

After finding the defendants had wrongfully used Agilent's trade secrets, the Court of Chancery bypassed certain requested injunctive relief and found damages were sufficient to remedy the harm. The Court calculated these damages using the "head start rule." The rule allows a monetary recovery for trade secret misappropriation for the period in which information is entitled to protection as a trade secret, plus the additional period, if any, in which a misappropriator retains an advantage over competitors because of the misappropriation.

In this case, the Court found that the defendants were given a three year head start by using Agilent's trade secrets and awarded damages for unjust enrichment. The Court did not stop there, however, awarding additional damages to cover the customers and profits that the defendants will continue to accrue for the unlawful use of Agilent's trade secrets. The total damages awarded were $ 4,530,017.75, including unjust enrichment and amounts attributable to Agilent's lost profits.

By awarding past and prospective damages, the Court found it was unnecessary to issue an injunction prohibiting defendants from marketing their products, noting that such relief would essentially drive the defendants' company out of business. In the Court's view, the monetary award, including damages for unjust enrichment under the head start rule, more than adequately compensated Agilent.

Agilent Techs. v. Kirkland, 2010 Del. Ch. LEXIS 34 (Feb. 18, 2010)

May 25, 2010

General Release thwarts attempt to enforce Non-compete

Releases are a common element of any settlement agreement between parties, including employers and employees. In the case of general releases, however, care must be exercised that the parties do not inadvertently relinquish unintended rights. A recent case from the Court of Chancery illustrates this point when a company apparently unintentionally waived its rights to enforce a noncompete agreement.

Christopher Schaffer was a major stockholder and Executive Vice President of a company acquired by CorVel Enterprise Comp, Inc. On the same day that the stock purchase agreement was signed, Schaffer, for additional consideration, also executed a noncompetition agreement which prohibited him from competing with CorVel for a five year period.

A dispute subsequently arose between Schaffer and CorVel regarding an earn out payment under the stock purchase agreement. That dispute was resolved in February 2009 through a settlement agreement providing Schaffer with a payment of $800,000. Significantly, both parties executed general releases of all claims as part of the settlement.

Continue reading "General Release thwarts attempt to enforce Non-compete" »

January 30, 2010

Noncompete Agreements Assignable In Delaware

Thumbnail image for business.JPGA well drafted noncompetition agreement should contain an assignment clause allowing a company to assign its rights to a successor. But what happens if this provision is left out and the company is sold? In most states, the successor is out of luck.

The majority of states follow the rule that a restrictive covenant not to compete is not assignable to a purchasing business entity in the absence of a specific assignability provision. The courts in these states rely on the theory that such covenants are personal in nature and, as a result, cannot be assigned without the employee's permission.

Delaware, however, appears to follow the minority rule. The Delaware Court of Chancery recently ruled that even without an specific provision noncompete agreements are generally assignable from one employer to another as long as both employers are engaged in the same industry. The court acknowledged that while personal service contracts usually may not be assigned, noncompete agreements and other restrictive covenants exist for the benefit of the business -- not the individual parties. The court explained that the business, whether as assignee or assignor, should enjoy that benefit by having the power to enforce such restrictive covenants.

This decision should benefit successor businesses who inherit employees with noncompetes that contain no specific assignment clause.

Great American Opportunities, Inc. v. Cherrydale Fundraising, LLC, C.A. No. 3718-VCP (Del. Ch. Ct. Jan. 29, 2010)