Choice of Venue and Forum

May 21, 2018

WHAT LAW APPLIES TO YOUR NONCOMPETE? DELAWARE COURT UPHOLDS PARTIES’ CHOICE OF LAW PROVISION

Enforcement of noncompete agreements is typically governed by state law, so knowing which state’s law applies is an important question both for drafting and enforcement purposes. Knowing what law will apply is particularly relevant if any of the parties are located in states which disfavor or even refuse to enforce noncompete agreements (think California). A recent decision from the Delaware Superior Court may add clarification whether businesses can utilize choice-of-law provisions to increase the enforceability of their noncompete agreements.

A Delaware choice-of-law provision provides that, if litigation arises over the terms of a contract, that the law to be applied to the contract will be Delaware contract law (as opposed to the law of the state where the employer or employee is located). Delaware follows the Restatement (Second) of Conflicts § 187 which provides that if the contracting parties designate a certain state’s laws to apply:

(2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either:

August 10, 2016

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

by Scott Holt

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.

January 16, 2014

Young Conaway Publishes Bloomberg BNA Series on Noncompetes

by Scott Holt

Partners 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

by Scott Holt

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.

October 5, 2011

Chancery Court Decision Provides Insight Into Drafting Enforceable Forum Selection Clauses

by Scott Holt

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.

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.

September 28, 2010

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

by Scott Holt

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.

August 27, 2010

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

by Scott Holt

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

with 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.

July 16, 2010

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

by Scott Holt

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.

June 14, 2010

Contract Language Key to Obtaining Jurisdiction Over Non-Residents

by Scott Holt

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.
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May 18, 2010

Delaware Statute Reinforces Choice of Law and Venue Provisions

by Scott Holt

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.”