Articles Posted in Court of Chancery

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

youngconawaywith 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.

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.

Electronic discovery plays a central role in litigation where parties claim violations of trade secrets and breaches of noncompete agreements. Electronic discovery and forensic investigations often reveals extremely damaging evidence against the former employee, including acts such as downloading or e-mailing valuable company information.

The sheer number of emails that must be collected and reviewed can be an overwhelming task. VeriSign (the exclusive registry for .com and .net domains) estimates that there are approximately 2.25 billion email queries per day, and that is only a fraction of the number of emails sent each day.

When litigation commences, a question may arise as to whose responsibility it is to ensure all emails and other forms of electronic documents have been preserved and collected. Delaware’s Court of Chancery has, not surprisingly, had several occasions to set forth how the Court intends to have litigants handle electronic discovery.

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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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.
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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.

chancerylogo60.gifIn Delaware, covenants not to compete are usually enforced in a court of equity, the Court of Chancery. The Delaware Court of Chancery is the nation’s principal forum for the resolution of corporate governance disputes. For consecutive years, the Delaware court system has been ranked by the U.S. Chamber of Commerce as the best in the nation.

No doubt this accolade is attributable, in part, to the five presiding jurists of the Chancery Court who are known for their highly sophisticated understanding of corporate matters and ability to handle complex litigation. There are no jury trials in Chancery Court. All matters are heard by the Chancellor or one of the four Vice Chancellors and are usually performed on an expedited basis.

The Court of Chancery’s equitable powers enable it to resolve the matters before it in ways a court of law might not. For instance, the Court of Chancery has the ability to reform, or “blue pencil,” what might otherwise be overly broad noncompete agreement.

Expedited proceedings are a vital component to the enforcement of noncompetition agreements. In Delaware, a motion for expedited proceedings is usually filed simultaneously with the verified complaint in the Court of Chancery. Typical relief includes shortening the time to answer the complaint, establishing discovery cut-off dates, and setting a date for the preliminary injunction hearing. A telephonic hearing is normally held by the Court shortly after the motion is filed.

The main purpose of expediting the proceedings is, of course, to get prompt relief before irreparable harm occurs. Such proceedings also have the effect of placing the ex-employee (and in some cases, the new employer) on the ropes in quick fashion.

The Delaware Court of Chancery Rules provide the court with broad power to permit expedited proceedings. The burden for obtaining expedited proceedings is fairly light. The party seeking relief must demonstrate a “sufficiently colorable claim” and show a sufficient possibility of a threatened irreparable injury to justify the costs involved. For non-compete cases, this burden is usually satisfied.

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.
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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.”

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