In LeCroy Corp. v. Hallberg, No. 4328-VCP (Del. Ch. Oct. 7, 2009), read opinion here, the Court of Chancery granted Defendants’ motion to dismiss an individual defendant from the action due to a lack of personal jurisdiction but denied defendants’ motion to dismiss based on forum non conveniens. For other cases involving forum non conveniens summarized on this blog, see here.
Kevin Brady, an highly respected Delaware litigator, prepared this revised synopsis.
By way of background, this case involves a dispute between two corporate competitors and a former employee who left one company to join the other. Plaintiff LeCroy Corporation is a Delaware corporation with no operations or connections to Delaware. Its operations, like those of Defendant SerialTek, LLC (“SerialTek”), are based in California. Likewise, SerialTek’s sole connection to Delaware is its status as a Delaware business entity. Defendant Matthew Hallberg, who has no connection to Delaware, previously worked for LeCroy in marketing and now has similar employment responsibilities at SerialTek.
SerialTek is owned by Paul Mutschler, Rand Kriech, and Dale Smith. Mutschler was Halberg’s supervisor, mentor and friend when they worked for LeCroy in California. Kriech and Smith were never employees of LeCroy, although Kriech was a LeCroy sales representative and he signed a version of an employment agreement. LeCroy employees had confidentiality and non-compete provisions in their employment agreements that extended one year after any potential departure from LeCroy. On August 14, 2007, while Mutschler was still employed at LeCroy, he and Smith created a SerialTek predecessor in Colorado, which was later dissolved in favor of the formation of a new Delaware entity, allegedly in an attempt to hide Mustchler’s involvement. SerialTek was originally conceived as a new start-up company that would compete directly with LeCroy in the protocol analyzer market.
Mutschler left LeCroy in November 2007 but following his departure from LeCroy, Mutschler remained in contact with Hallberg. Through this relationship, Hallberg allegedly transmitted confidential LeCroy information to Mutschler. In November 2008 during a period when Hallberg had been given the responsibility by LeCroy to determine how LeCroy could best compete with a new SerialTek product, Hallberg began actively seeking employment with SerialTek. Ultimately, Hallberg took a position at SerialTek which was essentially identical to his position at LeCroy.
Soon thereafter, LeCroy brought suit against SerialTek and Hallberg alleging breach of contract, tortious interference with contract, misappropriation of trade secrets, and unfair competition. The Defendants filed a motion to dismiss alleging lack of personal jurisdiction and forum non conveniens.
Plaintiff Fails Conspiracy Theory Test to Get Jurisdiction Over Former Employee
In opposition to Defendants’ motion, LeCroy alleged that it had personal jurisdiction over the Defendants under the Delaware long arm statute (10 Del. C. § 3104)(c)(3)) and under the conspiracy theory, where “the acts of one conspirator that satisfy the long-arm statute can be attributed to the other conspirators.” Even under the conspiracy theory, a plaintiff must still establish first that “there [is] a statutory basis for personal jurisdiction under Delaware’s long arm statute. . . .” and second, that “the court’s exercise of personal jurisdiction over a nonresident defendant must comport with the Due Process Clause of the Fourteenth Amendment.” Where the acts of a conspirator satisfy the long arm statute, such acts can be attributed to other conspirators as they are agents of each other.
Since Hallberg was a nonresident with no contacts to Delaware, personal jurisdiction over him would exist only if the acts of SerialTek, Mutschler, or some other alleged co-conspirator could be attributed to Hallberg. The Court noted that a plaintiff alleging personal jurisdiction under the conspiracy theory must satisfy a “very narrowly construed” five-part test from Istituto Bancario Italiano SpA v. Hunter Eng’g Co., 449 A.2d 210 (Del. 1982) where:
(1) a conspiracy [to defraud] 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.
To satisfy the above, there must be specific factual evidence asserted; conclusory allegations are not sufficient. While the Court noted that elements 1, 2, 3, and 5 represented “close calls,” it held that LeCroy had failed to allege specific facts in support of the fourth element – that Hallberg had reason to know of SerialTek’s formation in Delaware. The failure of such a reason to know would “by necessity [mean that Hallberg] would not have reason to know of either the Delaware act or effect.” Hallberg was a marketing person, with no need to know of SerialTek’s legal situs. LeCroy’s arguments that Hallberg would have reason to know of the Delaware connection were unconvincing.
Plaintiff Fails to Show Act Causing Tortious Injury in Delaware Under § 3104
In addition to failing to satisfy the five-part test, LeCroy was also unable to satisfy the long arm statute’s requirement of an act that “[c]auses tortious injury in the State by an act or omission in this State.” The Court noted that had the Defendants’ alleged conspiracy been a breach of fiduciary duty that harmed LeCroy, then under the holding of Sample v. Morgan, 935 A.2d 1046 (Del. Ch. 2007), the injury against the non-resident Delaware company would have been deemed to have occurred in Delaware. However, because the alleged harm was not that of a breach of fiduciary duties, the controlling authority of Iotex Communications, Inc. v. Defries, 1998 WL 914265, at *8 (Del. Ch. Dec. 21, 1998), applied. Under Ioetex:
[A]s a general rule, in the case of Delaware corporations having no substantial physical presence in this State, an allegation that a civil conspiracy caused injury to the corporation by actions wholly outside this States [sic] will not satisfy the requirement . . . of a substantial effect . . . in the forum state.
Thus, LeCroy failed to satisfy the showing of a tortious injury in Delaware, as required by the long arm statute.
Defendants Fail Forum Non Conveniens Test to Show “Overwhelming Hardship”
In setting forth the Cryo-Maid factors for forum non conveniens analysis, the Court reiterated that “[t]he issue is whether any or all of the Cryo-Maid factors establish that the defendant will suffer overwhelming hardship and inconvenience if forced to litigate in Delaware.” SerialTek’s suggestion that California was the more appropriate and convenient forum “[did] not drive the Cryo-Maid analysis, [because] the central goal . . . is to determine if the defendant faces overwhelming hardship and inconvenience.” The Court noted that under Delaware law, “considerations of convenience do not drive the Cryo-Maid analysis.”
The Court’s discussion of the Cryo-Maid factors provided two interesting take-away points. First, the Court held that the lack of another pending litigation between the parties “decisively favors respecting Plaintiff’s choice of a Delaware forum.” The Court stated that it was “aware of no case where this Court has upheld a forum non conveniens dismissal under similar facts [i.e., involving litigation at an early, pre-discovery stage that is pending only in Delaware].”
Second, the Court discussed at great length SerialTek’s argument that the catchall factor of Cryo-Maid [i.e., “all other practical problems that would make the trial of the case easy, expeditious, and inexpensive”] disfavors Delaware because SerialTek is a start-up company. SerialTek argued that the expenses of litigating in Delaware would hamstring the young start-up and diminish its limited resources. The Court held that Defendants failed to demonstrate the overwhelming hardship having “not provided any firm numbers relating to SerialTek’s size, its operating budgets, capitalization, or actual or projected revenues, or regarding the added expenses of litigating in Delaware.”
As a result, the Court concluded that SerialTek had not established overwhelming hardship and inconvenience if forced to litigate in Delaware, so LeCroy’s choice of forum would be respected and SerialTek’s motion to dismiss on forum non conveniens grounds was denied.