Search results for: "choice of law"

In connection with a recent decision granting a declaratory judgment to recognize the terms of and to enforce a loan, the Court of Chancery in the matter of Standard General L.P. v. Charney, C.A. No. 11287-CB (Del. Ch. Dec. 19, 2017), addressed several issues of practical importance to Delaware corporate and commercial litigators.  The background facts of this case were recited in a summary of a prior decision by the Court of Chancery in this matter appearing on these pages.

Highlights of Some Noteworthy Legal Principles Applied in this Decision:

  • When there is a Delaware choice of law clause, and the clause is broadly written, Delaware will enforce it as covering both tort claims and contract claims, even when asserted in affirmative defenses. See footnote 80.
  • A fraudulent inducement argument is “not available when one had the opportunity to read the contract and by doing so could have discovered the misrepresentation.” See footnote 97. Moreover, Delaware law also finds it unreasonable to rely on an oral representation that is expressly contradicted by the parties’ written agreement.
  • Unlike a slight breach of contract, a prior material breach of contract may excuse contractual performance. See footnotes 163 and 164.
  • The court discusses the four criteria to satisfy the requirement for an actual controversy when seeking a declaratory judgment pursuant to 10 Del. C. § 6501.

Viking Pump, Inc. v. Century Indemnity Company, et al., No. 465-VCS (Del. Ch., Oct. 14, 2009), read opinion here

The Delaware Court of Chancery’s 90-page opinion in this case, involving esoteric issues of whether certain claims are covered by historic insurance policies, may qualify in some circles merely by virtue of its length only as a novella or a doctoral dissertation, but alas, it covers a topic that strays beyond the typical scope of this blog (and the court primarily applied New York law), so it will be relegated to “bullet point treatment” in order to highlight cursorily a few nuggets that are most likely to be of interest to the typical reader of these pages.

  • Warren Pumps LLC and Viking Pump, Inc. bought businesses from Houdaille Industries, Inc. and they seek to use insurance coverage that Houdaille purchased, in connection with pump manufacturing businesses that Houdaille used to own.
  • On cross-motions for summary judgment under Chancery Court Rule 56(h), the Court ruled that Viking Pump and Warren Pump could exercise the rights of the insured under the applicable policies. The Court also made related rulings. See also prior ruling at: Viking Pump, Inc. v. Liberty Mutual Ins. Co., 2007 WL 2752914 (Del Ch. Apr. 13, 2007)(“Viking Pump I”).
  • The Court reminded us that Delaware employs the Restatement (Second) of Conflict of Laws, and recited the five factors in Section 188 of the Restatement that are reviewed to decide what law governs a contract that is silent on the issue.  See also Section 193 that specifically applies to insurance contracts and Section 6 that provides “general” choice of law considerations.
  • For an extensive choice of law analysis in a different context, involving jurisdiction over partners of a Delaware partnership, see the very recent decision in the Total Holdings case, by the same author of this opinion, highlighted on this blog here.

Professor Steven Davidoff highlights here, a paper he co-authored with Matthew Cain of the Notre Dame Mendoza College of Business, in a post on the Harvard Law School Forum on Corporate Governance and Financial Regulation. Their publication analyzes the selection of governing law and forum clauses in merger agreements between public firms from 2004-2008.

An excerpt from an overview of their analysis follows:

In contrast to prior research, we find that Delaware is the dominant choice among merging parties. During the sample period approximately 66.4% of agreements select Delaware for their governing law and 60% of agreements select Delaware as their choice of forum. This compares to 61.8% of targets during this time that are incorporated in Delaware, and 54.8% of acquirers that are similarly incorporated.

We find that Delaware’s attractiveness has increased in recent years in response to exogenous events, namely the financial crisis and the Second Circuit’s decision in Consolidated Edison, Inc. v. Northeast Utilities. The latter court ruling was perceived by practitioners as creating an unfriendly merger precedent under New York law. We find that the opinion made the Delaware forum a more attractive one vis-à-vis New York.

Delaware’s attractiveness is also evidenced by the fact that top-tier legal advisors, foreign acquirers, transactions surrounded by greater financial uncertainty, and larger transactions tend to select Delaware’s forum over other venues. Our results are robust to controls for simultaneity and endogeneity.

Our results also provide support for the theory that Delaware competes by providing quality governing law, and particularly, adjudicative services. They also highlight the contestability of Delaware’s dominance; parties adjust their choices of law and forum during our sample time period in response to legal and other events
 

 

In Greetham v. Sogima L-A Manager, LLC, et al., 2008 Del. Ch. LEXIS (Nov. 3, 2008), read opinion here, the Delaware Chancery Court addressed three legal issues that are of substantial practical importance in many corporate and commercial litigation cases, and the court’s rulings are also useful tools for the toolbox of those who labor in the fields of business litigation.

First, the court upheld a clause in an agreement that made Delaware law govern any issues that arose, and that also required the parties to litigate in Delaware Chancery Court. In addition to cases cited in support for this well-recognized position in Delaware, reference was made to the specific Delaware statute that provides authority for allowing parties to consent to the jurisdiction of the Delaware courts as long as at least $100,000 is in dispute. See Section 2708 of Title 6 of the Delaware Code.

Second, the court determined that the irreducible minimum elements of an enforceable contract were not evident in the record after trial and therefore the court rejected the contract claim. Notably, the court recognized that customs in a particular industry and/or prior practice of  the parties may in some instances serve as evidence of "missing terms" in an agreement.

Finally, the court recited the elements of promissory estoppel and found them wanting.

 In an abbreviated and conclusory fashion, the factual basis of this case, which was extensively described by the court, began with a group of eight people who started a company that was to invest in municipal tax liens. However, among the problems that arose was the failure of the parties to confirm in writing all the terms of all the various additional "agreements" that were allegedly intended to "flesh out" the details of each of the roles that the parties would play in their venture. In addition, not all the parties who were required to contribute capital had that capital available at the time of closing on the deal.

The court also rejected an "unclean hands" defense.

 

 

Prof. Ribstein has a post on choice of law and Prof. Bainbridge has a related post, comparing choice of law ex post facto in the bankruptcy context, as opposed to corporate law, where parties agree by contract, before a dispute arises, which forum (e.g., Delaware) they want disputes to be addressed in.

Rolando Diaz of the Lewis Brisbois Delaware office prepared this post.

          The Court of Chancery refused to enforce a restrictive covenant in Sunder Energy, LLC v. Jackson, 2023 Del. Ch. LEXIS 580 (Del. Ch. Nov. 22, 2023). Chancery subsequently approved, with thorough reasoning, an interlocutory appeal to the Supreme Court–which makes its own determination whether to accept the interlocutory appeal.

BRIEF FACTUAL BACKGROUND

          Sunder Energy, LLC (“Sunder”), a Delaware LLC headquartered in the State of Utah, a purveyor of residential solar power systems, had an exclusive dealer agreement with Freedom Forever LLC (“Freedom”), one of the nation’s largest installers. In the summer of 2023, Freedom encouraged Tyler Jackson, the head of sales for Sunder, who lived and worked in the State of Texas, to join Solar Pros LLC (“Solar Pros”), another solar power system dealer that referred installations to Freedom.  This led to a mass exodus of Sunder’s workforce. Nine of the twelve regional managers that reported to Jackson, as well as over three hundred sales personnel, joined Solar Pros.  On September 25, 2023, Solar Pros announced that Jackson had joined as its new President.

          Sunder asserted that Jackson—as a holder of Incentive Units—was bound by certain restrictive covenants (the “Covenants”) provided for in Sunder’s 2019 and 2021 LLC operating agreements (the “OA”) that applied to any Incentive Unit holder (the “Holder”).  The co-founders formed Sunder by filing a certificate of formation with the Delaware Secretary of State but did not execute a written operating agreement. 

In the fall of 2019, the two co-founders that together owned 60% of the membership interest of Sunder engaged a law firm to draft an LLC agreement that dramatically changed the ownership structure of the LLC; it imposed the Covenants, emasculated the minority members rights as owners, and reduced them to purely economic beneficiaries with very little rights. Communications from the majority co-founders to the minority rights holders did not explain that the two co-founders received common units with full rights while the minority holders received incentive units with little to no ownership rights. 

In a concerted effort to obfuscate reality, the majority co-founders referred to the Holders as “partners,” implying that there was some semblance of equal footing aside from the difference in percentage of interests. For the subsequent adoption of the 2021 operating agreement, the majority co-founders did not even bother to circulate a copy of the new operating agreement.  Instead they only circulated the signature page and indicated to the Holders that there were no substantive changes to the operating agreement and that the only change was the addition of a member.  This was not true.  The geographical scope of the restrictive covenant was also expanded.

          In addition to broad restriction on the use of Sunder’s confidential information, the Covenants in the OA prohibited a Holder from: (i) engaging in any competitive activity (the “Non-Compete”); (ii) soliciting Sunder’s employees and independent contractors (the “Worker Non-Solicit”); (iii) soliciting, selling to, accepting any business from, or engaging in any business relationship with any of Sunder’s customers; and (iv) inducing, influencing, advising, or encouraging any Sunder stakeholder to terminate its relationship with Sunder. Furthermore, each Covenant bound not only the Holder, but also Holder’s affiliates, defined in the OA as a Holder’s spouse, parents, siblings, and descendants, both natural and adopted. The Covenants applied while a person held incentive units and for two years thereafter.  However, a Holder had no right to transfer or divest themselves of the Incentive Units. In contrast, Sunder had the option, but not the obligation, to repurchase the Incentive Units for zero dollars upon either Sunder’s termination of Holder’s employment or if the Holder left the company without good reason.

          On September 29, 2023, Sunder terminated the dealer-installation agreement with Freedom and filed an arbitration to enforce their rights against Freedom. Sunder also filed an action in the Court of Chancery against Jackson and its competitors. Sunder sought a preliminary injunction enjoining Jackson and any party acting in concert with Jackson from taking any action in breach of the Covenants. The Court denied the preliminary injunction because Sunder could not establish a reasonable likelihood of success on the merits.  The Court found (i) the restrictive covenants unenforceable under general principles of law and (ii) the competition and solicitation restrictive covenants unreasonable in their scope and effect.

KEY ANALYSIS

          First, the Court was faced with determining the Covenants’ governing law. The terms of the Covenants appeared in the OA, which governs the internal affairs of a Delaware LLC.  The OA expressly provided that Delaware law governed its terms.  Thus, a contractarian basis for the application of Delaware law existed. Under normal circumstances, the combination of the internal affairs doctrine and contract principles would require the application of Delaware law. However, for the Covenants, the drafters were not attempting to govern the internal affairs of a Delaware LLC.  Instead, the drafters were attempting to govern an employment relationship.  The Court opined:

Delaware follows the Restatement (Second) of Conflict of Laws, and Delaware courts consequently will not enforce choice of law provisions when doing so would circumvent the public policy of another state that has a greater interest in the subject matter. Consequently, when a different state’s law would govern in the absence of a choice of law provision, and if that state has established legal rules reflecting a different policy toward restrictive covenants, than Delaware’s then this court will defer to that state’s laws notwithstanding the presence of a Delaware choice of law provision.

Thus, either Utah, where Sunder is headquartered, or Texas, where Jackson worked and resided would apply in the absence of a choice of a law provision.  Under the Court’s analysis, both Texas and Utah approach the enforceability of restrictive covenants only slightly differently than Delaware. Under its conflict of laws analysis, due to the low degree of divergence between laws of the relevant forums, the Court applied Delaware law, finding that the conflict between Delaware and Utah law was a false conflict.

          Second, due to the circumstances for ratification of Sunder’s 2019 and 2021 LLC operating agreements, the Court determined that Sunder’s purported majority co-founders breached their fiduciary duty by failing to fully disclose all material information and making misleading partial disclosures to the minority.  The 2019 agreement materially and adversely impacted the rights of Sunder’s minority members; legal counsel only represented Sunder and the majority co-founders, but the co-founders made it seem as if counsel represented everyone. For the 2021 agreement, the co-founders told the minority members that the 2021 agreement contained no material changes and did not even bother to circulate a copy of the 2021 agreement to the minority members. Thus, the Court determined that due to the co-founders’ breach of fiduciary duties, the amended operating agreements themselves were invalid, and consequently, so were the restrictive covenants therein.

          Assuming, however, for the “sake of argument” that the amended LLC agreements were valid, the Court addressed the enforceability of two of the Covenants, namely, the Non-Compete and Worker Non-Solicit provisions. The Court found the Non-Compete provision extremely overbroad. The prohibited business activity covered a wide swath of the “door to door sales industry, without regard to whether Sunder markets or sells similar products.” The restriction on a Holder’s affiliates (as defined in the OA) was inane; it was not written in a manner that simply thwarts a straw man conferring the benefits to a Holder.  But, as written, a Holder’s “daughter cannot go door to door selling girl scout cookies.” Absurdly, the Covenants thus purported to bind a Holder’s wife and children. The geographic scope of the Non-Compete left only Alaska, Montana, North Dakota, and South Dakota available for a Holder as territory not restricted by the Covenants. Perhaps the most appalling factor of the Non-Compete was that since a Holder had no right to divest himself of the Incentive Units under the OA, the temporal component could continue in perpetuity. Similarly, the Court found the Worker Non-Solicit overbroad and unreasonable. It also applied to the same set of affiliates and for the same potentially “forever” time period. It extended not only to any current Sunder employee or independent contractor, but also applied to “any person employed in the past by Sunder for any period of time.” Individually, each overbroad provision was unreasonable.  And read together, the Court deemed the Covenants oppressive and refused to enforce them.

PRACTICAL TAKEAWAYS

          Delaware courts will not apply Delaware law under a theory of contract law if another state has a greater public policy interest in an issue when, absent a choice of law provision, another forum’s laws would apply. Circumstances may also dictate abandonment of the internal affairs doctrine when drafters embed employment provisions that have nothing to do with the governance of the entity into a governing agreement. Additionally, Delaware courts apply both general principles of law and a holistic analysis of restrictive covenants to determine reasonableness. This analysis can result in Delaware courts refusing to enforce restrictive covenants.

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Delaware Supreme Court recently made landmark rulings on choice-of-law and fraud-exclusion issues in affirming a decision that required the last of nine D&O insurers to pay its share of settlements with investors who claimed Dole Foods Co. Inc.’s CEO cheated them in a 2013 going-private buyout in RUSI Indemnity Co. Inc. v. Murdock, et al., No. 154, 2020, opinion (Del. March 3, 2021).

The high court’s March 3 en banc opinion rejected all four key arguments RUSI Indemnity Co. made in its appeal of the Superior Court’s dismissal of the insurer’s claim that it did not owe coverage for $200 million in settlements of investor breach of fiduciary duty, securities fraud and appraisal actions.  

The opinion, and several other recent Delaware director and officer insurance decisions that some insurers view as policyholder-friendly, will be closely examined by business insurers and their defense firms nationwide, possibly resulting in the inclusion of forum selection clauses and other changes in policy wording and litigation strategy. 

Background

Since two thirds of the nation’s Fortune 500 companies are chartered in Delaware, the high court’s unanimous opinion is significant in that it endorsed rulings that:

•  Delaware law applied despite Dole’s incorporation being its only connection to the First State, while the policy was negotiated and issued in California, where the fruit giant was based and the officers and directors lived.

•  Under Delaware law, a policy provision that excludes coverage for fraudulent action by an insured does not defeat coverage

•  What RUSI calls the “Fraud/Profit Exclusion”— did not defeat coverage for the settlement of the stockholder actions

•  The “larger settlement rule,” was not improperly applied contrary to the policy’s provision governing the allocation of losses to the extent they were covered.

Justice Gary Traynor, writing for the full court, said Delaware insurance statutes specifically allow corporations “to purchase D&O insurance for liabilities arising from bad-faith conduct,” but “concluding certain conduct, including a director’s breach of loyalty sounding in fraud, is not uninsurable on public-policy grounds is notably different than placing a stamp of approval on that conduct.”

The underlying litigation

The underlying litigation stemmed from Murdock and President, COO and General Counsel C. Michael Carter’s alleged deception and fraud that enabled them to acquire the 60 percent of Dole stock they didn’t already own at an artificially low price in a going-private transaction.  In a consolidated action in the Chancery Court, a group of investors alleged fraud and breach of duty and that was combined with an appraisal action.  In a memorandum opinion after trial, Vice Chancellor Travis Laster ruled that Murdock and Carter had engaged in fraud and bad faith in orchestrating the unfair, self-interested transaction for an undeserved extra profit of nearly 17 percent and found the two jointly and severally liable for $148,190,590.18—or $2.74 per share—in damages.  In re Dole Food Co., Inc. Stockholder Litigation, 2015 WL 5052214, at *26 (Del. Ch. Aug. 27, 2015).

The other underlying action

Meanwhile, before the Chancery Court action was settled, another group of Dole stockholders who had sold their stock between January and October 2013, and were therefore not parties to the Stockholder Action, filed a securities class action in the U.S. District Court for the District of Delaware alleging fraud and violations of the Securities Act.  They cited references in the Chancery opinion regarding Murdock and Carter having “engaged in fraud”. San Antonio Fire & Police Pension Fund v. Dole Food Co., Inc., No. 1:15-CV-1140-SLR (D. Del. 2015).  The high court said without consent or confirmation of coverage from the insurers, Dole negotiated a settlement of the San Antonio action, under which the plaintiffs released the claims against the insureds and Dole agreed to pay or cause to be paid $74,000,000 plus interest.

The coverage actions

Eventually, after filing an unsuccessful declaratory judgment action in Superior Court, Dole’s excess insurers other than RUSI, paid the limits of their $10 million policies or settled with the insureds but RSUI pressed on with the suit and the Superior Court ordered RSUI to pay $10 million plus more than $2 million in prejudgment interest after rejecting four key arguments, and RSUI appealed.

Choice of law

The justices agreed that Delaware’s legislature intended that companies incorporated in Delaware should be governed by that state’s corporate law even if their charter was their only connection to the First State.  “The state of incorporation is the center of gravity of the typical D&O policy, including the policy under consideration here,” Justice Traynor wrote. The insureds’ legal ties to Delaware “are more significant – and therefore should be afforded greater weight — than their physical location in California.”

Public policy re: Insurability 

The high court asked itself the question ““does our State have a public policy against the insurability of losses occasioned by fraud as to vitiate parties’ freedom of contract?” and answered in the negative, noting that Delaware’s statutory indemnification provisions allow corporations to purchase D&O insurance “against any liability,” whether or not the corporation has the power to indemnify against such liability.  

The policy’s fraud exclusion

Although the Chancery Court found that the Dole officers “engaged in fraud” there was no final adjudication of that finding, especially in the District Court action.  However, the fraud finding on which the insurer relied was not in the Securities Lawsuit; it was in the Chancery Court lawsuit, Justice Traynor held.  The fact that the findings in the Chancery Court lawsuit “might have been implicated” in the resolution of the Securities Lawsuit had it not been settled “is irrelevant to a determination of whether there has been an adjudication” in the Securities Lawsuit.  A blanket prohibition, on public-policy grounds, against insuring for losses arising from a director’s or officer’s misstatements, misleading statements, or breaches of the duty of loyalty (when based on fraud) would leave many injured parties without a means of recovery.  A prohibition on insurability,  also “would leave many injured parties without a means of recovery,” which would conflict with “the public policy that favors the compensation of innocent victims,” the high court said.

The Allocation Issue

The Supreme Court said RUSI had pleaded no facts to suggest that the settlement of the Securities Lawsuit “represented an admixture of covered and non-covered losses.” Nor, it said, did the Insurer provide “an explanation of how the application of their ‘relative exposures’ allocation theory would lead to a reduction in the coverage available to the Insureds.”

Takeaways

“It is generally true that on balance policyholders will want to have their D&O insurance coverage disputes resolved in Delaware courts. Insurers? Not so much,” said Kevin M. LaCroix, an insurance law specialist who hosts the D&O Diary blog where he posted a comprehensive analysis and commentary on the RUSI opinion. https://www.dandodiary.com/2021/03/articles/d-o-insurance/del-sup-ct-rules-for-insureds-in-long-running-dole-foods-do-insurance-coverage-dispute/

He said in the crucial area of choice-of-law, the Supreme Court here gave little weight to the contract-related principles typically found to govern the “most significant relationship test”–such as where the contract was formed or where it was delivered–and instead gives outcome-determinative weight to the fact that the company involved was incorporated in Delaware.

The insurers undoubtedly will be taking up the question of whether they need to add a forum selection provision to their policies, LaCroix said.  Hopefully, the question of when and how a forum selection clause may be legally enforced will not become yet another facet of D&O litigation.

 

 

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Chancery Court recently green-lighted key parts of an investment company’s suit against officers and owners who allegedly inflated their I.T. and data center services provider’s worth, finding the buyer plaintiff was more likely the victim of fraud and breach of contract rather than mere buyer’s remorse in LightEdge Holdings LLC, et al. v. Anschutz Corporation et al., No. 2019-0710-JRS, memorandum opinion (Del. Ch. June 11, 2020.)

Vice Chancellor Joseph R. Slights’ June 11 ruling denied the seller defendants’ motion to dismiss LightEdge Holdings LLC and parent Anschutz Corporation’s well-plead charges that they concealed bad financial news and doctored the business prospects of Delaware-chartered OnRamp Access, LLC during sale negotiations.

Fraud, contract claims survive

He found that fraud and breach of contract allegations are well-supported and unjust enrichment and some extra-contractual representations claims are not barred by the anti-reliance provision in the sale document. However, he said the buyer failed to state viable aiding and abetting claims, civil conspiracy, conversion and Colorado and Texas state law charges.

In early May 2018, LightEdge Holdings, LLC had been negotiating a $106 million sale with defendants Brown Robin Capital, LLC, a Delaware-chartered Limited Liability Company, OnRamp CEO Lucas Braun, President and Board Chairman Ryan Robinson and CFO Jack D’Angelo when OnRamp disclosed news that literally gave LightEdge and parent Anschutz pause. A major OnRamp client had cancelled its services subscription for a $600,000 revenue loss and OnRamp’s April sales were less than 1/3 of its target.

Falsified financials?

According to the opinion, the buyers were assured of the company’s continued bright prospects and talks resumed because, “under the direction of the OnRamp insiders, company management secretly falsified the product pipeline by adding more than $6 million in illusory projected annual revenue.”

In addition, one of OnRamp’s biggest customers had told its management during the sales negotiations that it planned to cut its business in half but that was concealed from the buyers, as was the un-collectability of numerous client accounts, the September 2019 complaint says.

Defendants moved to dismiss the entire 13-count complaint, but the vice chancellor found the breach of contract claims were not barred by the sales agreement, the fraud claims were not boot-strapped breach of contract claims and the unjust enrichment claims were not duplicative of the breach of contract claims.

Parent helps finance

He found that even though LightEdge was the official buyer, Anschutz, which contributed $62 million toward the purchase, had standing to sue as a defrauded buyer.

The court spent most of the June 11 ruling parsing other claims that defendants argued were duplicative of other charges or barred under Delaware law – including Colorado statutory theft and securities fraud and Texas statutory fraud and securities fra

The vice chancellor said Delaware General Corporation Law applies to both the plaintiffs’ contractual and extra-contractual claims. He said § 2708 “requires courts to presume that, where parties have chosen Delaware law in their contract, the transaction memorialized in the contract has a material relationship with our state.”

Abry is controlling

He says the extra-contractual claims are governed by Delaware law as established by then-Vice Chancellor Leo Strine’s seminal 2006 opinion in Abry P’rs V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1046 (Del. Ch. 2006), which Vice Chancellor Slights quotes:

“To hold that their choice is only effective as to the determination of contract claims, but not as to tort claims seeking to rescind the contract on grounds of misrepresentation, would create uncertainty of precisely the kind that the parties’ choice of law provision sought to avoid.”

Vice Chancellor Slights agreed with that “persuasive” logic, writing that, “To try to parse out what exactly should be decided under Delaware law and what falls under another state’s law … would be a foolhardy endeavor almost certain to result in the kind of confusion contractual choice of law provisions are meant to avoid.”

Relying on anti-reliance?

Regarding defendants’ assertion that various sections of the sale agreement could be read as an anti-reliance statement, the vice chancellor said Delaware courts have consistently held that:

“sophisticated parties to negotiated commercial contracts may not reasonably rely on information that they contractually agreed did not form a part of the basis for their decision to contract.”

But he said anti-reliance language must be explicit and comprehensive, meaning the parties must:

“forthrightly affirm that they are not relying upon any representation or statement of fact not contained [in the contract].”

And although the sale contract contains a standard integration clause, “What is notably absent from these provisions is any disclaimer of reliance by Buyer,” the Court noted.

 

A recent Court of Chancery decision is noteworthy for its analysis of the interfacing between a forum selection clause requiring Delaware jurisdiction and the law of a foreign country ostensibly granting exclusive jurisdiction to the courts of that foreign country. In AlixPartners, LLP v. Mori, No. 2019-0392-KSJM (Del. Ch. Nov. 26, 2019), the court explained, relying on Delaware Supreme Court decisions, that in only very limited circumstances will the law of a foreign country that provides for exclusive jurisdiction in that foreign country, divest Delaware courts of subject matter jurisdiction–especially when a forum selection clause between the parties before it provided for exclusive Delaware jurisdiction. (A graphic of the Roman forum seemed appropriate for this case.)

Brief Overview:

The facts of this case involve an intricate web of connected and overlapping agreements and related Delaware and foreign entities. For purposes of this short overview, the key facts are that an employee of an Italian subsidiary of a Delaware entity, who had an employment contract governed by Italian law, also signed a partnership agreement with the Delaware entity that had a non-solicitation clause and a Delaware forum selection clause. The employee was accused of downloading confidential information and related activity in violation of the Delaware agreement. However, Italian law required the claims under the employment agreement governed by Italian law to be pursued exclusively in the courts of the country of Italy, even without a forum clause in that agreement.

This case features an unusual twist on the many cases highlighted on these pages over the last 15 years involving the enforceability of forum selection clauses.

Key Takeaways:

  • The court rejected defenses based on the applicable law of Italy and the law of the European Union–which required that certain claims be pursued in Italy–and explained that such foreign laws did not divest the Delaware court of subject matter jurisdiction, especially in light of an applicable forum selection clause providing for Delaware courts to address the majority of the disputes at issue.
  • The court relied on two Delaware Supreme Court cases that addressed the very limited circumstances where a foreign country’s exclusive jurisdictions statute will divest the Delaware courts of jurisdiction. See Slip op. at 14 and footnotes 44 and 45.
  • The court also explained, relying on prior Delaware court decisions, that even a non-signatory can be bound to a forum selection clause–which is also considered to constitute consent to personal jurisdiction that satisfies a due process analysis. See pages 25 to 29.
  • The court explained that a forum selection clause supersedes any defense based on forum non conveniens as well as an argument based on international comity.
  • Nonetheless, the court found that the employment agreement involved in this case, that had an Italian choice of law clause (but no forum selection clause), supported the entry of a stay of the claims related to that employment agreement based on forum non conveniens, and that result is also supported by the fact that Italy had the most substantial relationship to all the facts, the issues and the witnesses, who likely would not be subject to compulsory process in Delaware.
  • But see footnote 138, in which the court requires the parties to meet and confer to determine if there is a way to stay the proceedings “in Delaware or Italy to avoid having both courts determine overlapping issues.” The court reserved its right to reconsider its ruling on the stay depending on the outcome of the parties’ efforts to determine whether duplication of efforts can be avoided by the courts of Delaware and Italy.