A recent Court of Chancery decision is almost as noteworthy for what it decided as for what was not decided. In JUUL Labs, Inc. v. Grove, C.A. No. 2020-0005-JTL (Del. Ch. Aug. 13, 2020), Delaware’s court of equity enforced an exclusive forum selection clause in a company charter, based at least in part on the internal affairs doctrine, to prevent a stockholder in a Delaware corporation from filing suit in California in reliance on a California statute to demand the inspection of corporate records, notwithstanding a California statute that appears to allow a stockholder to sue in California for corporate records if the Delaware company has its principal place of business in California.

What the court did not decide is whether a stockholder may contractually waive her rights under DGCL section 220. Count this writer as a skeptic on that point. The court reviewed several overlapping agreements, such as a stock option exercise agreement, that the stockholder signed and that purported, at least in the company’s view, to waive inspection rights under DGCL section 220. Some of the agreements were governed by Delaware law and some by California law.

This decision could be the topic of a law review article due to the many core principles of corporate law and doctrinal underpinnings the court carefully analyzes. Alas, for now, I’ll only provide a few bullet points with an exhortation that the whole opinion be reviewed closely.

    • The court provides an in-depth discussion of the foundational concepts that undergird the internal affairs doctrine as it applies to the request for corporate records, as well as related constitutional issues that arise.
    • But footnote 7 acknowledges contrary authority that suggests that a local jurisdiction may apply its law to a demand by a local resident for corporate records of a foreign corporation.
    • The court compares DGCL section 220 with its counterpart in the California statutory regime.
    • The exclusive forum selection clause in the charter was addressed, and the court explained that but for this provision, the California court would be able to apply DGCL section 220.
    • Importantly, the court emphasized that is was not deciding whether a waiver of DGCL section 220 rights would be enforceable. Although at footnote 14 the court provides citations to many Delaware cases that sowed doubt about the viability of that position–but then the court also cited cases at footnote 15 that more generally recognized the ability to waive even constitutional rights.
    • Footnote 16 cites to many scholarly articles, and muses about the public policy aspects of the unilateral adoption of provisions in constitutive documents, such as forum selection clauses in Bylaws. Early in the opinion, at footnote 7, by comparison the court waxes philosophical about the concept of the corporation as a nexus of contracts–as compared to it being viewed as a creature of the state. The latter view has implications about the exercise of one state’s power in relation to other states, especially when private ordering may be seen as private parties exercising state power by proxy.
    • By coincidence or otherwise, this decision was published the same week that a California court in another case refused to enforce a Delaware forum selection clause because the California court ruled that forcing a California resident to litigate in the Delaware Court of Chancery would deprive that resident of a constitutional right to a jury trial.
    • The foregoing hyperlink leads to an article in Delaware Business Court Insider of Aug. 7, 2020, that describes an apparent settlement to allow the case to proceed in Delaware Superior Court, a trial court of general jurisdiction with juries available. The counterpart suit in Delaware has its own procedural history. See William West v. Access Control Related Enterprises, LLC, et al., C.A. No. N17C-11-137-MMJ-CCLD, opinion (Del. Super. June 5, 2019).

Delaware law allows for non-signatories to be bound by a forum selection clause if a three-part test is met, and a recent Delaware Court of Chancery opinion provides an analysis of those factors while granting a motion to dismiss in Highway to Health, Inc. v. Bohn, No. 2018-0707-AGB (Del. Ch. April 15, 2020).

The most noteworthy aspects of this pithy decision are: (i) a reminder that Delaware enforces forum selection clauses; and (ii) that a non-signatory can be bound by a forum selection clause if a three-part test is satisfied. See footnotes 46-47 and accompanying text. The directors of a Delaware company sought a declaratory judgment against non-residents of Delaware regarding a dispute about stock-appreciation-rights (SAR) that, by contract, required the board to fulfill fiduciary duties towards the SAR holders.

Three-Part Test for Binding Non-signatories

The three-part test requires one to demonstrate that: (i) the forum selection clause is valid; (ii) the non-signatories are third-party beneficiaries; and (iii) the claims arise from their standing relating to the agreement. Slip op. at 15. The third element of the test was not satisfied based on the facts of this case because the agreement containing the forum selection clause was not the same agreement that gave rise to the substantive claims brought by or against the non-signatories.

Long-Arm Statute and Specific Personal Jurisdiction

This decision also features an analysis of the Delaware long-arm statute, and explains why the “specific jurisdiction” requirements under Section 3104(c)(1) of Title 10 of the Delaware Code were not satisfied because there was no relevant act that actually occurred in Delaware. The Court factually distinguished a case that found specific jurisdiction based on an amalgamation of factors that included: Delaware lawyers drafting the agreement at issue; a Delaware choice-of-law provision; and issues related to the sale of capital stock in a Delaware company. See NRG Barriers, Inc. v. Jelin, 1996 WL 377014 (Del. Ch. July 1, 1996).

Although the plaintiffs in this case did not avail themselves of the opportunity, the Court observed that limited discovery may be allowed in connection with the plaintiff satisfying its burden of proof to establish personal jurisdiction over defendants.

The Delaware Supreme Court recently issued a highly anticipated decision in Salzberg v. Sciabacucchi, No. 346-2019 (Del. Mar. 18, 2020).  Many law professors and other commentators have written much learned commentary and published extensive scholarly analysis of the issues raised in the Court of Chancery’s decision, and have opined on what the Supreme Court was likely to decide in this case–and how the commentators thought the appeal should be decided.  Moreover, I expect that there will be a flood of additional learned commentary and analysis about this decision in the near future.  See, e.g., recent analysis of the Supreme Court’s opinion in this case by Professor Bainbridge for the Washington Legal Foundation.

Therefore, I will only limit this post to a few highlights that should be an incentive to read all 53-pages of the court’s opinion, to which a full-length law review article could easily be devoted. The photo nearby features one of the oldest venues, the Roman Forum.

The highlights of the Chancery decision in this case can be found on these pages.

Federal Forum Clause at Issue:

Delaware’s High Court referred to the Federal Forum Selection Provisions in the certificate of incorporation of the several companies whose charter provisions were jointly challenged in this case.  In essence, the clauses purported to require that the U.S. Federal District Court would be the sole and exclusive forum for the resolution of any complaint arising under the Securities Act of 1933 and that any person purchasing shares of stock in the companies with those provisions consented to the forum selection provision.

Highlights of Court’s Analysis:

The court began its analysis with the text of Section 102 of the DGCL which governs matters contained in the certificate of incorporation.  The court emphasized that Section 102(b)(1) authorizes two broad types of provisions:  (i) Any provision for the management of the business and for the conduct of the affairs of the corporation; and (ii) Any provision creating, defining, limiting and regulating the powers of the corporation, the directors and the stockholders, or any class of the stockholders, . . . if such provisions are not contrary to the laws of this State.

The Delaware Supreme Court reviewed several key U.S. Supreme Court decisions and prior decisions of the Delaware Supreme Court, including the recent SCOTUS opinion in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061, which held that federal and state courts have concurrent jurisdiction over class actions based on the 1933 Securities Act and that such claims are not removable to federal court.

Highlights of Court’s Decision:

  • The court determined that DGCL Section 115 did no alter the scope of DGCL Section 102(b)(1). Section 115 was added as an amendment to the DGCL in 2015 and was intended to codify the Boilermakers Chancery decision to preclude a charter or bylaw provision from excluding Delaware as a forum for internal corporate claims.  Slip op. at 16-17.
  • The opinion employs general principles of statutory construction of widespread applicability and usefulness. See Slip op. at 18-24.
  • Readers will enjoy a “deep dive” into the internal affairs doctrine. The appellate analysis concluded that the Court of Chancery’s opinion defined “internal affairs” too narrowly. See Slip op. at 31-38.  See also footnote 124-126 and related text, referring to the internal affairs doctrine as a principle of “serious constitutional proportions; not just a conflict of laws matter.”
  • The decision features a thorough discussion of why Section 102(b)(1) is more expansive than Section 115–the latter focuses on internal corporate claims. See Slip op. at 38.
  • The court described the facial challenge of constitutionality in this matter and concluded that the provision at issue neither violated federal law nor federal policy. See Slip op. at 43.
  • Both Delaware case law and decisions of the U.S. Supreme Court were relied on for the well-established presumption of enforceability of forum selection clauses. See footnotes 136-139 and accompanying text.
  • Especially notable is footnote 169, which addressed a concern that many had during the appeal of this case: enforcing the federal forum provision in this matter would, perhaps by analogy, “open the flood gates” for arbitration clauses in charters. But the Supreme Court explained that at least in terms of forum selection clauses for claims involving Delaware corporate internal affairs, in part based on the synopsis of Section 115, such a concern was unfounded.

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.

There are many decisions highlighted on these pages ordering the enforcement of forum selection clauses. A recent transcript ruling is notable for granting expedited proceedings, without ruling on the merits, for a plaintiff who sought to enforce a forum selection clause even though the plaintiff was not a signatory to the agreement with the forum selection clause.

The plaintiff in this case is a law firm seeking to enforce a forum selection clause in a release and settlement agreement that released the attorneys of the signatory. See Dentons US LLP, v. Platt, C.A. No. 2019-0177-MTZ, transcript (Del. Ch. March 20, 2019). Regular readers are aware that transcript rulings may be cited in Delaware briefs.

A forum selection clause, controlled by Austrian law, was recently interpreted by the Delaware Court of Chancery as a mandatory forum selection clause requiring the dispute to be litigated in Vienna.  In Germaninvestments A.G. v. Allomet Corporation, C.A. No. 2018-0666-JRS (Del. Ch. May 23, 2019), the court also determined that the choice of law provision designating Austrian law and the forum selection clause requiring litigation in Vienna were both enforceable.

N.B. The Delaware Supreme Court reversed this decision in an opinion dated Jan. 27, 2020.

Procedural Background:

The court observed that Rule 12(b)(3), which addresses improper venue, was “the proper procedural rubric” for addressing a motion to dismiss based on a forum selection clause.  The court also explained that a motion under Rule 12(b)(3) does not “shackle” the court to the plaintiff’s complaint, but rather the court is permitted to consider extrinsic evidence from the outset.  See footnote 63. 

The court also noted that Chancery Rule 44.1 provides the procedure for presenting foreign law to the court to allow the court to interpret a document governed by foreign law.  The rule provides that a party is required to give notice in the pleadings or other reasonable written notice that the law of a foreign country will control.  Prior decisions have recognized that expert affidavits may be considered along with expert testimony.

Key Statements of Law:

·     The court explained the well-settled rule that Delaware courts will give effect to the terms of private agreements providing for forum selection clauses.  See footnote 64 and accompanying text.

·     In order for a forum selection clause to be considered exclusive under Delaware law, the “contractual language must be crystalline in stating the parties’ intent to litigate only in the designated forum.”  See footnote 66.

·     The Delaware courts also generally honor contractually-designated choice of law provisions as long as the jurisdiction selected “bears some material relationship to the transaction.”  See footnote 70.

·     A key issue is whether the forum selection clause states that it is exclusive, or whether the language will be construed as merely permissive. See footnote 80 (citing Delaware cases holding that a mandatory forum selection clause must make clear that the litigation is required to proceed in the designated forum).

·     In this instance, the applicable Austrian law applied to require litigation only in Vienna.

·     The court also rejected the argument that DGCL Section 168 applied because the statute relates to replacements for lost stock certificates, and in this instance the issue was whether the original stock certificate should have been issued.

A recent Delaware Court of Chancery decision is noteworthy for its finding that the adoption of a forum selection bylaw implied consent to jurisdiction to the extent that it required lawsuits by stockholders against the company to be filed in Delaware.  See In re: Pilgrim’s Pride Corp. Derivative Litigation, C.A. No. 2018-0058-JTL (consol.) (Del. Ch. Mar. 15, 2019).

Background:

The basic facts involved a challenge to the sale of a company that was orchestrated by the controlling stockholder who needed cash.  On the same day as the acquisition, the board of the nominal defendant approved a Delaware forum selection bylaw.  The court discussed the applicable standard of review and other topics, but the jurisdictional issues are more notable.

Key Takeaways:

·     The Court held that the controlling stockholder who appointed a majority of the board of the nominal defendant agreed to personal jurisdiction when it caused the company to adopt the Delaware forum selection bylaw—for claims covered by the forum bylaw.

·     In rejecting the parent’s motion to dismiss for lack of jurisdiction, the Court explained that:

“on the same day that the Acquisition was approved, the Board voted unanimously to adopt a forum-selection bylaw, with the Director Defendants whom Parent controlled constituting a five-member majority of the nine-member Board.  The bylaw made the Delaware courts the exclusive forum for breach of fiduciary litigation involving the Company.  This decision holds that on the facts alleged, Parent implicitly consented to personal jurisdiction in this court for purposes of claims falling within the forum-selection bylaw.”

The court explained, however, that the better practice would be to specifically provide, when drafting contractual provisions, that personal jurisdiction is expressly agreed to in a particular form.  See footnotes 5 to 8 which provide voluminous citations to authority and learned commentary on this topic.

There are many forum-selection clause cases featured on these pages, but this decision explores an aspect of forum-selection clauses that is not often analyzed directly by Delaware courts, as compared to other nuances.

A recent Delaware Court of Chancery decision recognized that a non-signatory to an agreement may enforce the provisions of a forum-selection clause under certain conditions. Although this holding is counterintuitive, there are other Delaware decisions which recognize that in some circumstances a non-signatory to an agreement may either enjoy the benefits of that agreement or may enforce certain terms of that agreement. See, e.g., selected cases addressing this topic on this blog over the last 13 years.

In the case of Lexington Services Ltd. v. U.S. Patent No. 8019807 Delegate, LLC, C.A. No. 2018-0137-TMR (Del. Ch. Oct. 26, 2018), two important principles of Delaware law regarding enforceability of forum-selection clauses were explained. This case involved multiple litigations in several jurisdictions, including a foreign country, regarding the disputed transfer of rights in a U.S. patent.  (The photo nearby of the Roman Forum seems appropriate to add color to an overview of a case involving a forum-selection clause.)

The first principle of well-established Delaware law recognized in this decision was the enforceability generally in Delaware of forum-selection clauses.  They are regarded as presumptively valid and should be specifically enforced absent a showing that the enforcement would be unreasonable and unjust for reasons such as fraud. See footnote 28.  Mere inconvenience or additional expense is not the test of unreasonableness. Id.

Next, this decision recognizes that Delaware law allows non-signatories to invoke forum-selection clause provisions in an agreement where they are “closely related to one of the signatories such that a non-party’s enforcement of the clause is foreseeable by virtue of the relationship between the signatory and the parties sought to be bound.” See footnote 43.  Citing well-settled case law, the court added that, for example, officers and directors of an entity subject to a forum-selection clause may invoke its benefits because they were closely involved in the creation of the entity and because they were being sued as a result of acts that directly implicated the negotiation of the agreement that lead to the entity’s creation. See footnote 44.  Likewise in this case, the defendant is an entity created to receive the patent, and the ownership of the patent and assignment to a different entity such as the defendant was foreseen in the applicable agreement.  The party being sued for his actions as a manager of the defendant entity was foreseeable and is closely related to the agreement.

Relying on prior cases, the court noted that it typically grants motions to dismiss under Court of Chancery Rule 12(b)(3) based upon a forum-selection clause where the parties use express language clearly indicating that the forum-selection clause excludes all other courts before which those parties could otherwise properly bring an action. See footnote 31.  In this case, the court imposed a stay due to the possibility that one or more issues would return to Delaware after certain aspects of the case were resolved in the original non-Delaware forum called for in the agreement.

In connection with a business divorce involving several inter-related entities and two key agreements among the parties that impacted the issues disputed, the Delaware Court of Chancery in Village Green Holding, LLC v. Holtzman, C.A. No. 2018-0631-TMR (Del. Ch. Oct. 5, 2018), enforced the forum selection clause that selected Delaware courts, and imposed an anti-suit injunction to prevent the parties from proceeding in a separate action in Pennsylvania despite the second agreement containing a forum selection clause that selected Pennsylvania courts as a forum for disputes related to some, but not all, of the numerous entities involved in the business break-up. (The nearby photo of the Roman Forum is an appropriate graphic for this post.) Many other decisions interpreting forum clauses have been highlighted on these pages over the last 13 years.

Among the several important legal principles recited by the court in this useful opinion, are the following principles highlighted by bullet points:

  • The court reiterates the familiar prerequisites that must be satisfied in order for a preliminary injunction to be granted. See page 12.
  • On a more nuanced level, the court recites the additional criteria that need to be considered by the court when there is a request for an anti-suit injunction to prevent a party from proceeding in another forum. See page 13.
  • Also discussed by the court were the enhanced or modified prerequisites that must be satisfied for a “mandatory injunction,” which requires a greater showing than one needs for a typical injunction that seeks merely to maintain the status quo.
  • The court recites the basic principle, and cites to the seminal Delaware cases supporting the general rule, that a forum selection clause is enforceable in Delaware. See pages 15 and 16.
  • The court also refers to Section 18-111 of the Delaware LLC Act which gives the Court of Chancery specific jurisdiction to interpret the rights and duties in an LLC operating agreement. See page 18.
  • Exceptions to the enforceability of forum selection clauses, such as fraud, are also discussed. See page 20.
  • The necessary element of irreparable harm required for injunctive relief was described to be established when one is forced to litigate in a forum that is contrary to the selected forum provided for in a valid forum selection clause. See pages 20 and 21.
  • Although a separate agreement between the parties in this case provided for a Pennsylvania forum for only some of the involved entities, the court enjoined the parties from proceeding outside of Delaware regarding claims involving the parties and entities that were subject to the separate agreement that contained a Delaware forum selection clause.

Utilipath, LLC v. Baxter McLindon Hayes, Jr., C.A. No. 9922-VCP (Del. Ch., Apr. 14, 2015), is a short Chancery opinion notable for a few short reasons:5409380582_0b993a45d0_m

  • In light of a non-exclusive forum selection clause pursuant to which the parties agreed to litigate their dispute in Delaware, the court declined to apply the first-filed rule, known as the McWane doctrine, and denied a motion to dismiss. But the greater import of this case lies in its potential application on a larger stage.
  • One reasonable application of this Court of Chancery opinion is that: when parties have irrevocably consented to Delaware courts as a non-exclusive forum, even if a first-filed suit has been filed elsewhere involving similar parties and similar claims, the McWane doctrine may not require that the Delaware action be stayed in deference to the pending action in another forum.
  • This decision may have relevance to the pending legislation in Delaware described on these pages, that would require forum selection clauses that are included in bylaws to provide for the selection of Delaware courts in addition to any other state. In other words, when a forum selection clause is included in a bylaw to cover intra-corporate disputes, any state in the country can be selected as the forum–as long as Delaware is also included as one of those two fora. Stated another way, if the legislation is passed, when forum selection clauses are included in bylaws for stockholder disputes, Delaware must be either (i) the exclusive forum; or (ii) if another forum is selected, Delaware must be included as an additional forum.
  • Also notable is footnote 29 of the opinion which described a conversation that the author of this Chancery opinion had with the federal judge overseeing the related first-filed case in the U.S. District Court for the Eastern District of Pennsylvania, in which both jurists invited cooperation to the extent that there may be some overlap between the two cases.

Roman forum (an ancient forum selection) image above provided by Flikr’s Creative Commons by Benson Kua.