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The Harvard Law School Corporate Governance Blog has a thoughtful post on the above topic here, with reference to recent Delaware decisions that support the inclusion in a company’s charter or bylaws of a provision that would require shareholders suits to be filed in Delaware. This discussion follows a suggestion in the recent Revlon  decision and also relates to a recent article here by Professor Bernard Black and others indicating that cases governed by Delaware law are increasingly being filed in other jurisdictions in the hope that judges less experienced in Delaware law may give those cases less scrutiny than some plaintiffs would prefer to receive in Delaware. See also a recent article in the Wilmington paper here that discusses the topic generally.

Lisa, S.A. v. Mayorga, No. 410,2009 (Del. Supr. Apr. 20, 2010), read opinion here

This Delaware Supreme Court decision affirmed the decision of the Court of Chancery which dismissed the complaint based on forum non conveniens grounds. The prior decision of the Court of Chancery is highlighted here.

Although this case has a lengthy and tortuous history, the sum and substance of the importance of this decision can be briefly summarized as follows:

1) When other pending actions in other jurisdictions are involved, the test to apply to a motion to dismiss on forum non conveniens grounds is the “overwhelming hardship” test. See generally General Foods Corp. v. Cryo-Maid, Inc., 198 A.2d 681, 684 (Del. 1964) ( as supplemented by Parvin v. Kaufmann, 236 A.2d 425, 427 (Del. 1967)) (Listing the six factors that the Court must consider in determining whether to apply the forum non conveniens doctrine).

2) Importantly, however, when a Delaware action is not the “first filed” action, a different standard will apply. The Supreme Court in this case ruled that: “where the Delaware action is not the first filed, the policy that favors strong deference to a Plaintiff’s initial choice of forum requires the Court freely to exercise its discretion in favor of staying or dismissing the Delaware action." (the "McWane doctrine”) (emphasis in original). See McWane Cast Iron Pipe Corp. v. McDowell-Wellman Engineering Co., 263 A.2d 281, 283 (Del. 1970). As a general rule, litigation should be confined to the forum in which it is first commenced and a Defendant should not be permitted to defeat the Plaintiff’s choice of forum in a pending suit by commencing litigation involving the same cause of action in another jurisdiction of its own choosing.

Notably, at a recent seminar presented by veteran members of the Delaware Bar and a former member of the bench, the view was expressed that this case enunciates what is, in effect, a somewhat new standard–or at least it announces a distinction not previously well-known, and it also indicates a softening of the prior hard-line stance in these types of cases.

In this case, the Court reasoned that because the Delaware action was not the first filed action, the McWane doctrine applied and under that doctrine it is not necessary that the competing cases be exactly the same, but rather, it is sufficient that they be “functionally identical” to the Delaware action and that they were filed in a jurisdictionally competent Court arising out of a “common nucleus of operative facts. See Chadwick v. Metro Corp., 2004 WL 1874652 at *2 (Del. Aug. 12, 2004).

Also, the Court ruled that even if the prior action was no longer pending, and  despite McWane referring to a prior pending action, this Delaware case should still be dismissed, the Court reasoned, because to allow the Delaware action to proceed after the dismissal with prejudice of the prior Florida action would ignore the binding effect of Florida adjudication and also create the possibility of inconsistent and conflicting rulings, which was precisely the outcome that the doctrine of comity espoused by McWane sought to prevent. Because the Court dismissed on forum non conveniens grounds, it did not reach the issue of whether the trial court should have allowed jurisdictional discovery on personal jurisdiction issues.
 

Ashall Homes Limited v. ROK Entertainment Group, Inc., C.A. No. 4643-VCS (Del. Ch. Apr. 23, 2010), read opinion here.

 This Court of Chancery decision upheld a forum selection clause that required the dispute between the parties to be litigated in the Courts of the United Kingdom and to be governed by the laws of England. Notably, the Court observed that the internal affairs doctrine did not require the application of Delaware corporate law to this dispute. This instant decision spends a large proportion of its 25-pages addressing the public policy reasons why forum selection clauses are upheld including the Court’s aversion to “issue splitting”.
 

Compare a more recent Court of Chancery opinion that upheld a forum selection clause requiring the case to be litigated in Texas even though the internal affairs doctrine in that separate case did require the application of Delaware corporate law. See Baker opinion from Chancery here.

 

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.

 

 Rosen v. Wind River Systems, Inc., C.A. No. 4674-VCP (Del. Ch., June 26, 2009),  read opinion here.

Kevin Brady, a highly respected Delaware litigator, provides the following synopsis of this case.

In this decision, the Court of Chancery, in a putative class action regarding an all-cash, all-shares tender offer for the shares of Wind River Systems, Inc. (“Wind River”), declined to stay or dismiss the Delaware action in favor of various California actions (the “California Actions”) even though the earliest of the California Actions was filed 12 days before the Delaware Action.

Coast-to-Coast Battle

On June 4, 2009, Wind River announced a merger with a subsidiary of Intel Corporation. By June 16, 2009, four suits had been filed in California Courts challenging the merger and disclosures made in Wind River’s 14D-9. Only limited discovery had started. On June 16, Plaintiff Rosen filed an individual and derivative action in the Court of Chancery challenging the merger. The following day Rosen filed a motion for preliminary injunction and for expedited proceedings. Wind River then filed a motion to dismiss or stay the Delaware action. The Court of Chancery granted the motion to expedite and set the hearing on the preliminary injunction for July 7. The California court expedited those actions and set a hearing for the preliminary injunction for July 8.

Forum Non Conveniens Versus McWane

Defendants argued that under McWane, the California actions were first-filed and the Delaware action should be stayed or dismissed. Plaintiff responded by arguing that a forum non conveniens analysis should apply because the Delaware Action was filed in relatively the same time period as the California Actions. The threshold question was whether the Court should apply a McWane or forum non conveniens analysis. Citing his 2008 decision in In re Bear Stearns, 2008 WL 959992 (Del. Ch. Apr. 9, 2008), Vice Chancellor Parsons held that in the case of class actions the “appropriate approach is something akin to a forum non conveniens analysis.”  Where the delay in filing the class action is prejudicial, the forum non conveniens presumption may be rebutted.

Holding

Here, the Court found that there was no prejudicial delay. The California actions had not progressed far beyond the Delaware action. In addition, the Court noted that in light of the events from the announcement of the merger to the filing of the 14D-9, Rosen’s delay was minimal and in line with the Court’s “long expressed . . . ‘public policy interest favoring the submission of thoughtful, well-researched complaints – rather than ones regurgitating the morning’s financial press.’”

Applying the forum non conveniens analysis, the Court noted that none of the factors “severally or jointly, as applied to the facts and circumstances of this action, demonstrate the kind of hardship that would cause this Court to stay or dismiss the Delaware Action.” The Court did note that the applicability of Delaware law, even for issues that were neither “cutting-edge [n]or terribly novel issues of Delaware corporate law,” weighed heavily in favor of denying the motion.

 

Weygandt v. Weco, LLC, Del. Ch., No. 4056-VCS (May 14, 2009), read opinion here

Issue Presented

The question in this case is whether a non-signatory defendant can be required to appear in a forum chosen in an agreement executed by an affiliate.

In this Chancery Court decision, the court determined that a party was subject to the personal jurisdiction of the Delaware courts based on a forum selection clause in an agreement that the party was not a signatory to, but which an affiliated party was a signatory to, based on equitable estoppel.

Background

The factual background involves the negotiated sale of an aviation repair business in California. The sale of the business included a contemporaneous lease agreement for the premises on which the purchased business was located. As a condition to closing for the purchase of the business, the lease agreement was entered into for the premises which the business occupied.  

The lease agreement was entered into by the owner of the building where the business was located, which was a different entity than the owner of the business but the same person controlled both entities. The Asset Purchase Agreement for the business contained a forum selection or “consent to jurisdiction” clause providing for exclusive personal jurisdiction over any party to the agreement in any state or federal court sitting in Delaware. The lease agreement, however, did not contain a consent to jurisdiction clause. The court reasoned that the sale of the business was to be paid for in two ways: (i) the basic purchase price of the business, and (ii) the stream of lease payments from the lease for the premises on which the business was located.

Legal Analysis

The court reiterated that on a motion to dismiss under Rule 12(b)(2), the plaintiff bears the burden of showing a basis for the exercise by the court of jurisdiction over a non-resident defendant.

The court rejected the applicability to these facts of the general rule that “agreements that are part of the same transaction are construed together.” However, the court did find applicable the equitable estoppel theory which many cases have applied to hold that a non-signatory was bound by a forum selection clause based on a three part test. First, the forum selection clause must be valid. Second,  the defendants need to be either third-party beneficiaries or “closely-related” to the relevant contract. Third, the claim must arise from the status of the defendant as closely-related to the agreement that contains the forum selection clause.

The purpose of the third prong of the three-part test is that the agreement containing the forum selection clause must also be the agreement that gives rise to the substantive claims brought by or against a non-signatory in order for the forum selection clause to be enforceable against a non-signatory. (See footnotes 13 to 15 and 18.)

The rationale for the cases that have enforced forum selection clauses against non-signatory parties are based on the principle that a third-party beneficiary or closely-related party can not enjoy the benefits of an agreement without accepting its obligations. See Capital Group Cos. v. Armour, 2004 WL 2521295 (Del. Ch. Oct. 29, 2004). See also cases collected at footnote 17.

Importantly, it is not only third-party beneficiaries, but also parties who are “closely related” to the agreement at issue that are estopped from avoiding the obligations of an agreement from which they benefit. Thus, even if an agreement expressly disclaims any third-party beneficiaries, a “closely-related party” to the agreement can still be bound by its terms even if not a signatory. See Capital Group, 2004 WL 2521295, at *6.

A party will be considered “closely related” to an agreement for purposes of binding a non-signatory if: (1) she receives a direct benefit from the program; or (2) it was foreseeable that she would be bound by the agreement. (See footnotes 18 and 19.)

Direct Benefit

In the instant case, the landlord, who was a non-signatory to the purchase agreement which contained the forum selection clause, received a direct benefit from the purchase agreement because the buyer of the business would not have entered into the lease agreement with the landlord if it was not buying the busines–and the lease was not only part of the “consideration” paid for the business, but was also a condition precedent to the purchase of the business.

Foreseeability

When a control person agrees to a forum, it is foreseeable that the entities controlled by that person which are involved in the deal will also be bound to that forum. See cases collected at footnote 25. The rationale for binding such entities rests on the public policy that forum selection clauses “promote stable and dependable trade relations” and it would be inconsistent with that policy to allow entities through which one of the parties chooses to act, to escape the forum selection clause. See cases collected at footnote 26.

If the purchaser of the business in this case was excused from buying the business because of fraud or falsity of representations and warranties, it would have no business reason or legal obligation to enter into the lease agreement which it needed only to operate the business. Thus, it was foreseeable that a dispute involving the purchase agreement and the lease agreements would have to be brought in Delaware because of the forum selection clause in the purchase agreement.

Conclusion

Any contrary result would allow for duplicative and inefficient litigation in multiple forums and undermine the benefit of predictability that was provided to the purchaser by agreeing to a forum clause in the purchase agreement. Thus, the court found that the landlord was equitably estopped from asserting that the Delaware court lacked jurisdiction.

This opinion will be helpful for the many transactions which involve multiple agreements–all of which do not contain a forum selection clause. What this agreement does not directly address, however,  is those situations where there are multiple agreements in the transaction which have different forum selection clauses, although there are other decisions that have addressed such situations.

 

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.

 

 

Smartmatic Corp. v. SVS Holdings, Inc. and Sequoia Voting Systems, Inc.,(Del. Ch., April 4, 2008), read opinion here. This letter opinion involved the application of New York law to multiple disputes surrounding a stock purchase agreement. Because this blog focuses on Delaware law, the only point I want to highlight in this 24-page decision is a footnote that reiterates basic Delaware law to the effect that forum clauses are generally upheld, but even as here where the law of another state is applied to the substantive dispute, Delaware procedural and remedial law will still govern. That was key here because there were cross-motions for summary judgment filed along with motions for expedited proceedings and injunctive relief–and summary judgment was granted less than 3 weeks after the complaint was filed. Here is the money quote from footnote 21:

“As a general proposition, Delaware courts will recognize and enforce contractual choice-of law provisions if the selected jurisdiction has a material connection with the transaction.”
Trilogy Dev. Group, Inc. v. Teknowledge Corp., 1996 WL 527325, at *3 (Del. Super. 1996)
(citing Falcon Tankers, Inc. v. Litton Systems, Inc., 300 A.2d 231, 235 (Del. Super. 1972)). The current dispute involves interpretation of several agreements providing that New York law governs disputes resulting therefrom. The parties conduct business in New York. New York law thus governs interpretation of this contract. Procedural matters, however, are determined by Delaware law. See, e.g., Taylor v. LSI Logic Corp., 1998 WL 51742, at *4 n.19 (Del. Ch. Feb. 3, 1998); Lutz v. Boas, 176 A.2d 853, 857 (Del. Ch. 1961) (“It is well established that the law of  the forum governs questions of remedial or procedural law.”).

 In Aveta, Inc. v. Colon, 2008 WL 151859 (Del. Ch., Jan. 15, 2008), read opinion here, the Chancery Court found the facts of this case to exhibit the rarest of jurisdictional "birds" (my word). Namely, based on overwhelming hardship and forum non conveniens factors, the court stayed a Delaware action, in favor of a later filed proceeding in Puerto Rico, despite a forum selection clause selecting Delaware. The court noted that it is rare that a defendant can defeat a plaintiff’s choice of forum and rarer still to do so in light of a contractual forum selection clause. Among the compelling facts that supported the court’s opinion were the following: the key witnesses and key players in the matter were in Puerto Rico and English was a second language for most of them–thus, likely requiring translators "all around" for depositions and for introducing documentary evidence. In addition, the controlling law was the law of Puerto Rico and serious public policy issues that were of great concern to Puerto Rico were implicated by the issue of first impression (for that jurisdiction) that was involved: the enforceability of a non-compete agreement with a doctor and his patients pursuant to the law of Puerto Rico as well as the fact that the doctor did not read the document which was in English–not his first language. The court observed that Delaware "has no interest in this dispute."

In Troy Corp. v. Schoon, (Del. Ch., March 26, 2007), 2007 WL 949441, read opinion here, the Chancery Court reiterated the settled Delaware jurisprudence that forum selection clauses are enforceable but that in order to achieve their purpose, if they are meant to be exclusive, they must clearly express that intent unequivocally. The clause in this case was unequivocal in stating that the parties agreed to choose as an exclusive forum the federal court for the Southern District of New York. In this Motion to Dismiss under Rule 12(b)(3), however, the issue was joined because the complaint filed did not raise an issue of federal jurisdiction. The Chancery Court was compelled to make an unusual analysis–for a state court–about whether a federal court had jurisdiction over a particular dispute. Reasoning that there was no federal court jurisdiction (based on diversity or otherwise), and the agreement not having provided for an alternative forum, the court concluded based on the facts presented that Delaware state court was a permissible forum to adjudicate the dispute.

One lesson to be learned from this decision, especially for those drafting forum selection clauses, is that they must provide for an alternative court in the chosen state if, as in this case, the only court chosen did not have subject matter jurisdiction over the dispute.  Another example  for avoiding the result in this case arises from the following hypothetical:  if an agreement only provided for Chancery Court as a forum, it would be possible, depending on the type of claim asserted,  that the court would not have equitable jurisdiction–which cannot be created by consent of the parties–as opposed to personal jurisdiction–much like federal subject matter jurisdiction cannot be conferred by the parties. Thus, if the drafter wanted to be certain that all disputes would remain in Delaware courts, the drafter should allow for an alternative Delaware court if Chancery did not have equitable jurisdiction.