Court of Chancery finds that it lacks personal jurisdiction over employee in former company’s non-compete action
Choice of law and choice of forum clauses in employment agreements are tricky business. Even though a Delaware LLC employer may think they have strong, iron-clad selection provisions in their employment agreements, the Delaware Court of Chancery may find otherwise, as it did recently in Focus Financial Partners, LLC v. Holsopple, 241 A.3d 784 (Del. Ch. 2020).
Plaintiff Focus Financial Partners, LLC (“Focus”) is the publicly traded parent company of non-party Focus Operating, LLC (“Focus Sub”). Defendant Scott Holsopple previously worked for Focus Sub but eventually resigned and took a position with defendant Hightower Holdings, LLC (“Hightower”), a competitor of Focus Sub.
When Holsopple joined Focus Sub, he received a signing bonus in exchange for execution of an employment agreement (“Agreement”), which contained restrictive covenants customarily used in employment agreements, including a non-competition provision, a non-solicitation provision, and a provision restricting Holsopple’s ability to share confidential information. The Agreement specified that Delaware law would govern its terms.
After Holsopple joined Hightower, Focus filed suit. Focus claimed that Holsopple breached the Agreement and violated the exclusive choice-of-forum provisions by filing a lawsuit in California state court. Focus maintained that both Holsopple and Hightower violated the Delaware Uniform Trade Secret Act and asserted that Hightower tortiously interfered with its contractual rights and business expectations.
Holsopple moved to dismiss, arguing that the Delaware court could not exercise personal jurisdiction over him. Holsopple argued that the Delaware forum provisions in the Agreement and the company’s operating agreement was his only connection to Delaware. Importantly, California statutory law provides that a choice-of-forum provision is voidable at the request of the employee if the provision appears in an agreement that the employee signed as a condition of employment.
When Holsopple joined Focus, he was a resident of Kansas City, Missouri and signed his offer letter and a later incentive agreement while there. Holsopple worked remotely from Kansas City and commuted back and forth from Kansas City to San Francisco for two months. Thereafter, Holsopple relocated to San Francisco and worked from there for the remainder of his tenure. Later incentive agreements also included Delaware choice-of-law and choice-of-forum provisions.
The court had to determine which law applied, Delaware or California, and whether the Delaware forum provision was valid under the applicable law. The court determined that, although both Delaware and California have an interest in the Employment-Related Provisions, Delaware’s interest was “generalized and weak,” while “California’s interest is strong and paramount.” The court further stated that Focus’s status as a Delaware LLC “does not give Delaware a significant interest in the Employment-Related Provisions.” In the court’s own words:
After a lengthy choice-of-law analysis, this decision concludes that California law would govern the pertinent provisions in the agreements in the absence of the Delaware choice-of-law provisions, that a true conflict exists between Delaware and California law as to the validity of the Delaware choice-of-forum provisions, and that applying Delaware law to validate the Delaware choice-of-forum provisions would offend a fundamental policy of the State of California on a matter where California has a materially greater interest.
The court therefore granted the former employee’s motion to dismiss for lack of personal jurisdiction.
In sum, employers cannot expect to rely solely on Delaware choice-of-law and choice-of-forum provisions in employment contracts. When determining whether an employer has personal jurisdiction over an employee in Delaware, the court will look at multiple factors—including residency of the employee and where the majority of the work was performed—to determine the forum and law that has the greatest connection to the relationship.