By Robert Milligan and Jeffrey Oh

As part of the process of acquiring of a business and retaining key employees of the acquired business, multiple agreements surrounding the parameters and contingencies of the transaction are often drafted, including asset purchase agreements and employment agreements. These agreements sometimes overlap in scope and ensuring that all material aspects of the deal align in the documents is crucial in maintaining the effectiveness of any singular business transaction. In an order denying defendant’s motion to dismiss in a non-compete dispute involving a former key executive of the purchaser, the Honorable Judge R. Brooke Jackson of the United States District Court for the District of Colorado illustrated the importance of congruity within these sorts of agreements, particularly forum selection provisions. The bottom line is that special care needs to given in the drafting of these documents so that the non-compete provisions and forum selection provisions remain consistent.  

The case, Robert Stuart v. Marshfield Doorsystems, Inc. Civil Action No. 12-cv-00454-RBJ, 2012 WL 872766 (D. Colo. March 14, 2012), concerns a dispute over agreements signed during defendant’s acquisition of plaintiff’s company and retention of his employment services.  In 2004, Stuart and his business partner David Cox sold Consolidated Fiber, LLC, which deals in the manufacturing and selling of commercial and residential doors, to Marshfield Doorsystems. By the terms of the Asset Purchase Agreement (“APA”), Stuart and Cox received $2 million each and agreed to stay with the company and sign separate employment agreements.  The APA included reference to unsigned employment agreements that were attached as exhibits and incorporated by reference.

The APA included a non-competition clause that barred them from joining a competing business for 24 months after the termination of their employment agreements. Additionally, the APA stipulated it would be governed by Delaware law, where Marshfield is incorporated, and that “any dispute, controversy or claim arising out of or relating to” the APA would be settled through arbitration in Chicago, IL. Any dispute not able to be settled through arbitration would then be settled in an applicable court in Chicago.

In concordance with the APA, Stuart signed an Employment Agreement with Marshfield that had him under contract for a five year “Initial Term.” Per the Employment Agreement’s “Renewal Terms” the contract was extended automatically at the end of the Initial Term for one year every year unless terminated by either party through 45 days advance notification. Stuart’s Employment Agreement contained a non-competition clause largely identical to the one found in the APA, but, in contrast with the APA, provided that any and all disputes “arising out of or related to” the Employment Agreement were to be resolved by a court trial without a jury. Moreover, the Employment Agreement contained a merger clause stating that it “merges and supersedes all prior and contemporaneous discussions, agreements and understandings of every nature between the parties hereto relating to…employment.” The APA and Employment Agreements were apparently executed on the same day.

After the Initial Term had passed, in addition to three subsequent Renewal Terms, Stuart informed Marshfield on January 9, 2012 that he intended to resign approximately four weeks later.  A few days after this, Stuart informed Marshfield that upon his departure, he would be joining TruStile Doors, LLC in Denver, CO.  Marshfield terminated Stuart’s employment on January 17, 2012 and cited the non-competition clauses of the APA and his Employment Agreement in insisting he quit his job with TruStile Doors, which Marshfield considers a competitor.  Marshfield also informed TruStile Doors of Stuart’s agreements and pressed them to terminate his employment.

On February 22, 2012, Stuart filed a complaint in federal court in Denver, Colorado against Marshfield seeking a declaration that the non-competition agreements are not enforceable, or that they were waived, or that they were not violated, as well as an injunction against Marshfield from interfering with his employment at TruStile Doors.  In response, Marshfield requested arbitration through the American Arbitration Association to settle the arbitrable aspects of the dispute in Chicago, per the APA. Marshfield also filed a complaint against Stuart in the United States District Court for the Northern District of Illinois, Eastern Division, seeking an order from the court for arbitration as well an injunction barring Stuart from working at TruStile Doors. Similarly, Marshfield filed a motion to dismiss Stuart’s complaint filed in the Colorado federal action due to improper venue based on the forum selection clause found in the APA, as well as motion to transfer venue based upon forum non conveniens.

In denying Marshfield’s motion to dismiss, the court determined that the Employment Agreement is a “stand-alone contract with no forum selection clause” that has governed the employment relationship since its signing.  Additionally, due to the language of the merger clause providing that it “merges and supersedes all prior…agreements,” the Court ruled that the Employment Agreement merges and supersedes any inconsistent provisions in the APA. 

The Court reasoned:

“Because it requires a court trial, it is not governed by the APA’s arbitration clause. Because it has no forum selection clause, Mr. Stuart is not precluded from instituting a lawsuit outside Chicago. . . .

Marshfield argues that the parties clearly intended that any disputes under the APA would be resolved by arbitration or litigation in Chicago. However, while the APA so provides in general, the Employment Agreement does not. The parties could have put an arbitration clause and a forum selection clause in the Employment Agreement, but they did not.

Marshfield argues that the Employment Agreement was incorporated into and became a part of the APA. I do not agree. The APA incorporated by reference its exhibits which, as relevant here, were facsimile forms of employment agreements. Mr. Stuart was required to agree to an actual employment agreement in substantially the same form as the facsimiles, which he did. However, as indicated above, the Court finds that the actual Employment Agreement by its plain language stands on its own as an independent contract." (emphasis added)

Accordingly, the court denied the motion to dismiss on grounds of improper venue. The court also denied Marshfield’s request to transfer the case to the Northern District of Illinois. The court reasoned that neither party had significant contract with Colorado or Illinois. Delaware law could be determined and applied by either court. The court stated that there was no basis to find that it would be difficult or expensive to obtain or present relevant evidence in Colorado or that either party would not receive an equally fair trial or enforcement of judgment would be more difficult in either forum. The court noted that arguably that there could be duplicative litigation and inconsistent outcomes but that it would not interfere with the current Illinois action and that “by insisting on litigating in Colorado, Mr. Stuart has chose to run the risk of having to litigate in two places.”

When dealing with complex transactions such as the acquisition of an entity, companies should be sure to place a high premium on attention to detail, including non-compete and forum selection provisions. Ensuring that all aspects of a deal, from purchase agreements to employment contracts, have been carefully drafted with every potential contingency accounted for can be a tedious task. However, doing so can save a company significant money by mitigating the number and impact of future disputes. Contract provisions such as a forum selection clause may appear trivial until they are forgotten.  In the case of Stuart v. Marshfield, consistent forum selection provisions in the APA and Employment Agreement would likely have allowed Marshfield to secure a favorable forum for all disputes between the parties, extinguished Stuart’s attempt to secure a perceived more favorable forum, and provided Marshfield with greater certainty and less expense in the enforcement of the non-compete provision against Stuart.