Delaware has long been favored by businesses for many reasons, including its courts’ deference to parties’ ability to contract. Recently, however, the Delaware Chancery Court was seemingly less deferential to restrictive covenant agreements in circumstances outside of the traditional employment agreement context. In Cantor Fitzgerald, L.P. v. Ainslie, the Court, in a well-reasoned decision which arguably included a surveyContinue Reading Delaware Supreme Court Curbs Erosion of Forfeiture-for-Competition Protections
M&A attorneys representing buyers, and their private equity and strategic clients, have long felt comfortable that the courts would uphold restrictive covenants in an acquisition. Even if the restrictive covenant at hand was perhaps somewhat broader than necessary, buyers and their counsel believed that the courts would judiciously apply their “blue pencil” to reform an overbroad covenant to make it enforceable. They also believed that by picking Delaware law and Delaware courts to hear any dispute, their restrictive covenants would be upheld by a court that has a well-deserved reputation for enforcing contracts.Continue Reading A Delaware Surprise: Busting the Limits of Enforceability of Non-Competes in an M&A Transaction under Delaware Law
Consistent with many jurisdictions which have adopted the Uniform Trade Secrets Act, Delaware’s version expressly preempts common law claims based on the misappropriation of trade secrets. See 6 Del. C. § 2007. In a recent opinion, Vice Chancellor Slights of the Court of Chancery dismissed a claim for unjust enrichment based on defendant’s alleged misappropriation and use of plaintiff’s confidential and proprietary data because Delaware’s trade secret statute “occupies the filed” and preempts claims for common law unjust enrichment.
Continue Reading Spam Trap Evading Plaintiff Falls into Statutory Preemption Trap under Delaware Trade Secret Act
Delaware has long been one of the jurisdictions most friendly to the interests of corporations and is the state of incorporation for a significant majority of corporations. While that trend does not seem likely to change, a new Delaware Chancery Court decision should give pause to choice of law decisions of Delaware…
Continue Reading Beware of the Delaware Choice of Law in Non-Compete Agreements
Summary. Many courts testing the validity of a contractual forfeiture-for-competition provision use a “reasonableness” standard. Recently, however, a Missouri district court judge aligned himself with the minority view and held that regardless of whether the provision in an …
Continue Reading Missouri Federal Court Finds Forfeiture-For-Competition Provision in Stock Option Agreement Enforceable
Using a forum selection clause to transfer a case out of California federal court may have become easier thanks to a recent order from Judge Koh of the United States District Court for the Northern District of California. In her order, Judge Koh granted defendants’ motion to transfer plaintiff’s complaint to Delaware federal …
Continue Reading California Federal Court Ships Fiduciary Duty and Unfair Competition Suit to Delaware Based Upon Forum Selection Clause
A high profile trade secret dispute among the board members of one of the fashion world’s most well-known companies has the American fashion elite taking sides. Last month, Christopher Burch filed a breach-of-contract and tortious interference complaint against his ex-wife, fashion mogul Tory Burch, in Delaware Chancery Court. In response, Tory filed counterclaims in early November, in which she accused…
Continue Reading Breach of Fiduciary Duty and Trade Secret Misappropriation Alleged In “Preppy Clothing Dispute” Involving Fashion Designer Tory Burch
On July 11, 2012, the Delaware Court of Chancery found that former employees are not indispensable parties for purposes of dismissal pursuant to Chancery Court Rule 19 in an action against their new employer for breach of covenants not to compete, misappropriation of trade secrets, and aiding and abetting a breach of fiduciary duty, based on allegations that the new…
Continue Reading Delaware Chancery Court Rules That Former Employees Are Not Indispensable Parties in Non-Compete Case
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.Continue Reading Colorado Federal Court Decision In Non-Compete Dispute Demonstrates Importance Of Drafting Enforceable Forum Selection Provisions In Business Transactions
Delaware Court of Chancery Vice Chancellor J. Travis Laster, faced with an unreasonable non-compete/non-solicitation agreement, indicated that he would have preferred to hold it invalid but said that he had no choice other than to modify its terms because its Maryland choice-of-law provision requires judicial “blue penciling.” He did enjoin the ex-employee from using his ex-employer’s customer list, a trade secret…