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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 6 posts in Choice of Law.
Chancery Applies California Law Despite a Delaware Choice-of-Law Provision and Dismisses a Claim for Breach of a Non-Solicitation Provision in an Employment Agreement as Unenforceable under California Law
When a contract, executed by parties in a foreign jurisdiction, designates Delaware law as controlling, Delaware courts must first determine whether the choice-of-law provision is enforceable. In such cases, Delaware follows the Restatement (Second) of Conflict of Laws for the conflict-of-laws analysis. Under that analysis, Delaware courts will defer to the laws of the foreign jurisdiction if that jurisdiction’s laws (1) would apply absent the Delaware choice of law provision, (2) enforcement of Delaware law over the contractual provisions at issue would conflict with fundamental policy of the foreign jurisdiction, and (3) the foreign jurisdiction has a materially greater interest in enforcement (or non-enforcement) of the provision at issue than Delaware. In NuVasive, the Court ruled that California law would apply but for the contractual choice of law provision. In an earlier bench ruling, the Court found that California had a materially greater interest on the issue of whether a post-employment non-compete in the employment agreement was enforceable, and it voided the non-compete as violating fundamental California public policy. In this decision, the Court determined that a one year post-employment restriction on solicitation of customers and employees also violated the fundamental public policy of California as reflected in case law interpreting its business statutes. The Court then held that California had a materially greater interest in precluding non-solicitation covenants as part of its interest in “overseeing conditions of employment relationships” than Delaware had in enforcing its “fundamental but general interest” in freedom of contract. Accordingly, the Court granted the defendant’s motion for summary judgment to the extent the plaintiff’s claims were grounded on enforcement of non-solicitation covenants in the defendant’s employment agreement.
Delaware Superior Court Addresses Choice of Law Issues in the D&O Insurance Context and Requires Carriers to Cover Pfizer’s Litigation Costs
Pfizer Inc. v. Arch Insurance Co., C.A. No. N18C-01-310 PRW CCLD (Del. Super. July 23, 2019).
This case from the Delaware Superior Court discusses important D&O coverage exclusion issues that frequently arise during securities litigation. Pfizer sought coverage from its insurers in connection with the defense and settlement of a securities action in the Southern District of New York. Defendants, the excess insurers, denied coverage based on “related wrongful acts” exclusions in the policies. They argued that the action “arose out of” or “shared a common nexus” with another action in the District of New Jersey such that the D&O policies’ exclusion provisions precluded coverage. Noting that the contract interpretation result would likely be different if applying New York law rather than Delaware law, and that the policies lacked a controlling choice of law provision, the Superior Court first applied the Restatement’s “most significant relationship” test to determine which state law should apply. Although some of the Restatement Section 188 factors tipped in favor of New York, the Court ruled that application of Delaware law was most consistent with the parties’ reasonable expectations at the time of contracting and with the Delaware choice of law precedent for D&O policies. For such policies, under Delaware law, the state of incorporation, rather than the state where the corporation is headquartered, has the most significant relationship. This also was consistent with the parties’ choice of Delaware law in the policies to govern arbitration or mediation of their disputes. Applying well-settled Delaware law to the interpretation of the policy provisions, the Court found the two actions were not “fundamentally identical.” Thus, the exclusion did not apply and the insurers were obligated to cover the costs. More ›
Delaware will enforce non-compete agreements against former employees, but generally California law bars such agreements. This decision explains how to determine which state’s law applies by looking to how important is the public policy of each state on the issue before the Court. Because California does enforce a choice of Delaware law when that choice is the subject of negotiation, not coercion, the Delaware choice of law was upheld. Note that under a different California statue then in force, a contrary result was reached in the Ascension Insurance Holdings v.Underwood case.
This decision holds that a contractual provision adopting Delaware law will generally be upheld. However, when applying Delaware law will violate the public policy of another state whose law would have applied but for the contractual choice of law, Delaware will not enforce that choice of law. This distinguishes the Ascension case that declined to apply Delaware law to a non-compete contract that violated California law.
Delaware District Court Finds That Controlling Stockholder Claim Falls Outside Of Forum Selection Bylaw
Forum selection bylaws are a powerful tool for companies to avoid the burdens of multi-forum litigation. But those bylaws only cover the claims falling within their terms. Where, as here, the bylaw only covers fiduciary duty claims against officers and directors, the bylaw will not be enforced for a fiduciary duty claim against a controlling stockholder.
Section 115 of the Delaware General Corporation Law addresses forum selection provisions in corporate charters or bylaws. This decision explains how a contract may also select a forum, how to interpret such a contract and how such contractual provisions may be incorporated into other contracts.