Delaware Business Litigation Report

Chancery Dismisses Action Involving Unusual Issue of Personal Jurisdiction

Sustainability Partners LLC, v. Jacobs, C.A. No. 2019-0742-SG (Del. Ch. June 11, 2020)

In this action involving “an unusual issue of personal jurisdiction,” plaintiff Sustainability Partners LLC (“SP” or the “Company”) sought a declaratory judgment that defendant, a former SP employee (the “Defendant” or “Jacobs”), had no rights under a purported oral agreement between the Defendant and the Company. Despite the fact that Jacobs was not a signatory, the Company claimed that there was personal jurisdiction over Jacobs pursuant to the forum selection clause in the Company’s Operating Agreement based on a theory of equitable estoppel. The Court of Chancery disagreed and dismissed the action for lack of personal jurisdiction pursuant to Chancery Court Rule 12(b)(2). 

Jacobs was a former at-will employee of SP who later served as an independent contractor for the Company. Jacobs never signed the form independent contractor agreement provided to him by the Company because it did not include entitlement to any equity interest in the Company. After being terminated by the Company, Jacobs asserted that the Company breached an oral agreement between Jacobs and the Company’s CEO by which Jacobs was to receive an equity transfer (the “Oral Agreement”). In response to this assertion, the Company filed a declaratory judgment action against Jacobs seeking a declaration by the Court of Chancery that Jacobs had no rights under the Oral Agreement.

The Court first noted that the positions of the parties in this case were “turned about”—SP would have been the natural defendant in a breach of contract action brought by Jacobs to enforce the alleged Oral Agreement. The sole basis by which the Company claimed there was personal jurisdiction over Jacobs, a California resident, was through a forum selection clause in the Company’s Operating Agreement to which Jacobs was not a party. While denying that any agreement existed entitling Jacobs to equity, the Company claimed that “had the Oral Agreement existed [] it would have provided (via the Operating Agreement) for Delaware jurisdiction.” While neither Jacobs nor the Company contended that Jacobs had ever actually received any equity interest, the Company argued that, by asserting entitlement to equity via the Oral Agreement, Jacobs was bound by the Operating Agreement—including the forum selection clause—pursuant to the doctrine of equitable estoppel.

In finding that equitable estoppel did not apply here, the Court noted that, as a non-signatory, equitable estoppel could only apply if Jacobs was a third-party beneficiary or closely related to the Operating Agreement. The Company asserted that Jacobs was “closely related” to the Operating Agreement because, (1) if the Oral Agreement was valid, Jacobs could receive a benefit from the Operating Agreement, and (2) it was foreseeable that he would be bound by the Operating Agreement. The Court rejected the argument that Jacobs was “closely related” to the Operating Agreement because any “benefit” Jacobs might receive was merely a contemplated benefit—not an actual benefit—which did not suffice for purposes of estoppel. The Court also rejected the Company’s foreseeability argument, noting that, when foreseeability is the standalone basis for finding a party to be “closely related” to a contract, it would only be applied in a situation like this if the non-signatory defendant sought to enforce the forum selection clause and the plaintiff sought to avoid it. Thus, the Court dismissed the Company’s action for lack of personal jurisdiction

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