Delaware Business Litigation Report

Chancery Holds California Statutory Bar to Choice-of-Forum Clauses in Employment Contracts Prevents Exercise of Personal Jurisdiction – Despite Parties’ Choice of Delaware Law and Agreement to Litigate in Delaware

Focus Fin. Partners, LLC v. Holsopple, C.A. No. 2020-0188-JTL (Del. Ch. Oct. 26, 2020).
Delaware law promotes freedom of contract, and Delaware courts enforce contractual choice-of-forum and choice-of-law provisions, including those in employment-related contracts. Recently, however, several Delaware cases have considered whether such provisions can be enforced against non-residents in the face of contrary substantive law or fundamental public policy in their home jurisdiction. In California, a statute (“Section 925”) makes choice-of-law and choice-of-forum provisions voidable by the employee if the provisions appears in an agreement signed as a condition of employment. Here, the Court addressed how to reconcile Section 925 with the parties’ agreement to resolve disputes in Delaware and to apply Delaware law. Specifically, when the defendant (a former employee who lives and works in San Francisco) was hired, he received incentive units pursuant to agreements that contained restrictive covenants and selected Delaware as the exclusive forum for disputes, and selected Delaware law as the applicable law. The plaintiff brought suit in Delaware to enforce the restrictive covenants, and the employee moved to dismiss for lack of personal jurisdiction.

After a lengthy choice-of-law analysis, the Court concluded that California law controlled and that the Court lacked personal jurisdiction. The Court reasoned that the Unit Agreements’ choice-of-law provisions “pass muster under Section 187(a) but fail under Section 187(b)” of the Restatement (Second) of Conflict of Laws. That is, Delaware had a substantial relationship to the transaction and the selection of Delaware law was not unreasonable under Section 187(a). But the Delaware choice-of-law and exclusive forum provisions did not pass muster under Section 187(b), under which parties may not choose a state’s law that conflicts with the fundamental policy of a state with a materially greater interest in the dispute, whose law would otherwise apply. Here, the Court concluded that California law should apply because California’s interest in protecting its employees overrides Delaware’s general interest in promoting freedom of contract. The former employee accordingly had the right to void the Delaware choice-of-forum under Section 925. Because no other basis for personal jurisdiction existed, the Court dismissed the case against the former employee.

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