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State Courts Continue to Wrestle With Jurisdictional Conflicts

Articles & Publications

November 16, 2011
By: Edward M. McNally
Delaware Business Court Insider

What happens when two courts in different states have the same case? Delaware courts, both state and federal, frequently face that question.

A Delaware entity may be sued in Delaware because that is its place of incorporation. Particularly in class action litigation, the Delaware entity may also be sued by a second plaintiff in another jurisdiction where that plaintiff resides, on the same claim brought in Delaware.

In just the last few weeks, the Delaware Court of Chancery and the federal District Court in Delaware have provided guidance of what they will do when faced with multijurisdictional litigation.

First, the Delaware Court of Chancery has clearly stated how it will react to such multijurisdictional litigation. In December 2010, the court expressed its concerns over potential forum-shopping of settlements of multijurisdictional litigation. Briefly, the fear was that corporate defendants would cherry pick the most compliant plaintiff or the easiest jurisdiction to obtain approval of a settlement. They would then try to impose the settlement on all the parties in all the cases pending in several jurisdictions.

The court appointed a special counsel who prepared an extensive report. The court was reassured that unfair settlements were not being forced on parties by any collusive process. The report went on to suggest that the litigants in multijurisdictional litigation should provide pleadings and other pertinent information to each court involved in the litigations and that the courts communicate with one another about any proposed settlement.

That approach is working to satisfy the Court of Chancery's concerns over settlements of multijurisdictional litigation. The Court of Chancery will coordinate with the other courts involved, agree on which court will review any proposed settlement, and even allocate a fee award among all plaintiffs' counsel.

On the broader question of what court should actually proceed with the litigation going forward after several cases are filed, the Court of Chancery recently outlined its preferences. In a scheduling conference on Nov. 7 in the Southwall Technologies litigation, Vice Chancellor J. Travis Laster concluded that "it makes sense that the case should proceed in the jurisdiction whose law governs the dispute."

In practical terms, that means a Delaware court will proceed when Delaware corporate law is involved. That will occur even if another case may have been filed earlier than the Delaware case. That result is appropriate because a Delaware court is at least marginally more familiar with Delaware corporate law than a non-Delaware court and only the Delaware Supreme Court can give definitive answers to Delaware corporate legal issues.

Note that this does not mean that every case involving Delaware law will go forward in Delaware even when similar litigation is pending elsewhere. Delaware's courts rightly claim expertise in the highly textured Delaware corporate law. In other areas of the law, however, Delaware jurisprudence is not always so specialized. For example, Delaware contract law generally follows the substantive law of most other jurisdictions.

Under established Delaware precedent, cases first filed outside of Delaware may well proceed while the Delaware court stays any proceedings before it. But as the corporate cases seem to generate the most multijurisdictional litigation, the court's views expressed in Southwall Technologies are often applicable.

This difference between corporate litigation and other litigation is well illustrated by the Delaware Federal District Court's Nov. 7 decision in Corporate Employment Resources Inc. v. Boone.

The Boone case involved a classic "race to the courthouse." According to the opinion, when James E. Boone left his job with Corestaff Support Services Inc. (one of the plaintiffs in this case), he immediately filed a declaratory judgment suit in Georgia. He sought to enjoin the enforcement of his noncompete agreement with Corestaff on the grounds that under Georgia law the agreement was unenforceable. A Georgia judge agreed with Boone, even though the agreement had a choice of law provision selecting Delaware law and that law would have enforced the noncompete agreement.

After Corestaff and its parent company filed suit in Delaware and Boone had the action removed to federal court, the Delaware District Court transferred the case to the Northern District of Georgia.

Why did that happen? The Delaware District Court based its decision on: (1)Boone filed first in Georgia where he lived; (2) the noncompete agreement did not have a forum selection clause; and (3) only Delaware general contract and conflicts law were involved that another court might interpret.

Of all of these, the lack of a forum selection clause was most important. Had the agreement provided for a Delaware forum, the Delaware court would have had jurisdiction over Boone and his attempt to circumvent that jurisdiction by rushing to a Georgia court would have been unsuccessful.

This choice of forum has big consequences to the parties. The Delaware District Court in another case refused to apply Louisiana law to declare a noncompete agreement unenforceable, even when the former employee resided in Louisiana and its law may have invalidated his noncompete agreement. In that case, the agreement did select Delaware law and Delaware as a forum for all disputes and the former employer was a Delaware corporation. When the Delaware court upheld the Delaware choice of law, it enjoined a violation of the noncompete agreement. Thus, the choice of forum affected the substantive result.

This brief review points out the importance of forum selection and the effect on that selection by considering what substantive law applies. Delaware courts are most likely to proceed when faced with multistate litigation when Delaware corporate law is involved. They are even more inclined to do so when a forum selection clause chooses Delaware. The choice of the forum that proceeds may affect the outcome of your case.

However, only choosing the substantive law to apply to any dispute is not sufficient to ensure that law will be used by a court in all cases. Instead, it is also a good idea to chose the forum for any dispute to ensure that law will be applied.

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