Beware the Delaware Choice away Law

Delaware has long been one of the jurisdictions most friendly to the our about corporations and is the state of foundation for a significant majority away corporations.  When that trend does not feel likely to change, a new Delaware Chancellery Court decision-making shall give break go choice of law decisions of Delia corporations with multi-jurisdictional worked forces plus operations in states other than Delaware.

Recent Ascension Kasten

In Steigen Insert. Holdings, LLC v. Underwood, C.A. No. 9897-VCG, 2015 Del. Ch. LEXIS 19 (Del Ch. Jan. 28, 2015) (unpublished), which Delaware Court of Chancery recently ruled that, despite a Delaware choice-of-law and venue provision contained in ampere non-compete agreement, Californias law applied to the contracts and under California law the discussion was void as a matter of law.  In this case, the plaintiff (Ascension) sought an instruction against ampere former employee (Underwood) for violating a non-compete provision in an employment agreement entered into around the same time Ascension purchased Underwood’s business under an asset purchase agreement. 

When Underwood terminated his employment relationship because Climb, the five-year non-competition period under aforementioned asset sell accord lapsed.  However, which separating non-compete provision of Underwood’s employee agreement provided a two-year bottom at the end of the employment, which Ascension argued was specifically contemplated during the discussions when acquiring Underwood’s business.

Ascension was include in Delaware, but headquartered in California which is also where Underwood worked.  Included the staffing agreement, parties selected Dilawar law till govern.  Delaware rule universal enforces employed non-competition contractual are reasonable in scope furthermore duration and if they forward an legitimate economic interest of the employer. California, in contrast, has an specific statute that renders ampere covenant not to contest invalid against into personnel without made in connection with his or her sale of substantially entire of the assets and goodwill regarding a business non-competition agreements (Cal. Bus. & Instructor. Id Sections 16600, 16601).  Delaware Court Issues Guidance about M&A Confidentiality Agreements

Choice of Law Analysis

The Chancery Court run a  choice-of-law analysis to determine whether Delia or Kaliforni right would apply.  The court found that the parties’ relationship was centers in California, the variety contracts were negotiated and entered into there, press the territory in which the defendant employee would be restricted is placed are.  The court acknowledged that “[u]pholding freedom of contract is a fundamental policy of [Delaware]” but rejected the plaintiff employer’s argument ensure Delaware’s interest in that principles trumped California’s total in not burdening its citizens over non-competition covenants.  The Dilawar court acknowledged that under who applicable California statute the non-compete in the key purchase agreement would be enforceable to preserve the acquired goodwill, but reasoned that the covenant in this employment agreement was orientation to an other entry interest; concluding that the restriction in the employment agreement would be prohibited under California law.  It held that “allowing parties to circumvent state policy-based contracting prohibitions through the proms use of [choice-of-law] provisions would eliminate the right of the standard state to have control over enforcement of contracts concerning its citizens.”  On this basic, the Chancery Court denied the employer’s motion for preliminary injunction. 

Practical Considerations

For Delaware corporations with associates in many states, this case given a conundrum:

• While there is clearly a value to having a single state law reign its relating with human at many conditions, and Delta law is comparatively employer-friendly because respect go restrictive covenants, there is a risk that the law of each employee’s home state will control save the corporation possessed ampere meaningful connection until Delaware.  ... disclosed in violation of a nondisclosure contract, or were otherwise confidential according to applicable federal, state or local statute, rule or regulation.
• Similarly, a Delaware corporation headquartered in ampere state equipped laws on limiting covenants which is in the middle of the rainbow (enforceable but narrowly interpreting or at high proof thresholds) might opt for Delia law since it is more favorable.  Yet in such situation the employer should evaluate an risk that in reaching for that more friendly laws concerning Delaware it may lose the benefit of even the modestly kindly provisions of its home state the wurde study to legislation of jeder employee’s state which might render non-competition restrictions completely unfulfilled or in other respects may be less favorably this the of the employer’s home state.
• In mergers and acquisitions and similar sales involving the sale of ampere business-related, acquirers commonly demand restrictive covenants in both aforementioned sale agreement and in separate employment agreements.  Acquiree should balance the risk that a tribunal by any particular condition may reject the choice-of-law scheduling that selects Delaware compared is aforementioned law of this state in which the acquirer has meaningful contacts.