02 November 2020

Delaware Won’t Let Just Anybody In

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Perhaps because it addresses the usually unexciting topic of forum non conveniens, a recent decision by Vice Chancellor Laster has flown largely under the radar. In Focus Financial Partners, LLC v. Holsopple, C.A. No. 2020-0188-JTL (Nov. 2, 2020), the Court issued a characteristically in-depth analysis of that sleepy doctrine in a case involving claims relating to the enforcement of a noncompete.

The Focus decision is worthy of attention not only for its in-depth treatment of the doctrine, but also because it reaches what is — at least superficially — an unlikely conclusion. Specifically, the Court dismissed the plaintiff’s claims on forum non grounds despite (i) the complaint having been first-filed in Delaware; and (ii) the relevant contract having contained both Delaware forum and choice-of-law provisions.

The facts are as follows:  Focus “conducts business in the wealth management industry,” including by “provid[ing] services to investment advisors.” Scott Holsopple was employed by Focus from 2015 to 2020, during which time he primarily worked out of its San Francisco office. Holsopple helped develop Focus’s “proprietary methods, processes, and strategies for pursuing prospective investment firms.” Holsopple’s employment contract contained non-compete, Delaware-law and Delaware-forum provisions.

In January 2020, Holsopple resigned from Focus and a month later joined a competitor called Hightower Holdings. Before he resigned, Holsopple allegedly downloaded and sent himself “confidential information and trade secrets” concerning Focus’s prospects, which he then utilized while at Hightower.

In March 2020, Focus sued both Holsopple and Hightower in the Court of Chancery. Five days later, Holsopple and Hightower sued in California state court, seeking a declaration that the non-compete, forum, and choice-of-law provisions were invalid and unenforceable under California law. In an earlier decision, the Court of Chancery had dismissed Holsopple for lack of personal jurisdiction, so at the time of the recent decision only Hightower remained a defendant in Chancery.

In assessing whether the case against Hightower should proceed in Delaware or California, the Court considered the well-established “Cryo-Maid factors,” based on a more-than-50-year-old precedent. As the Court explained, under Cryo-Maid and its progeny, where a case is first-filed in Delaware, a defendant generally will be able to obtain forum non dismissal only upon a showing that litigating in Delaware would result in “overwhelming hardship.” The Court found this high bar satisfied for the following reasons (among others).

First, the Court noted that, “[a]lthough the test sounds extreme,” it is not preclusive and should be viewed only as requiring that the Cryo-Maid factors weigh “heavily and decisively” in favor of dismissal.

Second, the Court had earlier determined that the Delaware-forum provision was unenforceable.  Focus had invoked the Delaware forum provision in an effort to establish that the Court had personal jurisdiction over Holsopple. The Court held that California law should govern the validity of the Delaware-forum provision, and that such provision was unenforceable under California law. Accordingly, for the same reason that the provision could not support personal jurisdiction, so too was it unhelpful in establishing Delaware as the proper forum.

Third, the Court found that while the Delaware action “technically was filed first,” the race to the courthouse was won “only by a nose.” Moreover, despite the Delaware action being earlier-filed, the California action was “more advanced,” having proceeded into discovery, and the California court had the benefit of being able to exercise jurisdiction over Holsopple.

Fourth, despite the Delaware choice of law provision in Holsopple’s employment contract, Vice Chancellor Laster found that the case in fact presented significant issues under California law. Interestingly, the Court noted that Focus would not be disadvantaged because, by dismissing the action on forum non grounds, Focus would no longer be “wedded to arguing that Delaware law should apply as part of its effort to stay in this forum,” and could thereafter seek to invoke New York law.

Fifth, and finally, the Court found the other Cryo-Maid factors — access to proof, compulsory process, and “other” factors affecting administration of justice — to be of less importance, but nonetheless to weigh in favor of dismissal. The case was framed to be “fundamentally an employment dispute” involving an individual who lived and worked in California.

Notably, the Court criticized Focus for “forum shopping,” not only by rushing to file a complaint in Delaware, but even by the mere act of “prospectively” including the Delaware-forum and law provisions in its “standard-form agreement.” In other words, and counterintuitively, the plaintiff’s use of contractual tools intended to allow it to take advantage of the Delaware courts ultimately weighed against its ability to proceed in Delaware. The Court indicated, however, that the result may have been different had the contract been freely negotiated.

While it is tempting to limit the import the Focus decision to its particular facts, it shows that even the most carefullyconstructed contract will not guarantee a seat at the Chancery table.