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Non-Compete Agreements Are Getting Even More Personal

In crafting their non-competes, employers often focus on the “big ticket” questions: How long can a former employee be sidelined? How large of an area can the former employee be prevented from working in? What type of conduct can the former employee be restricted from doing? Given that the answers to these questions have a large practical impact on an employer’s operations, it is perhaps unsurprising that the more abstract concept of personal jurisdiction does not often steal the spotlight. But, in light of a recent decision by the Court of Chancery of Delaware, perhaps it should.

In EBP Lifestyle Brands Holdings, Inc. v. Boulbain,1 the Delaware court encountered a California-based company (incorporated in Delaware) that was attempting to enforce a non-compete agreement against a former California employee. Though both parties were rooted in California, the non-compete agreement’s choice of law clause stated that Delaware law applied. By its own admission, the employer wanted Delaware law and a Delaware court, because it believed a California court would not enforce a non-compete as a matter of public policy. Prior to determining whether the clause was enforceable, however, the Delaware court was confronted with the fundamental question of whether it had personal jurisdiction over the former employee — in other words, should a Delaware court hear a dispute regarding an individual defendant from California?

The answer to the threshold question of whether the court could exercise personal jurisdiction over the employee was a resounding “No.” At the outset, the court noted the former employee had not transacted any business in Delaware. Although the former employee owned stock in a Delaware corporation and had signed a non-compete with a Delaware choice of law clause, the court noted he had “done nothing to invoke Delaware law or avail himself of its protections.” The former employee neither lived nor worked in Delaware, nor had he consented to jurisdiction there. Critically, the employee neither drafted nor negotiated the contract, and the court rejected the employer’s argument that by serving as vice president for a competitor, the former employee availed himself of Delaware law by virtue of the competitor’s sales there. Because the court concluded it lacked jurisdiction to hear the case, it never even reached the discussion of whether the non-compete was enforceable. 

There are several lessons to be learned here. First, when crafting a non-compete, employers should consider not only the terms of the non-compete itself, but also give serious thought as to where a potential lawsuit would take place. Second, when including a choice of law provision, it may also be wise to include consent to jurisdiction and venue clauses. Such clauses were noticeably absent in Boulbain and, although they may not be a panacea to a personal jurisdiction challenge, they make some headway against the argument that an employee has not purposely availed themselves of a particular jurisdiction. Finally, consider making part of the duties of the employee relate to the chosen jurisdiction. Have the employee execute the agreement in that jurisdiction and require the employee to attend at least annual meetings there. Because time is of the essence in any non-compete dispute, an employer can ill afford to waste time battling over jurisdiction issues. Some states, such as Texas, may apply the chosen law while others such as California may not.

So, employers need to be mindful of forum and jurisdictional issues; and by doing so, they may greatly reduce their risk of having their non-compete enforcement suits tossed at the early stages.

1 No. CV 2017-0269-JRS, 2017 WL 3328363, at *1 (Del. Ch. Aug. 4, 2017). 

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.