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Chancery Court Dismisses Suit for Breach of Non-Competition Covenant Due to Lack of Personal Jurisdiction

By Francis G. X. Pileggi, Esq.

Mobile Diagnostic Group Holdings, LLC v. Suer,  Del. Ch., No. 4298-CC (March 24, 2009), read opinion here.

Kevin Brady, a highly respected Delaware litigator, provides us with the following review of this decision.

Chancellor Chandler dismissed this action seeking to enforce the terms of non-competition covenants that defendant Suer allegedly agreed to in connection with the sale of his employer to plaintiffs. Defendant moved to dismiss for lack of personal jurisdiction. The Court agreed concluding that the plaintiffs failed to meet their burden of showing that there is a statutory basis for personal jurisdiction over the defendant in Delaware or that the defendant consented to personal jurisdiction.

This dispute arises out of a number of agreements: (i) an employment agreement between plaintiff Kan-Di-Ki- Incorporated (the 'Company'), a provider of mobile diagnostic laboratory and x-ray services, and defendant sales professional, Suer; (ii) a Purchase Agreement regarding the sale of the Company which was signed by certain plaintiffs and Suer; and (iii) a Consulting Agreement between Suer and plaintiff DL Holdings. Plaintiff DL Holdings terminated Suer on November 6, 2008 and on January 13, 2009, Suer's attorneys notified plaintiffs that they intended to advise Suer that he was not bound by the non-competition covenants in the Purchase Agreement. Plaintiffs filed suit on January 16, 2009 and Suer moved to dismiss for lack of personal jurisdiction.

Two-Part Test to Determine Personal Jurisdiction

Chancellor Chandler applied a two-prong analysis to determine whether the plaintiffs satisfied their burden of showing a basis for personal jurisdiction in Delaware over a nonresident defendant: (i) whether there was a basis for jurisdiction under Delaware's long-arm statute, 10 Del. C. § 3104; and (ii) whether subjecting the nonresident to jurisdiction in Delaware violates the minimum contacts requirement of the Due Process Clause of the Fourteenth Amendment. Because the defense of lack of personal jurisdiction is a personal right that can be obviated by express or implied consent to jurisdiction, the Court's analysis turned to whether there was an express or implied waiver by Suer.

Consent

Plaintiffs argued that there was implied waiver because Suer 'consented' to jurisdiction in Delaware with respect to claims arising out of the Purchase Agreement when he signed the service of process provision in the Purchase Agreement. This provision provided that 'each party may be served with process in any manner permitted under Delaware Law….' The Court rejected that argument because the service of process provision in the Purchase Agreement was 'an independent and separate provision, not rendered superfluous by a lack of consent to jurisdiction in Delaware.' The Court also referred to § 12.12 of the Purchase Agreement, which included language that indicated that the parties to the Purchase Agreement agreed to be subject to jurisdiction in a court 'having jurisdiction over the parties and the matter.' That provision did not specify which court(s) would have such jurisdiction. However, it was clear to Chancellor Chandler that 'the parties contemplated the issue of jurisdiction in the contract and chose not to include a provision whereby the parties consented to personal jurisdiction in any particular forum. Rather, the parties agreed to be subject to jurisdiction in a court ‘having jurisdiction over the parties.''  As a result, the Court concluded that there was no evidence to find that Suer had consented to personal jurisdiction in Delaware.

Long-Arm Statute

Under Delaware's long-arm statute, Delaware courts can exercise personal jurisdiction over a defendant for a claim that 'arises from' a 'jurisdictional act' enumerated in the statute. Plaintiffs argue that Suer is subject to specific jurisdiction under § 3104(c)(1), which confers jurisdiction over a nonresident who '[t]ransacts any business or performs any character of work or service in the State. Plaintiffs argue that § 3104(c)(1) confers jurisdiction over Suer because he signed and participated in negotiations regarding the Purchase Agreement. The Court disagreed finding that '[i]t is well settled law that a contract between a Delaware corporation and a nonresident to . . . transact business outside Delaware, which has been negotiated without any contacts with this State, cannot alone serve as a basis for personal jurisdiction over the nonresident for actions arising out of that contract.'

Plaintiffs then attempted to match the facts of this case with the factual setting in In re General Motors (Hughes) Shareholder Litigation, 2005 WL 1089021 (Del. Ch. May 4, 2005), where an action was brought regarding breaches of fiduciary duty (as opposed to breaches of contract as here). That Court found that jurisdiction was proper where the defendant, a South Australian corporation 'negotiat[ed] and engag[ed] in a transaction between itself, an indirect Delaware subsidiary . . . and another Delaware corporation . . . in which Delaware law was to be applied', and the transaction included 'necessary acts by the parties in furtherance of that transaction [which] would be taken in Delaware.' Chancellor Chandler determined that Delaware's interest in providing a forum for claims regarding the internal affairs of Delaware corporations justified concluding in General Motors that the relatively minor act of filing the Certificate of Merger in Delaware constituted a basis for personal jurisdiction in Delaware.

In this case, the plaintiffs contended that the creation of the entities that were used to acquire the Company constituted a jurisdiction-conferring act in Delaware. Chancellor Chandler disagreed finding that Suer's involvement with the Purchase Agreement and his connection to the alleged jurisdiction-conferring act were not sufficient to support the conclusion that Suer transacted business in Delaware within the meaning of § 3104(c)(1) and to hold otherwise would constitute an 'unwarranted extension of the holding in General Motors.' Moreover, the plaintiffs failed to establish a sufficient nexus between Suer and the alleged jurisdiction-conferring act in Delaware.

As a result of the above, the Court dismissed the claims against Suer but said that the plaintiffs were free to pursue their claims against Suer in a court that has jurisdiction over the parties and the matter.

 

Full post as published by Delaware Corporate and Commercial Litigation Blog on March 30, 2009 (boomark / email).