Many companies include a provision in their employment agreements specifying that any dispute arising out of the agreement, including disputes regarding the enforcement of restrictive covenants, will be litigated exclusively in Delaware courts. Such a clause, generally referred to as a forum selection clause, is presumptively valid and will be enforced unless the party opposing enforcement shows that the clause is unreasonable, unjust or was procured by fraud. Additional expense or inconvenience do not demonstrate unreasonableness.
Including a clause designating Delaware as the exclusive forum for litigation has significant advantages. First and foremost, such a clause provides access to Delaware's courts, including the Delaware Court of Chancery, in circumstances where an injunction is sought. Business groups, including the United States Chamber of Commerce, routinely rank the Delaware court system as the best in the nation. Disputes before the Court of Chancery are resolved by knowledgeable judges, not juries, who have expertise in business disputes and explain the reasons for their decisions in written opinions. The Court of Chancery also resolves disputes expeditiously.
It is not unusual in the restrictive covenant context for injunctive hearings to be scheduled days after suit is filed and for a final hearing to be held within three or four months thereafter. Given the benefits of litigating in Delaware, we strongly recommend considering an exclusive forum selection clause designating Delaware as the forum of choice in your employment agreements.
In addition to forum selection clauses, many companies choose Delaware law as the law that will govern any disputes arising out of an employment agreement, including those regarding restrictive covenants. Where a contract involves aggregate consideration of $100,000 or more, a Delaware statute (6 Del. C. § 2708) provides that a provisions in a contract designating Delaware law as the law governing the contract will be enforced, provided that the parties to the agreement are subject to the jurisdiction of Delaware courts. Therefore, where the consideration for a non-compete provision exceeds $100,000, the courts of Delaware will rely on Delaware law to interpret and construe the contract, even if the contract and relationship between the parties is centered in a different jurisdiction. However, where the aggregate consideration is less than $100,000, courts will apply a common law test to determine whether a choice of Delaware law in a contract should be honored. In that circumstance, a court reviewing a contract with a Delaware choice of law provision will enforce the provision and apply Delaware law only if Delaware has a material connection to the employer/employee relationship. Materiality exists if a party's principal place of business is located in Delaware, a majority of the activity underlying the dispute occurs in Delaware, or where parties to the employment contract performed most of their services in Delaware. If Delaware does not have a material connection to the employer/employee relationship, we recommend including a Delaware forum selection clause but designating a state other than Delaware under a choice of law provision.
Companies select Delaware law because (a) Delaware is an at-will state and its courts recognize that restrictive covenants are necessary to prevent competitors from poaching employees and their valuable know-how; (b) Delaware courts recognize the freedom of contract and tend to enforce restrictive covenants as written (subject to reasonableness as to scope and duration); and (c) Delaware has a well-established body of case law detailing what is reasonable with regard to scope and duration of restrictive covenants and generally will reform, rather than strike down in total, provisions found to be unreasonable. Thus, while other states, such as California, eliminate or significantly limit an employer's right to enforce restrictive covenants, Delaware recognizes their utility and generally upholds their terms when reasonable.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
