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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.
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