Also Dismisses First-Filed Delaware Action against Delaware LLC and Executive Where California Had a Materially Greater Interest in the Employment Dispute
In a pair of detailed decisions, the Court of Chancery dismissed claims against Scott Holsopple (Holsopple), the chief growth officer of Hightower Advisors and its affiliated companies, and Hightower Holding, LLC (Hightower), a Delaware limited liability company (LLC), in an action brought by Focus Financial Partners, LLC (Focus), a competitor to Hightower in the financial advisor space and Holsopple’s former employer. McCarter represented Hightower and Holsopple in this case.
The court’s initial ruling dismissed Holsopple for lack of personal jurisdiction and is significant because it is the first Delaware decision to perform a choice-of-law analysis at the pleading stage to void a Delaware forum selection clause under California Labor Code Section 925. That statute prohibits a California employer from circumventing California public policy against restrictive covenants by requiring its California resident employees, as a condition of their employment, to agree to litigate disputes arising out of their employment in another forum under another state’s laws. And from a Delaware entity law perspective, the court’s rejection of the application of Delaware’s internal affairs doctrine as part of its choice-of-law analysis reinforces that the internal affairs doctrine does not extend to a Delaware entity’s relationships with its employees and clarifies that the venerable doctrine does not apply to employment-related provisions connected to LLC units created under Delaware law.
At the time Holsopple was hired by Focus, and as a condition of his employment, he signed a unit agreement giving him incentive units in Focus’s parent company. In total, during the course of his employment, Holsopple signed five unit agreements in connection with his compensation as an employee of Focus. Each unit agreement contained employment-related provisions—including restrictive covenants (e.g., noncompetition provisions, nonsolicitation provisions, and confidentiality provisions)—and unit-related provisions—governing the initial grant, vesting, transfer, and restrictions on transfer of units. Each unit agreement also purported to state that Delaware law would govern its terms. By accepting these units, Holsopple also became party to Focus’s parent’s LLC operating agreement, which contained its own Delaware forum selection provision.
Holsopple eventually resigned from Focus and took a position with Hightower, and litigation ensued. Focus sued Holsopple and Hightower in Delaware (the Delaware action) alleging, inter alia, breaches of the restrictive covenants and seeking to enforce the Delaware forum and choice-of-law provisions in the unit agreements. Focus later amended its complaint to allege that Holsopple breached the Delaware forum selection provision in Focus’s parent’s LLC agreement by filing a suit in California (the California action), which sought, inter alia, a declaration that the restrictive covenants that Focus wanted to enforce in the unit agreements were void under California law. Holsopple and Hightower successfully defeated Focus’s request for a mandatory injunction that sought to prevent Holsopple and Hightower from proceeding with the California action.
The Court’s Rulings
At the motion-to-dismiss stage, the court concluded that Holsopple, a California resident and employee, was not subject to personal jurisdiction in Delaware because the purported Delaware forum selection clauses in the unit agreements were void under California Labor Code Section 925. The court’s choice-of-law analysis affirmed that California’s interest in protecting its resident-employees under Labor Code Section 925 is materially greater than Delaware’s generalized interest in freedom of contract.
In addition, relying on Delaware Supreme Court precedent, the court noted that employment-related disputes fall outside the scope of the internal affairs doctrine, and it explained that Delaware did not derive any significant interest in the employment-related provisions “from the status of the units as a form of personal property created under the auspices of Delaware law.” The court further explained that for purposes of seeking to enforce any employment-related provisions, Holsopple became subject to the Delaware forum provision in the LLC agreement as a condition of his employment, which would be subject to Labor Code Section 925. Notably, the court did not reach questions of whether the LLC agreement’s Delaware forum provision would apply to a claim arising under the LLC agreement itself or claims seeking to enforce the unit-related provisions. In dicta, the court suggested that cases of that sort would more traditionally implicate the internal affairs doctrine and could result in a different choice-of-law conclusion.
The following week, the court dismissed Hightower on forum non conveniens grounds under Court of Chancery Rule 12(b)(3). Under Delaware’s well-established Cryo-Maid framework, the court agreed that Hightower would suffer overwhelming hardship if forced to litigate in Delaware while the California action was proceeding, in part because of the greater interest that California held in resolving the employment dispute given its prior choice-of-law analysis. The court’s decision finding in favor of Hightower on forum non conveniens grounds is noteworthy for at least the fact that (a) Hightower is a Delaware LLC and (b) the Delaware action was filed before the California action, both of which could weigh against a finding of inconvenient forum but for the unique facts present in this case.
The case was Focus Financial Partners, LLC v. Holsopple, C.A. No. 2020-0188-JTL. Links to the court’s two opinions can be found here: Focus Financial Partners, LLC v. Holsopple, C.A. No. 2020-0188-JTL (Del. Ch. Oct. 26, 2020) (Slip Op.) and Focus Financial Partners, LLC v. Holsopple, C.A. No. 2020-0188-JTL (Del. Ch. Nov. 2, 2020) (Slip Op.).
Hightower and Holsopple were represented by Dan Silver, Travis Ferguson, and Alexandra Joyce of McCarter & English, LLP, and Pankit Doshi of McDermott Will & Emery LLP.
[Disclosure: the views expressed herein are the views of the authors and do not represent the views of any party to the litigation.]