When a defendant contests a court’s personal jurisdiction, the defendant may file a motion to dismiss the action under Rule 12(b)(2) of the Federal Rules of Civil Procedure or its state-court analog. Such a motion is typically decided before the court considers the merits of the plaintiff’s claims. If the court determines that it lacks personal jurisdiction, the case is dismissed at the outset and the plaintiff must seek relief in another jurisdiction that may have personal jurisdiction over the defendant.
One basis for a court’s personal jurisdiction is a forum selection clause under which the parties to a contract consent to the personal jurisdiction of the courts of a specified jurisdiction. However, if the alleged contract is not valid and binding on the parties, and there is no other basis for personal jurisdiction, the specified courts cannot exercise jurisdiction over the defendant.
In Eagle Force Holdings, LLC v. Campbell, C.A. No. 10803-VCMR (Del. Ch. Sept. 1, 2017), Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery found it necessary to conduct a trial to determine whether the document executed by the parties, which contained a forum selection clause, was a valid and binding contract. Following trial, she found that the parties did not enter into a valid and binding contract and dismissed the action under Court of Chancery Rule 12(b)(2) for lack of personal jurisdiction over the defendant. It was necessary for the Court to decide the merits of the case in order to resolve the jurisdictional issue.
The defendant, Stanley Campbell, developed “certain medical diagnosis and prescription technology.” Mr. Campbell and Mr. Richard Kay “decided to form a business venture” to market Campbell’s technology. Kay contributed cash and Campbell contributed the intellectual property. The two men “outlined the principal terms of the investment through two letter agreements,” and subsequently entered into a contribution agreement and an operating agreement to form a Delaware limited liability company, Eagle Force Holdings, LLC. The contribution agreement and the operating agreement both contained Delaware forum selection clauses.
Although the parties clearly had formed a business venture together, Campbell argued that the agreements were not valid and binding because the parties did not agree on certain “essential” terms, including the consideration he would contribute to the new company. The “precise scope” of the consideration was to be “captured” by two sections of the contribution agreement and four schedules to that agreement, but those portions were “either blank or inconsistent with the reality” known to the parties. For example, Campbell was to contribute all of the equity in two Virginia companies, but it was unclear whether some of that equity was held by the companies’ employees, so the schedule that would specify Campbell’s equity contributions was left blank (except for a bracketed reference to an employee equity participation plan).
The Court found that the parties “recognized that Campbell likely does not own 100% of the equity” in the two Virginia companies and had not obtained releases from the employees. Although the parties were aware of the problem, “they did not come to agreement on terms that addressed the reality.” The term was “material” to the parties because it bore on whether the two men would have equal equity and control in the new company. Because the parties had not completed negotiations on terms they considered “essential,” the Court ruled that they had not entered into a binding contract.
The Court also found based on the record at trial that Campbell did not “actively participate in the management of a Delaware limited liability company” and therefore was not subject to personal jurisdiction under Section 18-109 of the Delaware Limited Liability Company Act.
In this “unusual” business divorce case, although the action was dismissed for lack of personal jurisdiction, the plaintiff will not have a viable opportunity to pursue the defendant in another jurisdiction (for example, Virginia) because the substantive claims for breach of contract have already been decided – there was no valid and binding contract. The moral of the story: when signing a contract, take your time and make sure none of the schedules is left blank.
James G. (Jay) McMillan is a partner in the Wilmington, Delaware office of Halloran Farkas + Kittila LLP. He concentrates his practice in complex corporate and commercial matters, with a particular focus on litigation in the Delaware Court of Chancery. For information on the firm, visit hfk.law