In June 2019, David Dunwoody (“Dunwoody”) left his position as President of EnVen Energy Corporation (“EnVen”) amidst a scandal centering around his alleged involvement in a kickback scheme. Dunwoody sued EnVen, the oil exploration company that he co-founded in 2014, in Texas state court to demand that EnVen honor the benefits package that Dunwoody was entitled to upon termination of his employment agreement for “good reason.” EnVen denied that Dunwoody had “good reason” for terminating his employment and argued that Dunwoody had simply resigned and was therefore not entitled to receive the severance package provided for in the employment agreement. EnVen also asserted a number of affirmative defenses, specifically alleging that Dunwoody breached his duty of loyalty to EnVen.
The following month, EnVen filed suit against Dunwoody in Delaware asserting claims for breach of fiduciary duty of loyalty and equitable fraud for Dunwoody’s alleged role in a rigged supplier bidding process to guarantee contracts to a pipe company in exchange for payments of nearly half a million dollars that went to Dunwoody’s father. Dunwoody moved to dismiss EnVen’s Delaware complaint by arguing that his employment agreement included a forum selection clause specifying mandatory venue in Texas. In the alternative, Dunwoody asked the Court to stay the Delaware proceedings in favor of the earlier filed Texas action claiming that there was substantial overlap between the Delaware case and the Texas case.
The Delaware Court of Chancery found that the forum selection clause in Dunwoody’s employment agreement did not bar venue of the matter in Delaware. The Court examined whether Dunwoody’s employment agreement included a broad forum selection clause which would limit the parties to Texas courts for any lawsuits related to the employment agreement. The Court found that the phrase “involving the enforcement of this Agreement or the rights, duties, or obligations of this Agreement. . . be brought exclusively in the state district or federal courts sitting in Harris County, Texas” in the forum selection clause limited its application to contractual claims. The Court explained this language encompasses only claims directly arising from the rights based on the contract and does not cover tort or other claims tangentially related to the contract. In particular, the fiduciary duty of loyalty is not a contractual obligation arising out of the employment agreement, but instead out of Delaware common law which exists outside the scope of the clause in the employment agreement. Based on the foregoing, the Court rejected Dunwoody’s motion to dismiss based on the forum selection clause.
The Delaware Court then analyzed whether the action could be dismissed under the “first-filed rule.” The Court recognized the common set of facts concerning Dunwoody’s termination from his employment with EnVen would necessarily involve litigation of Delaware fiduciary duty issues in connection with Dunwoody’s employment compensation claims. The Court reasoned that claims in the lawsuits do not have to be identical to have significant overlap of significant legal issues, and based on the foregoing, found that putting the Delaware case on hold would achieve the avoiding conflicting rulings on common issues. The Court thus stayed the Delaware case in deference to the Texas case.
Practitioners should keep EnVen in mind when drafting forum selection clauses in not only employment agreements, but any type of agreement, noting that courts will respect the terms of a forum selection clause, but it is possible that they will read the terms of these provisions in a narrow manner when the language requires courts to do so. When drafting forum selection clauses, exercise care to ensure that the provision anticipates all possible claims the parties might bring forward, including claims that are not contractual in nature. Clients may otherwise end up in a venue that was not originally anticipated. As further guidance to practitioners, the court in EnVen stated that it is generally true that “[f]orum selection clauses can be applied not only to contract-based claims but also tort claims arising out of, or depending upon the contractual relationship in question,” so a properly drafted venue clause could have led the court to dismiss in favor of the filing in Texas. A sample forum selection clause including a broader scope that may help avoid the venue dispute in EnVen is below:
For the purposes of any suit, action, or other proceeding arising out of this Agreement or with respect to Executive’s employment hereunder, the Parties hereto: (a) agree to submit to the exclusive jurisdiction of the federal or state courts located in Houston, Texas
A copy of the EnVen case can be found here.