The forum selection clause did not strip the Court of Chancery of proper venue

Dunwoody argued (unsuccessfully) that the forum selection clause in his employment agreement required disputes be filed in Texas courts.⁹ Dunwoody further argued that the employment agreement created a contractual duty of loyalty because it provided he “acknowledge[d] and agree[d]” that he owed a duty of loyalty.¹⁰ As an initial matter, it is well established under Delaware law that corporate officers owe fiduciary duties to the corporation identical to the fiduciary duties owed by directors.¹¹ An officer, such as Dunwoody, would be personally liable for breaches of the same duties of care and loyalty that are owed by directors.¹² Therefore, Dunwoody owes these fiduciary duties regardless of whether he agrees to do so contractually.

The court disagreed with Dunwoody’s argument that his employment agreement created a contractual obligation of a fiduciary duty of loyalty.¹³ The court explained that, read as a whole, the phrase “acknowledges and agrees” means “Dunwoody recognized that his position as an officer of a Delaware corporation gave rise to a fiduciary duty of loyalty.”¹⁴ The court squarely rejected the idea that such language could transform a corporate officer’s common law duty of loyalty into a contractual one.¹⁵

The court found the forum selection clause was also inapplicable and, therefore, did not strip the court of proper venue.¹⁶ The court explained it is generally true that forum selection clauses apply to both contract and tort claims arising out of contractual relationships.¹⁷ However, the employment agreement at issue expressly limited the application to only contract claims.¹⁸

Specifically, Dunwoody’s employment agreement required “[a]ny lawsuit that may be brought by either party 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.”¹⁹ The court explained that the relevant limiting phrase in the forum selection clause was “involving the enforcement of this Agreement or the rights, duties, or obligations of this Agreement.”’²⁰

Because the fiduciary duty claims asserted by EnVen against Dunwoody derived from common law—and not directly from rights in the employment agreement—the court held that the forum selection clause was not adequate grounds for dismissal.²¹

A stay of the Delaware action was warranted under McWane

Dunwoody, alternatively, sought a dismissal or stay of the Delaware litigation in favor of the Texas action under the “first-filed rule” set forth in McWane Case Iron Pipe Corp. v. McDowell-Wellman Engineering Co., 263 A.2d 281 (Del. 1970).²² Under McWane, “Delaware courts should exercise discretion in favor of a stay where a prior action, involving the same parties and issues, is pending elsewhere in a court capable of doing prompt and complete justice.”²³

The court in EnVen Energy Corp. ultimately agreed with Dunwoody’s argument and exercised its discretion to stay the Delaware litigation pending resolution of the first-filed Texas action.²⁴ Although the court found the claims in both actions were not identical, there were common facts and overlapping issues, and it would be impossible to predict with certainty the course of the Texas action.²⁵ Therefore, the court explained, putting the Delaware case on hold would achieve the goals of McWane by giving deference to Dunwoody’s chosen forum, avoiding a waste of judicial resources and foreclosing potential conflicting rulings on common issues.²⁶

Key takeaways

• Under Delaware common law, corporate officers owe fiduciary duties to the corporation and its stockholders that are identical to those owed by corporate directors.
• A corporate officer “acknowledging and agreeing” in his employment contract that he owes a duty of loyalty does not transform a common law duty into a contractual one.
• Where a breach of fiduciary duty claim arises out of common law, a forum selection clause in a contract limited to claims involving the enforcement of the contract itself is inapplicable.
• A common nucleus of operative facts and an overlap of issues in two cases is sufficient to warrant application of McWane and a stay in favor of a first-filed action. Delaware courts are given discretion, which should be freely exercised, to grant a stay when there is a prior action pending elsewhere.

1. See 2020 WL 2770609, at *4.
2. Id.
3. Id. at *6.
4. Id. at *1.
5. Id.
6. Id. at *3; see also Chancery Court Rule 12(b)(3).
7. See 2020 WL 2770609, at *1.
8. Id.
9. Id. at *3 (requiring disputes “be brought exclusively in the state district or federal courts sitting in Harris County, Texas”).
10. Id. at *4.
11. See Gantler v. Stephens, 965 A.2d 695, 708–09 (Del. 2009) (deciding the issue on first impression and explicitly holding “corporate officers owe fiduciary duties that are identical to those owed by corporate directors”).
12. Id.
13. See 2020 WL 2770609, at *4.
14. Id. at *4 (emphasis added).
15. Id.
16. Id.
17. Id.
18. Id. (“[L]anguage [in the employment agreement] encompasses only ‘claims directly pertaining to rights based on the contract at issue’ and does not cover tort or other claims that merely ‘touch on’ or relate to the contract.”)
19. Id.
20. Id.
21. Id.
    
22. Id. at *5.
23. See Ingres Corp. v. CA, Inc., 8 A.3d 1143, 1145 (Del. 2010) (citing McWane, 263 A.2d at 283).
24. See 2020 WL 2770609, at *5 (“Such discretion is exercised ‘freely’ to prevent a defendant from ‘defeat[ing] the plaintiff’s choice of forum in a pending suit by commencing litigation involving the same cause of action in another jurisdiction.’” (quoting McWane, 263 A.2d at 283)).
25. See 2020 WL 2770609, at *6 (noting that the Texas action involved Dunwoody’s contractual claim that he had the right to terminate his employment agreement, and, by contrast, the Delaware action concerned whether Dunwoody adhered to his fiduciary obligations or committed fraud in connection with the alleged kickback scheme).
26. Id.

Client Alert 2020-375