A transatlantic 'irreconcilable clash' of jurisdictions

11 June 2015

In the first of our two-part series our employment & equalities experts take a look at whether a US stock-option-linked non-compete clause will be effective to restrain an executive in a UK subsidiary. There is a good chance the answer is no.

Listed US corporations often grant senior executives in UK subsidiary companies valuable awards of stock options in exchange for non-compete obligations. Many US states have a superficially similar approach to employee non-competes to English law. The doctrine of 'restraint of trade' is found on both sides of the Atlantic. However, it can be applied very differently, and much more restrictively, in England. A case of the US and UK not only being divided by a common language but, additionally, divided by a common law.

Stock option agreements will usually contain an exclusive jurisdiction/governing law clause naming the law of the parent company's home state. If the senior executive is based in England, does an 'exclusive' jurisdiction clause do what it says on the tin? No.

Despite what the contract says, international employers can in certain circumstances be subject to the jurisdiction of the courts in the country where they - in a wide sense - 'employ' staff. As the case of Petter v EMC Europe Ltd and EMC Corporation illustrates, this can lead to a very unsatisfactory 'irreconcilable clash' of jurisdictions resulting in a legal stand-off. If proceedings continue in both countries, the losing party in each jurisdiction will likely succeed in simply resisting enforcement in the other jurisdiction.

It is essential for international employers to review the terms of stock option agreements to make sure the non-compete clause would be enforceable in the UK. Otherwise, employers are potentially leaving themselves vulnerable in future.

Unsurprisingly, an appeal is currently pending before the Court of Appeal in Petter. One to watch!

So how did this sorry state of affairs arise?

A flurry of claims

In an East coast v West coast battle of US data storage companies, the Massachusetts-based EMC Corporation has for some time been in dispute with California-based Pure Storage Inc over what EMC claims to be targeting by Pure Storage to poach EMC employees, stealing away the company's top talent to obtain confidential information and trade secrets. Unsurprisingly, when Mr Petter, the senior vice president and managing director for EMC's operations in the United Kingdom and Ireland, resigned to join Pure Storage, EMC was not too pleased.

Mr Petter had been employed by a UK subsidiary of ECM Corporation, EMC Europe Ltd. In addition to his service contract with EMC Europe, he had a separate contract directly with EMC Corporation for the issue of restricted stock units (RSU contract). The RSU contract was expressed to be subject to Massachusetts law and to the exclusive jurisdiction of the Massachusetts courts (clause 13).

When Mr Petter joined Pure Storage, EMC Corporation issued a lawsuit against him in Massachusetts for violating the terms of the 'detrimental activity' clause contained in the RSU contract. EMC Corporation claimed that any RSUs issued but not yet vested were forfeited.

Mr Petter responded by issuing proceedings in the UK. He denied being in breach of the detrimental activity clause and, furthermore, that the clause was unenforceable as an unreasonable restraint of trade and/or an unlawful penalty. He also sought an 'anti-suit injunction' from the High Court to stop the US lawsuit.

In order for Mr Petter to continue with the UK proceedings, he needed to establish that EMC Corporation was his 'employer', being a party to his contract of employment (as opposed to EMC Europe alone). Articles 20 to 21 of the Recast Brussels Regulation (EU 1215/2012) limits where an employer can bring proceedings against an employee from an EU member state. Basically, the employee can only be sued by an employer in the courts of the state in which he is domiciled, in this case England. EMC Corporation argued that the Recast Brussels Regulation does not apply as his employer was EMC Europe alone.

Before Mr Petter's UK proceedings were heard, EMC Corporation quickly obtained a ruling in Massachusetts that clause 13 of the RSU contract was enforceable and that all disputes arising out of it were subject to the exclusive jurisdiction of the Massachusetts courts.

Decision of the High Court

The High Court concluded that EMC Corporation could be classed as Mr Petter's 'employer' for the purposes of the Recast Brussels Regulation, even though it would not be classed as the 'employer' as a matter of English law for other purposes. The court referred to the earlier decisions in Samengo-Turner v J&H Marsh & McLennan (Services) Ltd (CA) [2007] and the High Court decision in Duarte v The Black & Decker Corporation (HC) [2007] which stressed the need to look at the employee's 'overall package, when considering the effect of the provisions of the Recast Brussels Regulation. As established in the earlier cases, other companies in a multinational group could be treated as 'employers' for these purposes even though they would not be treated as such for any other reason.

On the facts of this case, Mr Petter's terms of employment could not be ascertained without looking at both the EMC Europe contract and the RSU contract with EMC Corporation. Despite an express acknowledgment contained in the RSU contract that it did not give rise to a service relationship with the parent company, the court considered that due to the close connection between the award of the stock units and the employee's employment obligations, EMC Corporation had to be regarded as a party to the contract of employment with EMC Europe. In essence the RSU contract varied the EMC Europe contract of employment for the purposes of the Recast Brussel Regulations.

Having overcome the hurdle of establishing that the Recast Brussel Regulation applied to his case, Mr Petter than stumbled in relation to the injunction sought. While an anti-suit injunction was granted in the earlier Samengo-Turner case, the High Court was not bound to grant an injunction as each case turned on its particular facts.

In this case, while Mr Petter is entitled to bring his claim in the UK, it is he who was in breach of the RSU contract's jurisdiction clause. He had entered into the agreement willingly with the parties having made a free choice of law, namely Massachusetts. Furthermore, this was not a case where the Massachusetts proceedings were oppressive or vexatious. As such, the court concluded that it would not be appropriate to grant the anti-suit injunction.

It is always worth remembering that injunctions are a discretionary remedy. Court will be reluctant to exercise discretion in favour of a well-remunerated employee seeking the benefits of incentive arrangements but not the obligations of them.

But where does this leave the dispute?

'Irreconcilable clash'

This leaves what the court described as an 'irreconcilable clash' between the UK and US courts. Under Massachusetts law, the Massachusetts court has jurisdiction. Under English law, the High Court has exclusive jurisdiction (although it would apply Massachusetts law, subject to relevant mandatory English laws).

While stressing that the court "does not lightly assume that its orders will not be observed", the "requirements of comity" do not allow a solution in the present case. If proceedings continue in both countries, the losing party in each jurisdiction will likely succeed in simply resisting enforcement in the other jurisdiction - a jurisdictional stalemate. Unsurprisingly, an appeal is currently pending before the Court of Appeal.

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