Focus Financial Partners, LLC v. Holsopple, C.A. No. 2020-0188-JTL

• Decision Date: 26 October 2020
• Docket Number: C.A. No. 2020-0188-JTL
• Citation: 241 A.3d 784
• Parties: FOCUS FINANCIAL PARTNERS, LLC, Plaintiff, v. Scott HOLSOPPLE, and Hightower Holdings, LLC, Defendants.
• Court: Court of Chancery of Delaware

241 A.3d 784

FOCUS FINANCIAL PARTNERS, LLC, Plaintiff,

v.Scott HOLSOPPLE, and Hightower Holdings, LLC, Defendants.

C.A. No. 2020-0188-JTL

Court of Chancery of Delaware.

Date Submitted: October 7, 2020

Date Decided: October 26, 2020

Travis S. Hunter, Dorronda R. Bordley, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Michael V. Rella, MURPHY & McGONIGLE, New York, New York; Attorneys for Plaintiff.

Daniel M. Silver, Travis J. Ferguson, Alexandra M. Joyce, McCARTER & ENGLISH, LLP, Wilmington, Delaware; Attorneys for Defendants.

LASTER, V.C.

Plaintiff Focus Financial Partners, LLC ("Focus Parent") is the publicly traded parent company of non-party Focus Operating, LLC ("Focus Sub"). Defendant Scott Holsopple previously worked for Focus Sub. Holsopple resigned and took a position with defendant Hightower Holdings, LLC ("Hightower"), a competitor of Focus Sub.

When Holsopple joined Focus Sub, he received a signing bonus consisting largely of incentive units in Focus Parent. To receive the units, Holsopple had to sign an agreement with Focus Parent (a "Unit Agreement"). The Unit Agreement contained restrictive covenants that would appear customarily in an employment agreement, including a non-competition provision, a non-solicitation provision, and a provision restricting the unit holder's ability to share confidential information. The Unit Agreement specified that Delaware law would govern its terms.

Under the terms of his employment, Holsopple received both a base salary and an annual bonus payable in additional incentive units. To receive each grant of units, Holsopple had to sign another Unit Agreement with Focus Parent. During the course of his employment, Holsopple executed a total of five Unit Agreements. Two of the five Unit Agreements selected the courts of this state as the exclusive forum for any disputes arising out of or relating to the Unit Agreements.

By signing the Unit Agreements and receiving units, Holsopple became a member of Focus Parent. The two most recent iterations of Focus Parent's operating agreement selected the courts of this state as the exclusive forum for any disputes arising out of or relating to the operating agreements.

After Holsopple joined Hightower, Focus Parent filed this lawsuit. The currently operative complaint contains six different counts. Focus Parent contends that Holsopple breached the employment-related provisions in the Unit Agreements and violated the exclusive choice-of-forum provisions by filing a lawsuit in California state court. Focus Parent maintains that both Holsopple and Hightower violated the Delaware Uniform Trade Secret Act. And Focus Parent asserts that Hightower tortiously interfered with its contractual rights and business expectations.

Holsopple moved for dismissal from the case on the grounds that this court cannot exercise personal jurisdiction over him. The only potentially viable bases for asserting personal jurisdiction over Holsopple are the Delaware-forum provisions in two of the Unit Agreements and in Focus Parent's two most recent operating agreements. But California has enacted a statute that renders a choice-of-forum provision voidable at the request of the employee if the provision appears in an agreement that the employee signed as a condition of employment.

After a lengthy choice-of-law analysis, this decision concludes that California law would govern the pertinent provisions in the agreements in the absence of the Delaware choice-of-law provisions, that a true conflict exists between Delaware and California law as to the validity of the Delaware choice-of-forum provisions, and that applying Delaware law to validate the Delaware choice-of-forum provisions would offend a fundamental policy of the State of California on a matter where California has a materially greater interest. The Delaware-forum provisions therefore cannot support jurisdiction. Holsopple's motion is granted, and he is dismissed from the case.¹

I. FACTUAL BACKGROUND

The facts for purposes of Holsopple's motion to dismiss for lack of jurisdiction are drawn from the currently operative complaint, the documents it incorporates by reference, and other filings on the docket, including a declaration from Holsopple. At this stage of the case, the court views the record in the light most favorable to the plaintiff.

A. Focus Parent and Focus Sub

Focus Parent is a holding company that owns all of the member interests in Focus Sub. Focus Parent completed an initial public offering in July 2018, and its units trade on NASDAQ under the ticker symbol "FOCS."

Focus Parent is organized as a Delaware limited liability company (as is Focus Sub). During Holsopple's employment, Focus Parent amended its limited liability company agreement twice, first adopting a version dated July 3, 2017 (the "2017 Operating Agreement"). and later adopting a version dated July 30, 2018 (the "2018 Operating Agreement"). For purposes of this case, Focus Parent relies on consent-to-jurisdiction provisions that appear in the 2017 and 2018 Operating Agreements.

Through Focus Sub, Focus Parent conducts business in the wealth management industry. As part of its business model, Focus Sub invests in and provides services to investment advisors in the United States, Canada, the United Kingdom, and Australia. Focus Sub has offices in New York and San Francisco.

B. Holsopple Joins Focus Sub.

Holsopple joined Focus Sub as an employee on January 12, 2015. The offer letter that established the terms of his employment was dated December 12, 2014. The letter recited that New York state law would govern its terms. Dkt. 22 Ex. 1.

The offer letter informed Holsopple that he would be "based in [Focus Sub's] San Francisco, CA office." Id. The paragraphs of the offer letter that described his compensation stated:

Annual Salary: You will be paid an annual base salary of $220,000, which will be paid in 24 approximately equal installments twice per month and subject to adjustments for taxes and other withholdings as required by law or the policies of [Focus Sub].

Sign On Bonus: You will receive 40,000 Incentive Units in [Focus Parent], the ultimate parent entity of [Focus Sub]. Your receipt of the Incentive Units and their vesting will be subject to, and conditioned upon, your entry into the standard Incentive Unit Agreement of [Focus Parent]. In addition, you will receive a one-time $75,000 cash upfront bonus.

Bonus Potential: You may be eligible for a discretionary bonus based on performance starting with the fiscal year ending December 31, 2015. The bonus may be paid in cash and/or Incentive Units of [Focus Parent] or a combination of both.

Id.

As specified in Holsopple's offer letter, the receipt and vesting of the 40,000 incentive units that comprised part of Holsopple's signing bonus were "subject to, and conditioned upon" his entry into a "standard Incentive Unit Agreement" with Focus Parent. Holsopple executed the agreement on January 15, 2015. Dkt 49 Ex. 1 (the "2015 Unit Agreement").

The terms of the 2015 Unit Agreement made clear that the incentive units were a form of compensation tied to Holsopple's employment. Consistent with this reality, Holsopple represented in the 2015 Unit Agreement that he was "either an employee, officer, director, agent, consultant or other representative of [Focus Parent] or one of its subsidiaries." Id. § 1(c)(ii). The contract conditioned the vesting of his units on his continued employment at Focus Parent or one of its subsidiaries. Id. § 3(b). If he stopped working for Focus Parent or one of its subsidiaries, then he would forfeit all unvested units as well as any right to distributions on those units. Id. § 3(a). In addition, Focus Parent would gain the right to repurchase his vested units. Id. § 3(e).

The 2015 Unit Agreement defined Holsopple as the "Unit Holder." Id. § 1. Section 5 of the 2015 Unit Agreement was titled "Restrictive Covenants of Unit Holder." Id. § 5. It imposed a series of restrictions on the Unit Holder that typically would appear in an employment agreement.

Section 5(a) imposed the following non-competition obligation:

During the Unit Holder's employment or service period with the Company or its subsidiaries and for one-hundred-eighty (180) days thereafter following any termination of employment or service, the Unit Holder shall not, directly or indirectly, alone or as a partner, officer, director, manager, employee or consultant or equity-holder of any entity: (i) provide any wealth management services, including personal financial planning or personal advisory services of the type provided or contemplated to be provided by the Company or its subsidiaries at the time of such termination to any individual or entity anywhere in the continental United States (a "Competitive Business"); (ii) provide finder, broker or financial advisory services to any Competitive Business; (iii) interfere with any potential acquisition by the Company or its subsidiaries of any other business or discourage any party to any such potential acquisition from engaging in any such transaction; or (iv) provide any services currently provided by the Company to or on behalf of its subsidiaries or affiliates to any business or enterprise that is similar to, or otherwise competitive with, the Company.

Dkt. 49 Ex. 1, § 5(a) (the "Non-Competition Provision").

Section 5(b) imposed the following non-solicitation obligation:

In addition, during the Unit Holder's employment or service period with the Company or its subsidiaries and for twelve (12) months thereafter, the Unit Holder shall not, directly or indirectly, alone or as a partner, officer, director, manager, employee or consultant or equity-holder of any entity ... solicit or do business with any customer or client of the Company or any of its subsidiaries, or any potential acquisition target of the Company, any potential customer or client of the Company or any of its subsidiaries, or any potential acquisition target of the Company (A) in any matter which

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