Key UK Court of Appeal decision highlights the difficulty in enforcing US choice of law provisions within stock or bonus plans against UK based executives.
It is not unusual for US corporations to allow executives employed by their UK subsidiary to participate in stock or bonus plans of the US parent. Often US corporations will want to ensure that, where there is such participation, any dispute regarding the stock or bonus plan, will be subject to home state US law and subject to the jurisdiction of the home state courts. With a view to achieving this, it is common to require the UK executive, as a condition of being granted benefits under the stock or bonus plan, to enter into some form of participation agreement containing appropriate choice of law and jurisdiction clauses. But are those clauses ever challenged?
In the recently reported decision of Petter –v EMC Europe Limited, the UK Court of Appeal held that it was bound to disregard an exclusive jurisdiction clause contained within this type of agreement and granted an anti-suit injunction prohibiting the US corporation from pursuing the proceedings in its home state in accordance with the jurisdiction clause. Moreover, the Court of Appeal made clear that UK courts should ordinarily in these circumstances grant such injunctions to restrain the bringing of proceedings outside of the UK with a view to protecting employee rights. On the particular facts in the case, as a result of the US corporation’s actions suggesting that it was seeking to pre-empt the Court of Appeal’s decision by expediting its US claim, the Court of Appeal, even went as far as, making an order requiring the US corporation to withdraw motions filed in the US courts.
Mr Petter had been employed by EMC Corporation’s UK subsidiary. He was employed in a senior European role. Mr Petter’s employment contract contained a 12 month non-compete restrictive covenant. The contract also incorporated “a key employment agreement” which included a 12 month non-compete covenant in favour of EMC Corporation and its subsidiaries. Mr Petter had received stock distributions under EMC Corporation’s stock plan, his awards being documented in restricted stock unit agreements confirming the contractual agreement which Mr Petter entered into in relation to each award. The stock plan provided for forfeiture of awards if a recipient failed to comply with the terms of the key employment agreement. It also contained an express choice of Massachusetts law and an exclusive jurisdiction clause in favour of the Massachusetts courts.
Mr Petter decided to leave EMC’s employment to take up employment with a competitor. EMC corporation started proceedings against him in Massachusetts seeking declarations that it was entitled, under the terms of the stock plan, to rescind the most recent awards of stock to him. Mr Petter responded by starting proceedings in the UK High Court, seeking declarations that the provisions of the stock plan under which EMC sought to rescind the awards of stock, were unenforceable and seeking an injunction prohibiting EMC from pursuing the proceedings against him in Massachusetts. EMC challenged the jurisdiction of the English High Court on the grounds that the contracts between it and Mr Petter under which the stock had been awarded contained the choice of law/jurisdiction clauses in favour of Massachusetts law and courts.
The High Court held that, applying the provisions of the EU Brussels II Regulations, the Massachusetts exclusive jurisdiction clause was of no effect and the UK Courts had jurisdiction. It declined, however, to grant an “anti-suit injunction” to prevent EMC from pursuing the proceedings in Massachusetts on the basis of comity. This is the legal doctrine whereby courts recognise and enforce each other’s legal decisions as a matter of courtesy and usually will defer considering a case if the same issues are being considered in a Court in another jurisdiction. Following appeals, the case came before the UK Court of Appeal which had to consider the following two issues.
1. Jurisdiction and impact of Massachusetts exclusive jurisdiction clause
The Brussels Regulation is a regulation of the European Parliament on legal jurisdiction. It applies where the defendant is domiciled in an EU member state and contains special jurisdiction rules in relation to employment contracts.
Section 5 of the Brussels II Regulation contains provisions governing the exercise by Courts of jurisdiction in relation to individual contracts of employment. The section is split into various articles, the key provisions being as follows.
1. An employer may bring proceedings only in the courts of the Member State in which the employee is domiciled.
The provisions of this Section may be departed from only by an agreement:
(1) which is entered into after the dispute has arisen.
Agreements…. conferring jurisdiction shall have no legal force if contrary to …. “Article 23”.
The Judge giving the leading Judgment in the Court of Appeal made clear that, in interpreting these provisions deriving from European legislation, it was necessary to apply a “purposive approach” and, therefore, to bear in mind the underlying policy aim of the provisions. Here, that policy aim being, “to protect employees because they are considered from a socio-economic point of view to be the weaker parties to the contract”. Further that,
“even a principle as important as party autonomy is required to give way to prescriptive rules in favour of the protection of employees as the weaker parties in disputes relating to contracts of employment”.
Applying this approach, the Court found that the restricted stock unit agreements constituted a contract between Mr Petter and EMC Corporation under which he agreed to comply with the conditions of the key employee agreement. Although this contract did not create an employment relationship between Mr Petter and EMC Corporation (as opposed to its UK subsidiary), the dispute related to employment because the stock unit awards were intrinsically bound up with Mr Petter’s employment contract. As a result, Articles 23(1) and 25(4) applied, meaning that the exclusive jurisdiction clause had no legal force as far as English Courts are concerned.
In support of this conclusion, the Court of Appeal referred to a previous Court of Appeal’s decision on similar facts, Samengo – Turner –v- J&H Marsh and McLennan (Services) Limited, where the Court held that a Company providing benefits to employees of associated companies within the same group may be regarded as an employer for the purposes of the Brussels II Regulation if it provides those benefits in order to reward and encourage those employees for the benefit of their immediate employer and the group as a whole. The case involved a bonus agreement containing jurisdiction and governing law provisions specifying New York law and Courts. The Court of Appeal in that case granted an anti-suit injunction to restrain New York proceedings against UK employees.
2. Whether to grant anti-suit injunction prohibiting EMC from proceedings in Massachusetts
The principle which emerged from the previous case of Samengo – Turner
“is that in a case falling within Section 5 of the Regulation, an anti-suit injunction should ordinarily be granted to restrain an employer from bringing proceedings outside the Member States, in order to protect the employee’s rights”.
Therefore, the Court in Petter granted an anti-suit injunction preventing EMC from proceeding with its Massachusetts action.
Following conclusion of the hearing before the Court of Appeal and the making of an order by the Court restraining EMC from pursuing the proceedings in Massachusetts, EMC then engaged, in what the Court of Appeal described as a, “flurry of activity”. This included filing an emergency motion in the federal District Court in Massachusetts seeking an anti-suit injunction to prohibit Mr Petter from taking any further steps in the English action and filing a motion for a summary judgment on its claim against Mr Petter in the sum of over $US2,000,000. This was brought to the UK Court of Appeal’s attention, following which, the Court granted an injunction prohibiting EMC from pursuing proceedings in the Massachusetts Court. The Court of Appeal indicated that EMC’s actions, “strongly suggested that EMC had made a last minute attempt to pre-empt the decision of this Court by seeking to obtain an anti-suit injunction before this Court was able to deliver its judgment.” Given this, the UK Court of Appeal, having asked whether EMC wished to provide an explanation for its actions, which it declined to do, made orders requiring EMC, not only to take no further steps in the proceedings before the Massachusetts Court, but also to take such steps that were reasonably open to it to withdraw the motion in that Court, particularly, the motion seeking summary judgment.
Practical Implications of Decision
The Petter decision brings into focus two related issues that employers seek to address in contracts with their employees: choice of law and choice of forum. “Choice of law” means which jurisdiction’s laws will govern the interpretation of a contract under dispute (e.g. US law or UK law), whereas “choice of forum” means which jurisdiction’s court system will resolve the dispute (e.g. US courts or UK courts). The UK Court of Appeal’s ruling concerned choice of forum, and US employers filing suit in the US against UK-based employees may face a challenge similar to the one brought by Mr Petter. That does not mean, however, that US employers should dispense with choice-of-forum clauses when contracting with their EU employees. Each case may have distinguishing factors that could lead a different court to a different conclusion. There are also values of efficiency in keeping contractual terms consistent among employees. Moreover, the burden of raising a choice-of-forum challenge is on the employee, and some employees may not choose to undertake that burden. Employers should also note that the Petter decision does not necessarily affect their choice-of-law clauses.