Chancery Denies Motion to Dismiss for Lack of Indispensable Party in Non-Compete Case

NuVasive, Inc. v. Lanx, Inc., C.A. No. 7266-VCG (Del. Ch. July 11, 2012). 

Issue Addressed: Whether former employees are indispensable parties in a claim against their new employer for breach of a covenant not to compete, and misappropriation of trade secrets, based on allegations that the new employer induced its new employees to breach various agreements with their prior employer.

Short Answer: No.

Brief Overview

This case involved the claim that the defendant company improperly persuaded employees of the plaintiff to work for the defendant company.  The allegations are that the defendant induced the employees of the plaintiff to breach various agreements that those employees had with the plaintiff and to misappropriate the plaintiff's trade secrets and other proprietary information.  The plaintiff also asserts that the defendant aided and abetted breaches of fiduciary duty by the former employees.  The plaintiff also alleges a laundry list of related causes of actions.

This is a helpful case for those companies that need to sue both the company that "lured" their ex-employees and the ex-employees, but when it may be hard to obtain jurisdiction over the ex-employees in Delaware.

Analysis
Court of Chancery Rule 19(a) provides the standard that the Court applies to determine whether an absent party is a necessary party to the litigation.

If an absent party is deemed necessary and cannot be joined, the Court must then determine whether "equity and good conscience requires the action to proceed among the parties before it, or it should be dismissed, the absent person being thus regarded as indispensable."  See Rule 19(b).  Court of Chancery Rule 19(b) provides four factors for the Court to consider in determining if a necessary party is indispensable to the action.

This opinion of the Court is an indispensable part of any analysis of Delaware law on this topic.

The Court distinguished a prior decision from 1994 of the Court of Chancery which involved allegations that the defendants hired six of the plaintiff's former employees and that those former employees misappropriated trade secrets.

Among the agreements that the former employees are alleged to have breached, are non-competition agreements, non-solicitation agreements and related agreements.

The additional claims against the defendant, the new employer, include:  "Unfair competition, tortious interference with contractual relations, tortious interference with prospective contractual relations, aiding and abetting a breach of fiduciary duty, civil conspiracy, and misappropriation of trade secrets.

The Court conducts a careful and thorough analysis of the factors involved under both Rule 19(a) and Rule 19(b).

The Court's analysis emphasized that it has broad discretion to fashion an injunction which will protect the rights of parties who are not before it.  See cases cited at footnote 25.  The Court explained that it could "protect the rights of the absent parties by declining to enter injunctive relief, or crafting an injunction more limited in scope than that sought by NuVasive."  See footnote 26.  In sum, the Court reasoned that it was able to fashion relief based on the contract claims in a manner that did not inappropriately prejudice the absent employees.

The Court also concluded that in reliance on the representations of the plaintiff, judicial estoppel would prevent it from taking positions in other litigation and in other jurisdictions that would be contrary to its positions taken in this case.

Regarding non-contract claims, such as aiding and abetting the breach of fiduciary duties, the Court also observed that any potential reputational harm that could be suffered by the former employees in this litigation, in their absence, is not sufficient to render those former employees necessary parties.  See footnote 27.

Regarding the trade secret misappropriation claim pursuant to 6 Del. C. Section 2001, the Court relied on a prior Court of Chancery decision to conclude that any ruling on this issue would only affect the former employees' employment prospects with the new employer to the extent that their employment actually did rely on the misappropriation of trade secrets.  Therefore, the Court found that they were not necessary parties for that claim. 

In addition to denying the motion, the Court also rejected a request to stay this matter in light of related litigation against the employees pending in other jurisdictions.

Lexis.com subscribers can access a Lexis enhanced version of the NuVasive, Inc. v. Lanx, Inc., 2012 Del. Ch. LEXIS 150 (Del. Ch. July 11, 2012) decision.

Read more Delaware business litigation case summaries and commentary on Delaware Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X. Pileggi, of Eckert Seamans.

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