Maryland court enforces boilerplate forum selection clause in confidentiality and noncompetition agreement against spouse and related companies of signatory

Buyer is a group of related Maryland companies founded in 1976 and has its world headquarters in Taneytown, Maryland (an hour NW drive from Baltimore). Buyer provides service and makes products in the commercial HVAC, industrial process, power, and industrial refrigeration markets. Buyer manufactures products at 19 locations throughout nine countries and supplies products via a sales network of more than 170 offices.

Seller and Seller’ spouse founded Target as a North Carolina corporation in or around 1990. Target manufactures and sells components for cooling towers and heat exchangers, including Opti-Bar. Buyer was a customer of Target, and Buyer incorporated Target’s products into the cooling towers that Buyer manufactured and sold, and into Buyer’s field-erected cooling towers.

In 2005, Buyer purchased all of Target’s stock from Seller and Seller’s spouse for roughly $3.76 million. According to Buyer, it wanted to acquire Target, in part, because Target produced a product called Opti-Bar, which had an industry reputation as the best, most efficient splash bar in the cooling tower market.

Seller was employed by Buyer as sales manager, after the closing, as part of the deal. In consideration for the purchase of Target stock, Seller and Buyer entered into the confidentiality agreement. Seller, but not Seller’s spouse, signed the confidentiality agreement. In the confidentiality agreement, Seller assigned all his work product that he created for Buyer as a Buyer employee to Buyer.

The confidentiality agreement also prohibited Seller from competing against Buyer during his employment with Buyer for 2 years from the later of the date of the confidentiality agreement or the date Seller’s employment with Buyer ends. The confidentiality agreement was governed by Maryland law and specified that all disputes relating to the confidentiality agreement shall be tried in a federal or state court in Maryland. The agreement contained Seller’s consent to resolving all disputes in Maryland.

After they sold Target to Buyer, Seller and Seller’s spouse formed Seller Company #1, a North Carolina LLC. Seller Company #1 was in the business of buying and selling cooling tower parts. Records showed that Seller was Seller Company #1’s registered agent and manager and Seller signed checks and tax forms on Seller Company #1’s behalf.

Seller Company #2 was a Georgia LLC that Seller and Seller’s spouse formed in 2007. Seller’s spouse owned 51% and Seller owned 49%. A credit application that Seller signed described Seller Company #2’s business as the resale of cooling tower parts.

Seller’s sales manager duties included managing Target’s relationships with its customers as well as procuring and bidding on outside sales. In the spring of 2014, Target discovered that, for at least 5 years, Seller was engaging in business activities that not only distracted from performing his duties at Target but were also in direct competition with the business of Buyer. Specifically, Target believed that Seller, individually and through Seller Company #2 and Seller Company #1, was selling products and cooling tower parts made by Buyer’s competitors to Buyer’s actual and prospective customers; manufacturing replica Target and Buyer products to sell to Buyer’s actual and prospective customers; and diverting a project from Buyer by submitting a bid to a general contractor through Seller Company #2.

Target terminated Seller on July 29, 2014. Five months later, Target and Buyer, sued Seller in Maryland state court to stop his behavior and recover damages for Seller’s claimed illegal gains and Buyer’s lost profits, as well as treble damages. Buyer and Target added Seller’s spouse, and Seller Company #1 and Seller Company #2 as defendants.

Seller’s spouse and Seller Company #1 and Seller Company #2 filed a joint motion to dismiss for lack of personal jurisdiction. In it, Seller’s spouse claimed that she had no connection to Maryland other than the sale of Target to Buyer in 2005. She argued that she never worked for Buyer, and never signed the confidentiality agreement.

She rejected the idea that her purported awareness or knowledge of the confidentiality agreement could possibly form the basis for jurisdiction in a Maryland court, and that, until this dispute arose, was not aware of the terms of Seller’s confidentiality agreement with Target, including its non-compete and Maryland jurisdiction provisions.

Seller Company #1 and Seller Company #2 asserted that they had no contact with Maryland, and allegations that Seller and Seller’s spouse exercised complete dominion and control over their affairs was insufficient to assert Maryland jurisdiction over these North Carolina and Georgia companies.

Buyer and Target responded that Seller, Seller’s spouse, and their two companies were all part of the same scheme, to impermissibly compete with Buyer and used Buyer’s proprietary documents and information in breach of legal obligations to Buyer.

Buyer submitted that Maryland possessed jurisdiction over Seller’s spouse because Buyer’s complaint flows from the stock purchase agreement, which Seller’s spouse signed and thereby transacted business in Maryland by selling her stock in Target to a Maryland company in Maryland through a stock purchase agreement governed by Maryland law.

In regard to Seller’s spouse and Seller’s two related companies, Buyer charged, among other things, that Seller’s spouse, Seller Company #2, and Seller Company #1 are affiliates of Seller and are bound by the confidentiality agreement Maryland forum selection clause. Buyer urged that Maryland should not permit Seller’s use of his spouse and his companies in a shell game and should enforce the confidentiality agreement against not only Seller—but also the non-signatories (Seller’s spouse and the related two companies).

The trial court, expanding Maryland law, concluded that Seller’s spouse and the related two companies are bound by the provision in the confidentiality agreement requiring disputes to be resolved in Maryland, even though they never signed the confidentiality agreement, because they were closely related to the contractual relationship between Seller and Target.

The decision of the trial court was upheld by Maryland’s intermediate court of appeals. The appellate court held that the Maryland forum-selection clause in the confidentiality agreement is enforceable against each of Seller’s spouse and the two related companies because Buyer and Target’s claims arose out of their status in relation to the confidentiality agreement, and that they were closely related to the contractual relationship between Seller and Buyer, so that it was foreseeable that they would be bound by the forum-selection cause contained in the Confidentiality Agreement.

This case is referred to as Peterson v. Evapco, Inc., No. 778, September Term, 2016, Court of Special Appeals of Maryland (Filed: July 5, 2018).

Comment. A forum selection clause in an agreement for the sale of a business seems like boring boilerplate. However, there are practical advantages to selecting a court located close to you if a dispute breaks out.  It can save time and money.

The interesting wrinkle here is that the buyer of a business could also enforce confidentiality and noncompetition agreements in its home turf not only against the seller (the guy that signed the agreement) but also against others involved in the alleged scheme to circumvent the agreement’s provisions; even when those others did not sign the agreement.

By John McCauley: I help people start, grow, buy and sell their businesses.

Email: jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

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Posted in covenant not to compete, enforce against nonparty, forum selection clause, nondisclosure agreement

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