Richard Parks v. Horizon Holdings, LLC ( 2022 )

IN THE COURT OF CHANCERY FOR THE STATE OF DELAWARE
RICHARD PARKS and STEVEN PARKS, )
)
Plaintiffs, )
)
v. ) C.A. No. 2021-0988-SG
)
HORIZON HOLDINGS, LLC, )
PARKS MANUFACTURING, LLC a/k/a )
PMI OPCO, LLC, and )
PMI HOLDCO, LLC )
)
Defendants. )
)
)
)
HORIZON HOLDINGS, LLC, )
PARKS MANUFACTURING, LLC a/k/a )
PMI OPCO, LLC, and )
PMI HOLDCO, LLC )
)
Counterclaim-Plaintiffs, )
)
v. )
)
RICHARD PARKS and STEVEN PARKS, )
)
Counterclaim-Defendants. )
MEMORANDUM OPINION
Date Submitted: June 21, 2022
Date Decided: July 20, 2022
Thomas V. Ayala and Sally E. Veghte, of KLEHR HARRISON HARVEY
BRANZBURG LLP, Wilmington, Delaware, Attorneys for Plaintiffs-Counterclaim
Defendants Richard and Steven Parks.
Scott B. Czerwonka and Andrea S. Brooks, of WILKS LAW, LLC, Wilmington,
Delaware, Attorneys for Defendants-Counterclaim Plaintiffs Horizon Holdings,
LLC, PMI HoldCo, LLC, and Parks Manufacturing, LLC.
GLASSCOCK, Vice Chancellor
Parties to an agreement may desire to bind themselves contractually in a way
prohibited by the jurisdiction in which they operate, or in a manner unenforceable
under its laws. For instance, players may wish to contractually agree to pay a
gambling debt incurred in favor of the winner in a poker game. Such debts are
uncollectable under their home state law. They agree, in their contract, that the law
of Nevada, rather than home state law, will govern their contract, and consent to
jurisdiction of Nevada courts. Nonetheless, the losers stiff the winner and refuse to
redeem his chips; he then sues them in Nevada. Should the court there apply Nevada
law, or the home state law?
This scenario plays out commonly in this Court in the realm, not of gambling
debts, but of restrictions on employment or on the conduct of business. A number
of states prohibit covenants not to compete or similar limitations on transaction of
business, on public policy grounds; under Delaware law such covenants are
generally enforceable. What if the parties agree to be bound, not by home state law,
but by the law of Delaware? It is impossible to speak categorically, because the facts
of each situation are unique, but in a number of cases, 1 Delaware courts, despite our
state’s strong contractarian bent, have refused in such a scenario to enforce
1
See, e.g., Ascension Ins. Holdings, LLC v. Underwood, 2015 WL 356002, at *5 (Del. Ch. Jan.
28, 2015); Focus Fin. Partners, LLC v. Holsopple, 241 A.3d 784, 824 (Del. Ch. 2020).
2
covenants repugnant to the law of the state which is most concerned with the
contract, with our courts following the Restatement of Conflict of Laws. 2
The parties to the instant action have put before me the question of choice of
law via cross-motions for partial summary judgment. The scenario is a variation of
that laid out above, involving the sale of assets of an Oklahoma boat-building
company, the (now-terminated) employment of the sellers by the Delaware LLC
created by the buyer to facilitate the deal, and the resulting membership of those
sellers—the Plaintiffs here—in a second LLC affiliated with the buyer, subject to
restrictive covenants which would be unenforceable—at least in part—under the
laws of the Plaintiffs’ home state, Oklahoma. The Plaintiffs, sellers of the business
and former employees of the boat-building company, are now in the pool-
manufacturing business. The parties to the contracts involved purported to adopt
Delaware law. In order to determine the applicable law, I must evaluate the pertinent
transaction as a whole, including the sale of the Oklahoma corporation’s assets,
employment of the principals of the seller, and those principals’ resulting investment
in an affiliate of the buyer. I apply the Restatement analysis; the results, explained
below, require application of Delaware law. Briefly, while the relevant contracts
involve covenants not to compete, on the current record there is no serious allegation
2
RESTATEMENT (SECOND) OF CONFLICT OF LAWS (AM. LAW. INST. 1971) [hereinafter
“Restatement”].
3
that the Plaintiffs are in competition that would violate the pertinent covenants,
presuming they are enforceable. I need not determine which state’s law would apply
to the hypothetical issue of breach of the noncompetes. Nonsolicitation covenants
preventing poaching of company employees are at issue; such covenants are
enforceable under the laws of both Delaware and Oklahoma; thus, I find no reason
to dishonor the parties’ express choice, and Delaware law will apply.
The remaining choice of law question involves whether covenants not to
interfere in the business sold, embodied in the Operating Agreement of a Delaware
LLC created to facilitate the transaction, are to be assessed under the law of
Delaware or Oklahoma. The analysis below answers this question in favor of
Delaware law.
I. BACKGROUND
This matter is before me on cross-motions for partial summary judgment.3
The parties have narrowed the issues to be decided in this expedited Memorandum
Opinion to a primary question of choice of law and a secondary question of the
enforceability of certain restrictive covenants contained in agreements between the
3
The parties submitted the issues for resolution on cross-motions for partial summary judgment
following briefing in support of cross-motions for preliminary injunction. I have relied on this
briefing in outlining the facts and conducting my analysis, and have endeavored to limit the facts
herein to those only which are not in dispute. See Opening Br. Supp. Mot. for Prelim. Inj., Dkt.
No. 81 [hereinafter “Defs. OB”]; Pls. Richard Parks, et al.’s Opening Br. Supp. Mot. for Prelim.
Inj., Dkt. No. 80 [hereinafter “Pls. OB”]; Defs.’ Answering Br. Supp. Mot. Prelim. Inj., Dkt. No.
88; Pls. Steven Parks, et al.’s Br. Opp’n to Defs.’ Horizon Holdings, LLC, et al.’s Mot. for
Prelim. Inj., Dkt. No. 89.
4
parties to this action, depending on what law applies. I am able to resolve the first
question; the second awaits a more developed record.
The Plaintiffs-Counterclaim Defendants in this action are two brothers,
Richard and Steven Parks (the “Plaintiffs”) who along with others sold a family
business to a private investment firm, Horizon Holdings, LLC, a California limited
liability company and one of the Defendants-Counterclaim Plaintiffs (“Horizon”). 4
The other two Defendants-Counterclaim Plaintiffs in this action are two Delaware
limited liability companies: Parks Manufacturing, LLC (“Parks LLC”) and PMI
HoldCo, LLC (“PMI LLC”), both of which have a principal place of business of
Oklahoma.5 Horizon, Parks LLC, and PMI LLC are referred to herein as the
“Defendants.” The family business purchased was at that time called Parks
Manufacturing, Inc. (“Parks Inc.”), an Oklahoma corporation in the boat building
business. 6
A number of documents supported the transaction by which Parks LLC
acquired the assets of Parks Inc. (the “Transaction”). 7 Among these were a
Noncompetition, Nonsolicitation, Noninterference and Confidentiality Agreement
(the “Noncompete Agreement”) (each of the Plaintiffs signed a separate
4
See, e.g., Defs. OB 5–6; Verified Compl. ¶ 2, Dkt. No. 1.
5
Defs. OB 5–6; see Defs. Answer to Verified Compl., Affirmative Defenses, and Verified
Countercls. ¶ 7, Dkt. No. 12.
6
See Pls. Richard Parks, et al.’s Aff. of Steven Parks Supp. Mot. for Prelim. Inj., Ex. 1, at
PARKS MANUFACTURING0000001 (preamble) [such exhibit hereinafter “APA”].
7
See, e.g., Pls. OB 6–18 (discussing many of the documents in detail).
5
Noncompete Agreement, though the pertinent terms are substantively identical) and
the Operating Agreement of PMI LLC (the “Operating Agreement”) (a singular
agreement signed by both Plaintiffs, in addition to others, as members).8 I refer to
the Operating Agreement together with the Noncompete Agreement as the
“Agreements.”
The Agreements each contain restrictive covenants that the Defendants argue
are binding upon the Plaintiffs. The Plaintiffs, for their part, seek a declaratory
judgment that the Agreements are not enforceable against them, 9 primarily because
they believe that Oklahoma public policy prevents the Agreements from being
enforceable against “Oklahoma residents working in Oklahoma.” 10
Although plenary claims 11 and additional motion practice 12 have been filed in
this action, a sole issue has been expedited and is here addressed: the question of
applicable law—whether stemming from Delaware or Oklahoma—which in turn
8
See id. at 8–11 (discussing the Noncompete Agreement); id. at 14–18 (discussing the Operating
Agreement).
9
Verified Compl. ¶¶ 12–20, Dkt. No. 1 (the second instance of paragraphs 12 through 20 in the
Complaint). I note that the Complaint itself refers only to those restrictive clauses contained in
the Operating Agreement, but the parties have extensively briefed and argued as to the restrictive
clauses contained in the Noncompete Agreement as well.
10
Id. ¶ 19 (the second instance of a paragraph 19 in the Complaint).
11
See generally Verified Compl., Dkt. No. 1.
12
See, e.g., Def.-Countercl. Pls.’ Mot. (I) To Enforce This Ct.’s April 14 Status Quo Order, (II)
For an Order Holding Pls.-Countercl. Defs. In Contempt and (III) For Sanctions, Dkt. No. 95.
6
will impact the enforceability of the covenants at issue. 13 Addressing these questions
requires a more in-depth review of the Transaction and the Agreements.
I note, also, the need for this Memorandum Opinion to avoid the advisory.
The Plaintiffs in particular have sought for me to rule upon the general enforceability
of the covenants at issue.14 This I clearly cannot do. At present, the following
questions appear to be ripe before me: (1) the law applicable to the nonsolicit
provisions as relates to employee solicitation (the “Employee Nonsolicit
Provisions”); 15 (2) the law applicable to the noninterference provisions of the
Operating Agreement as relates to the common “supply chain” usage of suppliers by
both the Plaintiffs’ current business and the business of Parks LLC (the
“Noninterference Supply Chain Provisions”);16 and (3) the law applicable to the
nonsolicit and noninterference provisions of the Operating Agreement as relates to
Plaintiff Steven Parks’s marketing of a boat dealership in Texas that sells both
Defendants’ boats and competitor boats (the “Noninterference Marketing
Provisions”). 17
13
Am. Joint Mem. Regarding Procedural Posture for Addressing Restrictive Covenants and
Stipulation, Dkt. No. 107.
14
Joint Mem. Regarding Procedural Posture for Addressing Restrictive Covenants 5, Dkt. No.
94.
15
See, e.g., Defs. OB 53–54 (identifying employee solicitation as an issue).
16
See id. at 54 (identifying supply chain interference issues as potentially violative of the
restrictive covenants).
17
See, e.g., id. at 54–55 (identifying Steven Parks’s “marketing the sale of a boat dealership
(Austin Boats) in Texas” as a purported issue under the restrictive covenants).
7
As a preliminary matter, I note that although the covenants not to compete
with the business sold have been discussed and briefed, there has been no serious
contention that the Plaintiffs’ current activities—engaging in a fiberglass pool
building business called Grand Pools—conflict with the noncompete provisions in
either of the pertinent Agreements at this stage.18 Accordingly, I need not discuss
the hypothetical issue of choice of law applicable to those covenants. I now turn to
those parts of the Agreements pertinent to the choice of law with respect to the
covenants currently in play.
A. The Agreements and the Background of the Transaction
The Noncompete Agreement contains the following restrictive covenants:
3. Nonsolicitation. [The Plaintiffs] shall not during the Restrictive Period,
directly or indirectly: (a) solicit for [the Plaintiffs] or any other Person,
business from any customers, clients or accounts of Purchaser, except on
behalf of Purchaser while employed by Purchaser; (b) solicit for [the
Plaintiffs] or any other Person, any active prospective customers, clients or
accounts of Purchaser, except on behalf of Purchaser while employed by
Purchaser; or (c) solicit, employ, retain as a consultant, interfere with or
attempt to entice away from Purchaser any employee or former employee of
Purchaser who was employed by Purchaser prior to the Closing Date and
who has agreed to be, or has been, employed or retained by Purchaser within
six (6) months prior to such solicitation, employment, retention, interference
or enticement.
4. Noninterference. [The Plaintiffs] shall not during the Restrictive Period,
directly or indirectly: (a) encourage, in any way or for any reason, any
customer, client or account of Purchaser, to sever or alter the relationship of
18
There has been no small amount of briefing regarding the pontoon boat furniture supply
company the Plaintiffs considered starting prior to the termination of their employment with
Horizon. That alleged competitive activity will be analyzed in the plenary phase of this action.
8
such customer, client or account with Purchaser; (b) discourage, in any way
or for any reason, any active prospective customers, clients or accounts of
Purchaser from becoming a customer, client or account of Purchaser; (c) aid
any other Person attempting to take customers, clients or accounts from
Purchaser; (d) aid any other Person in discouraging, in any way or for any
reason, any active prospective customers, clients or accounts of Purchaser
from becoming a customer, client or account of Purchaser; (e) serve or work,
outside of [the Plaintiffs’] employment with Purchaser, in any way for any
customers, clients or accounts of Purchaser . . . . 19
The Operating Agreement contains the following restrictive covenants:
8.9 Nonsolicitation. No Member20 or Member’s Equityholder shall during
the Restrictive Period, directly or indirectly: (a) solicit for such Member or
any other Person, business from any customers, clients, dealers, employees,
suppliers or accounts of the Business; (b) solicit for such Member or any
other Person any active prospective customers, clients, dealers, employees,
suppliers or accounts of the Business; or (c) solicit, employ, retain as a
consultant, interfere with or attempt to entice away from the Company any
employee or former employee of the Company who was employed by the
Company within the six (6) months prior to the closing date of the sale of
such Member’s Units, as determined by the Company at its reasonable
discretion.
8.10 Noninterference. No Member or Member’s Equityholder shall, during
the Restrictive Period, directly or indirectly: (a) encourage, in any way or for
any reason, any customer, client, dealer, supplier, or account of the Business,
to sever or alter the relationship of such customer, client, dealer, supplier or
account with the Business; (b) discourage, in any way or for any reason, any
active prospective customers, clients, dealers, suppliers or accounts of the
Business, from becoming a customer, client, dealer, supplier or account of
the Business; (c) aid any other Person attempting to take customers, clients,
dealers, suppliers or accounts from the Business; (d) aid any other Person in
discouraging, in any way or for any reason, any active prospective
customers, clients, dealers or suppliers of the Business from becoming a
customer, client, dealer, supplier or account of the Business; (e) serve or
19
Pls. Richard Parks, et al.’s Aff. of Steven Parks Supp. Mot. for Prelim. Inj., Ex. 5, at PARKS
MANUFACTURING0000052–53 [such exhibit hereinafter “Noncompete Ag.”].
20
Including the Plaintiffs.
9
work in any way for any customers, clients, dealers, suppliers or accounts of
the Business . . . 21
The Agreements each select Delaware as the governing law.22 The Asset
Purchase Agreement, which enabled the broader Transaction, also selected
Delaware as the governing law.23
In addition to the language of the contracts, the reader will be aided by
additional context pertaining to the Transaction. The Transaction was generally
structured as follows: The Plaintiffs, along with other family members, worked for
and owned Parks Inc., an Oklahoma corporation. 24 Horizon developed an interest
in Parks Inc. and, following negotiations, formed Parks LLC, a Delaware limited
liability company with a principal place of business in Oklahoma, to facilitate an
acquisition.25 Parks LLC acquired substantially all of the assets of Parks Inc., though
notably no Oklahoma equity, via the Asset Purchase Agreement executed on July
21, 2017. 26 Parks LLC remains the operating company that carries out the boat-
building business acquired from Parks Inc. 27
21
Id. at Ex. 7, at PARKS MANUFACTURING0000092–93 [such exhibit hereinafter “Operating
Ag.”].
22
Noncompete Ag. at PARKS MANUFACTURING0000057; Operating Ag. at PARKS
MANUFACTURING0000106.
23
APA, at PARKS MANUFACTURING0000038.
24
See Defs. OB 5.
25
See Pls. OB 5–6.
26
See APA; see also Joint Stipulation Resp. to Ct.’s June 15, 2022 Letter, Dkt. No. 110; Defs.
OB 5–6.
27
Defs. OB 5–6.
10
PMI LLC, a manager-managed Delaware limited liability company, was
formed in May 2017.28 Horizon is the manager of PMI LLC; the members of PMI
LLC are the Plaintiffs, another individual named Timothy Long, Fishtoon Partners,
LP, and Horizon.29 The Operating Agreement, which outlines the governance of
PMI LLC, was effective as of July 19, 2017. 30
PMI LLC in turn is the parent company and sole member of Parks LLC. 31
The parties disagree as to what connection there is between PMI LLC and its
members and the broader Transaction. 32 Resolution of that issue is not necessary to
my limited decision here.
Certain other agreements were entered into between the Plaintiffs and various
Defendants around this same time period. 33 Particularly—and named as a closing
28
See id. at 6; Defs. Answer to Verified Compl., Affirmative Defenses, and Verified Countercls.
¶ 7, Dkt. No. 12. The Answer indicates that PMI LLC was formed on May 5, 2017, while the
Defendants’ opening brief indicates it was formed in July 2017. Id.; Defs. OB 6. The Plaintiffs’
opening brief supports the May date, so I have used that date above. See Pls. OB 4.
29
Defs. OB 6; Operating Ag. at PARKS MANUFACTURING0000119.
30
Pls. OB 5.
31
Defs. OB 6.
32
The Plaintiffs’ position appears to be that they were required to invest in PMI LLC as part of
the Transaction. See Pls. OB 37 (“Plaintiffs received less value from Parks LLC, and were
required to and did reinvest most of it in PMI [LLC].”). The Plaintiffs have also, in somewhat
contradictory fashion, argued that the Transaction and the PMI LLC Agreement were not so
entangled as to fall afoul of an Oklahoma statute allowing for certain restraints of trade in
connection with a sale of goodwill. See id. at 50. The Defendants suggest that the PMI LLC
Operating Agreement was an independent investment separate from the Transaction. See, e.g.,
Defs. OB 1 (enumerating the Transaction and the investment in PMI LLC as separate
transactions (1) and (2)); see id. at 13 (describing the Plaintiffs’ position as “nonsense”). But I
note that per the Defendants’ opening brief, the letter of intent that gave rise to the Transaction
anticipated the Plaintiffs’ investment in PMI LLC. Id. at 7.
33
See, e.g., Pls. OB 6–18.
11
deliverable in the Asset Purchase Agreement—the Plaintiffs entered into
employment term sheets with Parks LLC. 34 The employment agreements select
Oklahoma as the governing law.35
The parties also disagree as to whether and to what extent the Noncompete
Agreement between the Plaintiffs and Parks LLC “relate[] to” the Parks’ previous
employment with Parks LLC. 36
II. ANALYSIS
The cross-motions are before me in a summary judgment posture. Summary
judgment may only be granted where the movant has demonstrated that there are no
genuine issues of material fact and that she is entitled to judgment as a matter of
law. 37 The filing of cross-motions for summary judgment does not alter the
applicable standard of review; further, the existence of cross-motions “does not act
per se as a concession that there is an absence of factual issues.” 38 Parties moving
for summary judgment in the context of cross-motions only concede the absence of
factual issues and the truth of the non-movant’s allegations for purposes of their own
34
Id. at 7.
35
Id.
36
That is, the Plaintiffs essentially characterize the Noncompete Agreement as a condition of
their employment. Id. at 8 (“In connection with their employment . . . the Parks Brothers each
signed a [Noncompete] Agreement with Parks LLC as a condition to their employment with
Parks LLC[.]”). The Defendants characterize the Noncompete Agreement as a condition to entry
into the broader Transaction. See Defs. OB 9.
37
United Vanguard Fund, Inc. v. TakeCare, Inc., 693 A.2d 1076, 1079 (Del. 1997).
38
Id.12
motion only, and do not waive their right to assert the existence of disputed facts that
preclude summary judgment in favor of the other party.39
The choice of law question before me, which might appear deceptively
simple, spawns a rather lengthy analysis. Delaware choice of law cases first pose
the question of whether any actual conflict exists between the two states’ laws put
forth by the parties.40 If an actual conflict exists, Delaware cases then apply the
Restatement (Second) of Conflict of Laws (the “Restatement”), using Section 187
to determine whether a second state’s law might supplant a first state’s law where
the latter had been expressly selected by the parties.41 One way in which a second
state’s law might supplant the expressly chosen state law is where that second state
has a “materially greater interest” in the particular issue—here the restrictive
covenants.42
To assess which state has the greater interest, Delaware caselaw follows the
“most significant relationship” test, which stems from Section 6 of the
Restatement.43 Section 6 contains numerous broad-strokes factors that can help to
determine which state has the most significant relationship, but the inquiry does not
end there. The Restatement also includes Section 188, which provides a context-
39
Id. (emphasis added).
40
See AG Res. Holdings, LLC v. Terral, 2021 WL 486831, at *4 (Del. Ch. Feb. 10, 2021) (citing
Focus Fin. Partners, 241 A.3d at 814).
41
See id.
42
In addition to satisfying the other factors of Restatement § 187(2). See Restatement § 187(2).
43
Certain Underwriters at Lloyds v. Chemtura Corp., 160 A.3d 457, 459 (Del. 2017).
13
specific application of the most significant relationship test as relates to contracts.
Like Section 6, Section 188 also contains a number of factors to be weighed in
assessing each state’s relative interest; Section 188’s factors are more narrowly
directed towards the contract at issue.
Three different iterations of covenant restriction are at issue here. The first
forbids solicitation by the Plaintiffs of Parks LLC or PMI LLC employees,44
embodied in both of the Agreements. I find no conflict between the laws of
Oklahoma and Delaware here, and thus respect the choice of the contracting parties,
finding that Delaware law is applicable. The enforceability of the other restrictions,
involving solicitation of business and noninterference with business, I conclude will
result in different outcomes, dependent on choice of law. I therefore turn to the
Restatement. As I discuss below, a treatment of Section 188 of the Restatement
under the facts available to me does not counsel particularly strongly for either
outcome—Delaware or Oklahoma law—here.
Ultimately, an assessment of case law in combination with the broader factors
found in Section 6 of the Restatement convinces me that Oklahoma public policy,
on these facts, does not override the parties’ choice of law, and I must apply
Delaware law to each of the restrictive covenants at issue here.
44
The Noncompete Agreement forbids solicitation of Parks LLC employees while the Operating
Agreement forbids solicitation of PMI LLC employees. See Operating Ag. § 8.9; Noncompete
Ag. § 3(c).
14
As I have said, the Restatement in various subsections guides my analysis of
the choice of law question. Before reaching any of the substance of the analysis, I
note as a threshold matter that the Restatement provides that a Court is “not bound
to decide all issues under the local law of a single state.” 45 I thus analyze the
Agreements on a provision-by-provision, rather than agreement-by-agreement,
basis.
A. Choice of Law
1. Is There an Actual Conflict Between Delaware and Oklahoma Law?
To resolve the cross-motions’ choice of law issue, I must first ask whether
there is an actual conflict between the two states’ laws championed here: Oklahoma
and Delaware.46 It is evident that a public policy conflict exists. Delaware law prizes
freedom of contract, “presum[ing] that parties to a contract specifying choice of law
meant what they said when they said it,” 47 and would find the restrictive covenants
in the Agreements enforceable at least in part.48
Oklahoma public policy is strikingly different, with statute providing in
general that “‘[e]very contract by which any one is restrained from exercising a
45
Focus Fin. Partners, 241 A.3d at 803 (quoting Restatement § 188 cmt. d) (internal quotations
omitted).
46
AG Res. Holdings, 2021 WL 486831, at *4.
47
Id.48
Whether the full scope of the provisions would be enforceable is a different question.
15
lawful profession, trade or business of any kind’ is void,”49 except as provided by
further statute. Section 219 of the Oklahoma statutes makes exceptions for certain
restrictive covenants, stating:
219(A). A. A person who makes an agreement with an
employer, whether in writing or verbally, not to compete
with the employer after the employment relationship has
been terminated, shall be permitted to engage in the same
business as that conducted by the former employer or in a
similar business as that conducted by the former employer
as long as the former employee does not directly solicit the
sale of goods, services or a combination of goods and
services from the established customers of the former
employer . . . .
219(B). A contract or contractual provision which
prohibits an employee or independent contractor of a
person or business from soliciting, directly or indirectly,
actively or inactively, the employees or independent
contractors of that person or business to become
employees or independent contractors of another person or
business shall not be construed as a restraint from
exercising a lawful profession, trade or business of any
kind. 50
However different the public policies of the two states might be, the pertinent inquiry
is whether an actual conflict exists. With respect to the Employee Nonsolicit
Provisions, it appears that no conflict exists between Delaware and Oklahoma law.
Delaware law would find the nonsolicitation provisions in question to be facially
49
Berry & Berry Acquisitions, LLC v. BFN Props., LLC, 416 P.3d 1061, 1069 (Okla. 2018)
(citing OKLA. STAT. ANN. tit. 15, § 217).
50
OKLA. STAT. ANN. tit. 15, §§ 219(A), 219(B).
16
enforceable. So too would Oklahoma, per Section 219(B), which takes
nonsolicitation of employees out of the broader rule that restraints on trade are
disfavored.
No conflict exists with respect to the Employee Nonsolicit Provisions, and
therefore the selected governing law in the broader Agreements—i.e., Delaware
law—will apply to the construction of those provisions. Notably, the Employee
Nonsolicit Provisions are their own separate subsections within the broader
“Nonsolicitation” subsections in both Agreements (perhaps not well-named); the
decision that Delaware law applies, therefore, speaks with respect only to Section
3(c) of the Noncompete Agreement and Section 8.9(c) of the Operating Agreement.
Facially, however, the two other issues before me—the law applicable to the
noninterference provisions with respect to common “supply chain” usage, and the
law applicable to the nonsolicit and noninterference provisions relating to Plaintiff
Steven Parks’s marketing efforts in favor of another boat dealership—might resolve
differently depending on whether Delaware or Oklahoma law is applied to the facts
once they are developed. Each is a restraint on a lawful profession (marketing) or
trade (obtaining materials for a separate business), and no Oklahoma statute carves
these restraints back out of the state’s broader policy against restraints on trade.
Thus, an actual conflict exists with respect to the law as applied to the
17
Noninterference Supply Chain Provisions and the Noninterference Marketing
Provisions.
Finally, I note that, so far as I can tell from the briefing before me, the singular
issue currently implicated by the Noncompete Agreement is the interpretation of the
Employee Nonsolicit Provisions. The text of the restrictive covenants in the
Noncompete Agreement does not appear to reach either the supply chain allegations
or the marketing allegations. The provisions in the Noncompete Agreement focus
on restricting the Plaintiffs’ behavior with respect to customers, clients, or accounts
of Purchaser (Parks LLC).51 To my read, neither Grand Pools’s competing for goods
from a Parks LLC supplier nor Steven Parks’s marketing the sale of a dealership
selling Parks LLC’s products is restricted by language addressing customers, clients,
or accounts of Parks LLC. I therefore do not consider the Noncompete Agreement,
and the attendant choice of law, any further than I have here.
The text of the Operating Agreement, though, does purport to restrict the
Plaintiffs’ activities with respect to dealers and suppliers. I turn now to a
consideration of the appropriate choice of law as relates to the Operating
Agreement’s restrictive covenants.
51
See Noncompete Ag. §§ 2–4.
18
2. Choice of Law Principles
Having determined that an actual conflict exists with respect to the laws that
could apply to the Noninterference Supply Chain Provisions and the Noninterference
Marketing Provisions, I now follow the Restatement in addressing the choice of law
question. 52 The Restatement provides that where contractual counterparties have
selected a particular jurisdiction’s law to govern an agreement, that law will apply,
unless either
(a) the chosen state has no substantial relationship to the
parties or the transaction and there is no other reasonable
basis for the parties’ choice, or
(b) application of the law of the chosen state would be
contrary to a fundamental policy of a state which has a
materially greater interest than the chosen state in the
determination of the particular issue and which, under the
rule of Section 188, would be the state of the applicable
law in the absence of an effective choice of law by the
parties.53
As I have noted above, the law selected to govern the Operating Agreement is
Delaware law. The Plaintiffs therefore have to demonstrate that the Operating
Agreement fits into either prong (a) or (b) of Section 187 of the Restatement to
escape the application of Delaware law.
52
Focus Fin. Partners, 241 A.3d at 803 (citing Chemtura, 160 A.3d at 464).
53
Id. at 803–04; Restatement § 187(2).
19
The provisions in question appear in the Operating Agreement of a Delaware
LLC. The Plaintiffs do not, therefore, argue that subsection (a)—lack of any
substantial relationship to the chosen state—applies. 54 Instead, the Plaintiffs have
argued that their case fits into prong (b).
The default under the Restatement is that the contractual choice of law—here
Delaware—applies. For the Plaintiffs to obtain the result they seek here, they must
demonstrate (1) that applying Delaware law would be contrary to fundamental
Oklahoma policy, (2) that Oklahoma has a “materially greater interest” than
Delaware as to the restrictive covenants in the Operating Agreement, and (3) that
Oklahoma, “under the rule of Section 188 [of the Restatement],” would be the
applicable law in the absence of a choice of law provision. 55
Again, the Operating Agreement is the foundational operating document of a
Delaware limited liability company. Obviously, Delaware has a strong interest in
much of the agreement. But I must look specifically at the covenants at issue here,
and at the respective states’ interests in those provisions.
Delaware choice of law cases follow the “most significant relationship” test,
based on Section 6 of the Restatement, to identify which state has the superior
54
It is evident that Delaware has a substantial relationship to the parties to the Operating
Agreement—as the Operating Agreement is the governing document of a Delaware entity.
55
Restatement § 187(2)(b).
20
interest. 56 Section 6 outlines the below factors as relevant to the choice of law
analysis:
(a) the needs of the interstate and international systems,
(b) the relevant policies of the forum,
(c) the relevant policies of other interested states and the relative interests of
those states in the determination of the particular issue,
(d) the protection of justified expectations,
(e) the basic policies underlying the particular field of law,
(f) certainty, predictability and uniformity of result, and
(g) ease in the determination and application of the law to be applied.57
Other sections of the Restatement identify how these factors should be
assessed in a given context. Section 188 of the Restatement, in particular, addresses
contractual disputes, and lays out the following further factors for consideration:
(a) the place of contracting,
(b) the place of negotiation of the contract,
(c) the place of performance,
(d) the location of the subject matter of the contract, and
(e) the domicil, residence, nationality, place of incorporation and place of
business of the parties.
These contacts are to be evaluated according to their relative importance with
respect to the particular issue. 58
My analysis of the Section 188 factors is difficult, given the nature of the
contract at issue—an entity’s governing document rather than a commercial or
employment contract.
56
See Chemtura, 160 A.3d at 464.
57
Restatement § 6(2).
58
Id. § 188(2).
21
The Plaintiffs submit that they negotiated and signed all contracts pertinent to
the Transaction in Oklahoma,59 but the Defendants do not provide facts regarding
the place of negotiation or contracting. I assume for purposes of analysis that the
place of negotiation was Oklahoma. The Restatement notes that the place of
contracting is, standing alone, a “relatively insignificant contact.” 60 Still, without
facts pointing in the direction of Delaware, factors (a) and (b) must counsel (if only
weakly) for the application of Oklahoma law.
The place of performance and the location of the subject matter of the contract
are, per the Restatement, more significant factors, but are difficult to assess here
given the nature of the contract.61 The covenants are written to apply without
territorial limitation—they certainly can be expected to be performed in Oklahoma,
but not exclusively so. In fact, one of the acts alleged here as in breach is the
marketing of a boat dealership located in Texas. I find these factors are inconclusive.
The facts regarding factor (e)—the residence or location of the contracting
parties—are easy to confirm but split in multiple directions. The parties to the
Operating Agreement are Fishtoon Partners, LP, a Delaware limited partnership;
Horizon, a California limited liability company; the Plaintiffs; and a third individual,
Timothy Long, whose domicile is not disclosed in the record. The Plaintiffs are
59
See Pls. Richard Parks, et al.’s Aff. of Steven Parks Supp. Mot. for Prelim. Inj., ¶ 14.
60
Restatement § 188(2) cmt. e.
61
See id.
22
Oklahoma citizens,62 while Horizon is a California citizen and Fishtoon is a
Delaware citizen.63 PMI LLC itself is incorporated in Delaware, though its
“headquarters and all operations are located” in Oklahoma. 64 This factor is also
inconclusive.
The contacts described by the five-factor Section 188(2) are not terribly
helpful with respect to the choice of law analysis here; for further guidance, I turn to
case law dealing with choice of law in the context of a Delaware LLC agreement.
As this Court has noted, “a Delaware LLC can select the law of a different
jurisdiction to govern its LLC agreement.” 65 The Delaware LLC Act “makes clear
that Delaware’s interest is not inherently paramount, precisely because parties can
select the law of another state to govern an LLC agreement.”66 Where the internal
affairs doctrine has been implicated by claims arising from a Delaware LLC
agreement, this Court has not hesitated to apply Delaware law despite a choice of
law challenge: “Delaware maintains a ‘significant and substantial interest in
overseeing the conduct of [Delaware] corporate fiduciaries’ . . . . [D]etermining
62
See Pls. OB 3–4.
63
See Operating Ag.
64
Defs. Answer to Verified Compl., Affirmative Defenses, and Verified Countercls. ¶ 7, Dkt.
No. 12.
65
Focus Fin. Partners, 241 A.3d at 809.
66
Id. at 810.
23
whether [a party] acted in good faith, in line with his contractual fiduciary duties, is
quintessentially an internal affairs question,” such that Delaware law should apply.67
However, the allegations before me are not similar to a claim of breach of
fiduciary duty; the allegations here arise out of restrictive covenants embedded
within an LLC agreement. The restrictive covenants’ presence within an LLC
agreement does not mean the allegations are necessarily internal affairs questions;
here, I find, they are not.68 The covenants are instead aimed at restricting any
interference by the Plaintiff-sellers with the post-sale business.
67
See AG Res. Holdings, 2021 WL 486831, at *6 (citation omitted).
68
Focus Financial Partners, in dicta, mused that choice of law applicable to provisions of a unit
compensation agreement associated with a Delaware limited liability company but signed by a
California employee was an “interesting question,” although the Court did not ultimately need to
make a finding as to the applicable law. Focus Fin. Partners, 241 A.3d at 811. In its discussion
of the question, the Court looked beyond the citizenship of the limited liability company, noting
that the “terms of the Unit-Related Provisions make clear that they are a form of compensation
linked to [the party’s] employment,” and that the applicable vesting schedule for the units was tied
to the party’s employment status, rather than his rights as a unit holder. Id. at 810–11. The linkage
between the party’s employment and his receipt of units, per the Focus Financial Partners Court,
gave rise to a “significant interest” on behalf of California due to “the status of the units as a
method of compensating an employee who lived and predominantly worked in California.” Id. at
810.
By contrast, the provisions of the Operating Agreement here do not appear to be tied to the
Plaintiffs’ status as employees of Parks LLC. For example, the definition of “Restrictive Period”
in the Operating Agreement refers to “the period in which each Member owns Units” plus the
immediately following five years, rather than a period of time following termination of
employment. Operating Ag. § 18.63. The consideration provided in exchange for units in PMI
LLC was not employment, but an investment in the company in addition to the restrictive
undertakings of the Operating Agreement. Id. § 17.13.
The Focus Financial Partners Court also considered whether the restrictive covenants in
a (different) agreement “ma[d]e sense as restrictions on [the party] in his capacity as a holder of
units,” concluding that they did not: “each of the Employment-Related Provisions seeks to
constrain [the party’s] ability to take advantage of relationships and knowledge that he developed
in his capacity as an employee.” Focus Fin. Partners, 241 A.3d at 812 (emphasis added). Here,
by contrast, the Parks’s brothers expertise was, I assume, largely acquired pre-Transaction, and
24
In sum, the Operating Agreement is not an agreement for the employment of
the Plaintiffs in Oklahoma seeking to import Delaware law as a workaround of
Sooner prohibitions on certain restrictive covenants.69 Such a choice of law would
likely be unenforceable under Restatement principles.70 Instead, the Operating
Agreement represents membership interests in a Delaware LLC received by the
Plaintiffs at least partially in return for the sale of corporate assets from the Plaintiffs’
family business, and certain limitations placed on the members in aid of the LLC’s
business.
I assume that Oklahoma’s policies against restraints on employment and
conduct of business are “fundamental.”71 That satisfies one of three factors
sufficient, under the Restatement, to set aside the parties’ choice of law.
Nonetheless, as described above, Section 188 of the Restatement is not conclusive
here. In other words, the Plaintiffs have not shown that Oklahoma law would apply
to the covenants, absent the designation of Delaware law in the Operating
Agreement, pursuant to Section 188. Finally, given the nature of the Operating
Agreement, I do not find that the record demonstrates the remaining Restatement
factor necessary to negate the parties’ choice of law—that Oklahoma has a
thus pre-employment in the resulting LLC. The rationale of Focus Financial Partners is not
persuasive here, in that respect.
69
As noted above, the Plaintiffs entered into separate Employment Agreements in connection
with the Transaction. See supra note 34.
70
See, e.g., Ascension, 2015 WL 356002, at *5; Focus Fin. Partners, 241 A.3d at 824.
71
Restatement § 187(2)(b).
25
materially greater interest in the operation of the covenants of the Operating
Agreement than does Delaware.
The question before me is whether the interests of the competing jurisdiction
are sufficient to overcome the default, which is the recognition of the intent of the
parties as described in the contract. A review of the general principles of Section 6
of the Restatement convinces me that the overarching primacy of Delaware’s interest
in its own entities must carry the day. Section 6 counsels in favor of the protection
of justified expectations, certainty, predictability, and uniformity of result, and the
relative interests of the states in the determination of the particular issue. 72 Each of
these factors points in favor of the application of Delaware law to covenants
designed to protect a Delaware LLC. Oklahoma surely has an interest in restraints
on its citizens’ ability to engage in trade. But the Plaintiffs have not shown that
Oklahoma’s interest dominates over Delaware’s such that I should displace the
parties’ choice of law as selected in the Operating Agreement.
Delaware law, then, applies to each of the applicable sets of provisions before
me.
B. Enforceability of the Applicable Provisions
The parties have, by way of Amended Joint Memorandum, also asked me to
opine in this expedited phase of the action on the enforceability of the restrictive
72
Id. § 6(2).
26
covenants, in light of my decision on choice of law.73 This is a matter that must be
considered in light of the facts of record, including whether the actions of the
Plaintiffs have in fact breached the nonsolicitation and noninterference covenants of
the Operating Agreement, as well as the enforceability of the particular covenants in
light of Delaware law. Because the record is at present insufficiently developed to
produce answers to these questions that would be other than hypothetical and
advisory, I do not address the enforceability issues further here.
III. CONCLUSION
The law applicable to the Employee Nonsolicit Provisions, the
Noninterference Supply Chain Provisions, and the Noninterference Marketing
Provisions is Delaware law. It is SO ORDERED.
The parties should meet and confer and inform me of remaining issues
following this Memorandum Opinion.
73
Am. Joint Mem. Regarding Procedural Posture for Addressing Restrictive Covenants and
Stipulation, Dkt. No. 107.
27