The Court of Appeal (“CA”) has recently held that despite a former UK employee and a global parent company, EMC Corporation (“EMC”), agreeing to the exclusive jurisdiction of the Massachusetts courts in any dispute regarding EMC’s stock option plan, that dispute could be heard in the UK. The CA also granted an “anti-suit” injunction to stop proceedings by EMC against Mr Petter in Massachusetts.
This decision provides a timely reminder for all global organisations to understand fully all their rights when a key employee working within the group leaves to join a competitor and to review and amend their existing provisions accordingly.
What was in issue?
Mr Petter resigned from his UK employer, EMC Europe, to join a competitor. EMC Europe was part of the EMC group of companies. In essence, EMC alleged that Mr Petter had violated the “detrimental activity” clause in his employee agreement (which was expressly referred to in its stock option plan) and sought to cancel the restricted stock unit awards Mr Petter held under that plan. That stock option plan was between Mr Petter and EMC (not EMC Europe) and contained an exclusive jurisdiction and choice of law clause in favour of Massachusetts.
The crux of the matter was which country had jurisdiction to hear the dispute between EMC and Mr Petter. EMC brought proceedings in Massachusetts in accordance with the exclusive jurisdiction clause in the stock option plan. Mr Petter responded by bringing proceedings in the UK. In doing so, he relied on the European Brussels I (Recast) Regulations (the “Brussels Regulations”), which allow an employee to sue “an employer” in the courts of the Member State where he habitually carries out his work (the UK). He also sought an “anti-suit” injunction from the UK courts to stop the Massachusetts proceedings, on the basis that the Brussels Regulations only allow an employer to sue an employee in the courts of the Member State in which the employee is domiciled (again, the UK).
What did the Court of Appeal say?
The CA agreed that the UK courts did have jurisdiction over the dispute between EMC and Mr Petter regarding the stock option plan. Whilst Mr Petter’s employment contract was with EMC Europe, the CA agreed with the High Court that for the purposes of the Brussels Regulation, EMC also fell within the scope of an employer as the dispute regarding the terms of the stock option plan was “intrinsically bound up” with Mr Petter’s employment contract.
It also agreed to issue an anti-suit injunction to stop the Massachusetts proceedings (overturning the earlier High Court decision on this point). Some commentators had criticised an earlier decision in the case of Samengo-Turner where an anti-suit injunction had been issued on similar facts to prevent New York proceedings against UK employees regarding the terms of a bonus scheme.
The High Court had considered that Mr Petter’s case could be distinguished Samengo-Turner. The CA disagreed with this, and considered itself bound by the earlier decision. However, with the notable exception of Vos LJ, the judges explained that they would have granted the anti-suit injunction in any event.
Sales LJ noted that where an exclusive jurisdiction clause is in issue, there may be a tension between the principle of party autonomy and public policy considerations. In this case, the provisions in the Brussels Regulations concerning employees are intended to give protection to a party with a perceived weaker bargaining position. He considered that, in these circumstances, the balance lay with the clear public policy behind the Brussels Regulations, and felt that an English court should take such steps as are available to it to protect its jurisdiction. Although this would create difficulty for an international organisation such as EMC, which offers stock options to employees based around the world, the judge, quoting from Samengo-Turner, observed that:
“A multinational business must expect to be subject to the employment law applicable to those they employ in other jurisdictions.”
What should employers be aware of?
This case sends three clear messages:
1. An employee may not be bound by their agreement on jurisdiction
- An UK-based employee will be able to insist on any dispute concerning their employment contract to be heard in the UK, notwithstannding any exclusive jurisdiction clause contained in that contract. However, it is not uncommon for employees with a UK domestic employer to be rewarded through a global incentive plan operated by the US parent company and with any dispute as to those incentives being a matter for the relevant US court. This decision (and the earlier decision of Samengo-Turner) makes clear that if the US parent company is deemed the employee’s “employer” for these purposes, the employee may be able to insist on a dispute concerning a plan being heard in the UK, notwithstanding the terms of the plan and/or award documentation.
- The UK courts may also be prepared to stop any proceedings which are already running in the applicable US court by issuing an anti-suit injunction, even where that court has already accepted jurisdiction as Massachusetts had here. Should the US parent company continue with the proceedings it may face consequences from our UK courts for breach of that injunction with sanctions including fines and seizure of assets. It is also likely to be difficult for the US parent to enforce any overseas judgement against the employee in the UK.
2. Careful planning to distance so far as possible awards under employee share plans from the employment contract
- This case also highlights the fact that awards under employee share plans are increasingly being viewed as part of a participant’s employment, notwithstanding the terms of the plan and award documentation (which are likely to provide that the awards are separate from the contract of employment, to seek to protect the employer and wider group). Introducing a global employee share plan requires careful planning and implementation. The rules of the parent company’s plan and award documentation will need to be reviewed, in particular from a local tax, employment and securities law perspective. It is likely that a local Addendum or Sub-Plan will be required, and consideration of the governing law, tax withholding and employment provisions will be key.
3. Ensuring employment contracts protect the business when an employee joins a competitor
- It is also a timely reminder that organisations must remain wary of the risk of an employee defecting to a competitor, and potentially damaging its business by taking customers and confidential information and poaching staff in the terms of the domestic employment agreement. Here Mr Petter appears to have had a one month notice period and very limited restrictions on his activities post-employment. These were contained in a “standard” agreement. Whilst he was subject to a 12 month non-competition provision, a restriction of that length is notoriously difficult to enforce in the UK. Employers should ensure that their domestic employment agreements include:
- Sufficient notice periods.
- Garden leave provisions essentially locking a defecting employee out of the business during his or her notice period to protect customers, clients, confidential information etc.
- Restrictions on an employee’s activities post-termination including competing with the business, soliciting and dealing with clients and customers and poaching staff. It is critical, though, that such restrictions only go so far as is reasonably necessary.
- The terms of the employment agreement must also be tailored to the employee’s role and duties and kept under review. This is particularly so where an employee rises through the ranks to take up a senior position having historically been employed on a relatively junior contract of employment. A UK court will look at enforceability at the date an employee enters into the relevant restrictions. Changes deemed necessary to protect the company’s business must be agreed and the employment contract update.
- Press reports around the time of Mr Petter’s departure to join EMC’s competitor, a relatively new start-up, suggest that his move was just one of many over several years. Faced with what appears to be a “team move” scenario this should itself act as a trigger for employers to ensure that employment contracts contain adequate and enforceable garden leave and post-termination poaching provisions. These can keep potentially disruptive employees out of the business and minimise the potential for departing employees to poach other staff. However, an employer must also take care to ensure that it does not put itself in breach of contract in any way. It should be wary, for example, of excessively monitoring staff or taking pre-emptive steps when it has no grounds for doing so. Such conduct can breach trust and confidence between the employer and employee and open up the option to the employee of accepting the employers breach, rendering any covenants unenforceable.
With litigation in both the UK and Massachusetts, employers should take note not only of the legal issues over jurisdiction but also the lessons as to how such litigation might be avoided in the first place. If you wish to discuss any of the issues raised in this article, please do not hesitate to contact your usual OC Contact.