W. R. Berkley Corporation v. Niemela
Filing
130
MEMORANDUM OPINION. Signed by Judge Maryellen Noreika on 10/24/2019. (dlw)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
W.R. BERKLEY CORPORATION,
Plaintiff/
Counterclaim-Defendant,
v.
JASON R. NIEMELA,
Defendant/
Counterclaim-Plaintiff.
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C.A. No. 17-32 (MN)
MEMORANDUM OPINION
Scott A. Holt, Curtis J. Crowther, YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington,
DE. Counsel for Plaintiff, Counterclaim Defendant.
John A. Sensing, Jesse L. Noa, POTTER ANDERSON & CORROON, LLP, Wilmington, DE. Counsel
for Defendant and Counterclaim Plaintiff.
October 24, 2019
Wilmington, Delaware
NOREIKA, U.S. DISTRICT JUDGE
This case involves the enforcement of an anti-recruitment covenant, sometimes also called
a non-solicitation clause or an anti-raiding clause. Plaintiff W. R. Berkley Corporation (“Berkley”)
commenced this action against its former employee Defendant Jason Niemela (“Niemela”),
seeking to recapture the value of certain stock units previously awarded to Niemela through several
Restricted Stock Unit Agreements (“RSU Agreements”) and a Long-Term Incentive Program
Agreement (“LTIP Agreement,” and collectively, the “Agreements”). The Agreements grant
Berkley recapture rights if Niemela breaches a covenant not to recruit employees of his former
employer Berkley Aviation, which is an operating unit of a Berkley subsidiary. 1 Currently pending
before the Court are the parties’ cross-motions for summary judgment. (D.I. 87; D.I. 91). The
Court has subject matter jurisdiction over this action pursuant to 28 U.S.C. § 1332. For the
following reasons, the parties’ motions for summary judgment are DENIED.
I.
BACKGROUND
Niemela was employed as President of Berkley Aviation from December 2005 to
April 2016. (D.I. 20 ¶ 8; D.I. 92-1, Ex. 15). Berkley Aviation underwrites aviation insurance.
(D.I. 112 ¶¶ 2, 8). During his employment, Niemela signed several RSU Agreements and one
LTIP Agreement. (D.I. 90 at A219 – A313). Each agreement granted Niemela restricted stock
units as employee performance awards and provides that the stock units can be forfeited or
recaptured if certain events occur. (See, e.g., Id. at A230 (§ 3(d)).
Relevant here, the Agreements provided that the value of the stock units can be recaptured
if a grantee, such as Niemela, engages in “Competitive Action” within one year of the termination
1
Only Berkley and Niemela are signatories to the Agreements, so Berkley Aviation is a not
a party to this action.
of his employment (hereinafter, “recapture rights”). (See, e.g., Id. at A230, § 3(d)(B)). The
definition of Competitive Action includes actions by a grantee, “on behalf of any person or entity
engaged in business activities competitive with the business activities of the Company,” to
“solicit[] or induce[], or in any manner attempt[] to solicit or induce, any person employed by, or
as an agent of, the Company to terminate such person’s employment with the Company,”
(hereinafter, “the anti-recruitment covenant”).
(Id. at A231, § 3(e)(iii)).
Pursuant to the
Agreements, “[t]he determination of whether the Grantee has engaged in a Competitive Action . . .
shall be made by the Committee in its sole and absolute discretion.” (Id.). The “Committee” refers
to the Compensation Committee of the Board of Directors of Berkley. (Id. at A229, § 1).
In April 2016, the same month he submitted his resignation letter, Niemela established
Air Centurion Insurance Services, LLC (“Air Centurion”). In October 2016, three employees
resigned from Berkley Aviation and started working at Air Centurion. (D.I. 112 ¶¶ 13-14). At a
meeting on December 20, 2016, the Committee decided that Niemela had engaged in Competitive
Action by recruiting the three former employees to work for Air Centurion, which is a business
that competes with Berkley Aviation. (Id. ¶¶ 41, 46). The Committee further decided that the
Company should exercise its rights under the Agreements to recapture the value of the awarded
stock units. (D.I. 1 ¶ 31).
Niemela denies that he solicited the three former employees and claims that each of them
responded to a Craigslist.com online job advertisement that he posted on September 30, 2016.
(D.I. 20 ¶¶ 26, 33). Berkley believes the Craigslist ad was a ruse, because it did not name the
hiring company, it did not provide job titles or job descriptions, all three former employees
responded to the ad within one day of its posting, and those are the only three employees Niemela
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hired at his new company. (D.I. 86 ¶¶ 4-9). On January 11, 2017, Berkley filed this action to
enforce its contract rights. (Id.).
II.
STANDARD OF REVIEW
“The court shall grant summary judgment if the movant shows that there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a matter of law.”
Fed. R. Civ. P. 56(a). The moving party bears the burden of demonstrating the absence of a
genuine issue of material fact. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S.
574, 586 n.10 (1986). A party asserting that a fact cannot be – or, alternatively, is – genuinely
disputed must support its assertion either by citing to “particular parts of materials in the record,
including depositions, documents, electronically stored information, affidavits or declarations,
stipulations (including those made for the purposes of the motions only), admissions, interrogatory
answers, or other materials,” or by “showing that the materials cited do not establish the absence
or presence of a genuine dispute, or that an adverse party cannot produce admissible evidence to
support the fact.” Fed. R. Civ. P. 56(c)(1)(A) & (B). If the moving party has carried its burden,
the nonmovant must then “come forward with specific facts showing that there is a genuine issue
for trial.” Matsushita, 475 U.S. at 587 (internal quotation marks omitted). The Court will “draw
all reasonable inferences in favor of the nonmoving party, and it may not make credibility
determinations or weigh the evidence.” Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133,
150 (2000).
To defeat a motion for summary judgment, the non-moving party “must present more than
just bare assertions, conclusory allegations or suspicions to show the existence of a genuine issue.”
Podobnik v. U.S. Postal Serv., 409 F.3d 584, 594 (3d Cir. 2005) (internal quotation marks omitted).
However, the “mere existence of some alleged factual dispute between the parties will not defeat
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an otherwise properly supported motion for summary judgment;” a factual dispute is genuine only
where “the evidence is such that a reasonable jury could return a verdict for the nonmoving party.”
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). “If the evidence is merely
colorable, or is not significantly probative, summary judgment may be granted.” Id. at 249-50
(internal citations omitted).
III.
DISCUSSION
Each party asks the Court to enter judgment in its favor on Berkley’s claim that it has the
right, under the Agreements, to recapture the value of the previously awarded stock units, because
Niemela breached the anti-recruitment covenants. Before the Court can address the merits of that
issue, however, it must first address several threshold issues raised by Niemela, including:
(1) whether California or Delaware law governs the Agreements; (2) whether the recapture rights
are unenforceable penalties; (3) whether the anti-recruitment covenant applies to employees of
Berkley Aviation; and (4) whether the Agreements improperly limit the scope of the Court’s
authority.
A.
Threshhold Issues
1.
Choice of Law
The parties dispute which state’s law governs the Agreements. (D.I. 92 at 11-14; D.I. 110
at 8-11; D.I. 113 at 9-11; D.I. 123 at 2-3). Niemela argues that the Agreements are governed by
California law, whereas Berkley asserts that Delaware law governs, because each of the
Agreements contains a Delaware choice-of-law provision. (See D.I. 90 at A224 (§ 18), A236
(§ 18), A246 (§ 18), A261 (§ 19), A279(§ 19), A300 (§ 19), A310 (§ 10(e))). “[I]t is only in rare
circumstances that Delaware courts do not honor the choice-of-law provisions agreed to by parties
in a binding contract.” Coface Collections N. Am. Inc. v. Newton, 430 F. A’ppx 162, 166 (3d Cir.
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2011). To determine whether a choice-of-law provision will be enforced, Delaware courts apply
§ 187 of the Restatement (Second) of Conflicts of Laws. Sensus USA, Inc. v. Franklin, No. 15742 (RGA), 2016 WL 1466488, at *2 (D. Del. Apr. 14, 2016). Under § 187, a parties’ choice-oflaw provision is enforced unless:
(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 § 188,
would be the state of the applicable law in absence of an effective choice of law
by the parties.
Restatement (Second) of Conflict of Laws § 187(2) (1971).
Niemela invokes the second exception. (D.I. 92 at 11-13). For California law to apply
under the second exception, three elements must be met: (i) application of Delaware law must be
contrary to a fundamental policy of California; (ii) California must have a materially greater
interest than Delaware in the Agreements; and (iii) under the test set forth in § 188 of the
Restatement, California law would apply absent the Delaware choice-of-law provisions. Cabela’s
LLC v. Highby, 362 F. Supp. 3d 208, 217 (D. Del. 2019).
On the first element, California does not have a clear public policy against enforcement of
anti-recruitment covenants. Section 16600 of the California Business and Professions Code
provides that “every contract by which anyone is restrained from engaging in a lawful profession,
trade, or business of any kind is to that extent void.” California courts interpreting § 16600,
however, have reached conflicting outcomes about whether the statute invalidates anti-recruitment
covenants. In Loral Corp. v. Moyes, 174 Cal. App. 3d 268 (Cal. 1985), the California Court of
Appeals for the Sixth District upheld an anti-recruitment covenant. In AMN Healthcare, Inc. v.
Aya Healthcare Servs., Inc., 239 Cal. Rptr. 3d 577 (Cal. Ct. App. 2018), however, the California
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Court of Appeals for the Fourth District struck one down. The court in AMN Healthcare reasoned
that Loral was no longer good law after Edwards, a decision by the California Supreme Court
issued ten years earlier where, as AMN Healthcare itself admits, the court “did not address” an
anti-recruitment provision. 2 AMN Healthcare, 239 Cal. Rptr.3d at 589 (discussing Edwards v.
Arthur Andersen LLP, 189 P.3d 285, 292 (Cal. 2008)). This Court need not determine if AMN
Healthcare was rightly decided or whether Loral is still good law. It is enough to recognize that
AMN Healthcare and Loral were issued by courts sitting at the same appellate level, meaning that
there is a split in California authority addressing the validity of anti-recruitment covenants.
Accordingly, Niemela has not shown that, under § 187 of the Restatement, application of Delaware
law would be contrary to a fundamental policy of California.
As to the second element, Niemela has not shown that California has a materially greater
interest than Delaware in the Agreements, particularly given the Third Circuit’s holding in Coface
Collections North America Inc. v. Newton, 430 F. App’x 162 (3d Cir. 2011). In Coface, the Third
Circuit determined that Louisiana did not have a “materially greater interest” than Delaware in
“determining the effect of the non-compete clause” at issue. Id. at 168. The Third Circuit
acknowledged that the defendant was a Louisiana citizen, he signed the agreement in Louisiana,
and his allegedly competing business was headquartered in Louisiana. Id. But “these geographical
contacts” were insufficient to overcome Delaware’s “materially greater interest” when both parties
were not Louisiana citizens, plaintiff was a Delaware corporation that operated nationally, and
2
Because Edwards did not directly address anti-recruitment covenants or the Loral decision,
it is not surprising that, after Edwards, some California courts continued to uphold antirecruitment covenants under Loral. See, e.g., Gallagher & Co. v. Lang, No. 14-0909 (CW),
2014 WL 2195062, at *4 (N.D. Cal. May 23, 2014); Sunbelt Rentals, Inc. v. Victor, No. 134240 (SBA), 2014 WL 492364, at *9 (N.D. Cal. Feb. 5, 2014); Kindt v. Trango Sys., Inc.,
D062404, 2014 WL 4911796, at *10 (Cal. Ct. App. Oct. 1, 2014).
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“Delaware ha[d] a substantial interest in enforcing this voluntarily negotiated contract clause that
explicitly designate[d] Delaware law to govern.” Id. (citing Abry Partners V, L.P. v. F & W
Acquisition LLC, 891 A.2d 1032, 1049-50 (Del. Ch. 2006)).
Like Coface, Niemela resides in California, signed the agreement in California, and
headquartered his competing business in California. (See D.I. 112 ¶¶ 5-6, 11). But these
geographical contacts are insufficient to show that California has a “materially greater interest”
than Delaware when this is not a case between California citizens (D.I. 112 ¶¶ 6, 16); Berkley is a
Delaware entity, headquartered in Connecticut, that operates throughout the United States,
(D.I. 112 ¶ 16; D.I. 113, Ex. 6 ¶ 5); and “[t]he parties voluntarily negotiated the contract clause
expressly designating Delaware law to govern any disputes.” Sensus, 2016 WL 1466488, at *4.
“Delaware has a fundamental interest in allowing its citizens to use its law as a commercial lingua
franca to transact business across borders.” Id. 3
Neither party addressed the final element under § 187(2)(b), which is whether California
law would apply under § 188 of the Restatement. 4 Instead, Niemela argues that Berkley waived
other non-compete covenants in the same contracts. (See D.I. 92 at 13 & 13 n.72; D.I. 124 at 1).
Because waiver is not one of the factors under § 188, however, it does not aid the Court’s analysis.
3
The Court does not find persuasive Ascension Insurance Holdings, LLC v. Underwood,
where California’s specific interest in prohibiting non-compete provisions was materially
greater than Delaware’s general interest in the sanctity of contract. C.A. No. 9897-VCG,
2015 WL 356002, at *5 (Del. Ch. Jan. 28, 2015). Ascension did not address Coface or the
Delaware state jurisprudence on which Coface relies. In addition, the holding in Ascension
relied on the fact that all the parties resided in California, whereas here all the parties do
not.
4
Under § 188, a court considers: “(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 domicile, residence, nationality, place of incorporation and place of
business of the parties.” Restatement (Second) of Conflict of Laws § 188 (1971).
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For the foregoing reasons, Niemela has not shown that California law should apply under § 187 of
the Restatement. Accordingly, the Court will enforce the parties’ choice-of-law provisions
selecting Delaware law.
2.
Unenforceable Penalties
Niemela argues the recapture rights in the Agreements are unenforceable penalties.
(D.I. 92 at 16). Delaware courts distinguish between a liquidated damages clause (which is valid
and enforceable) and a penalty (which is void as against public policy). Delaware Bay Surgical
Serv., P.C. v. Swier, 900 A.2d 646, 650 (Del. 2006). To distinguish between the two, Delaware
courts apply a two-prong test. A clause is a valid liquidated damages provision if, at the time of
contracting: “(1) the damages are uncertain and (2) the amount agreed upon is reasonable.”
Delaware Bay, 900 A.2d at 651 (quoting Brazen v. Bell Atlantic Corp., 695 A.2d 43, 48
(Del. 1997)). Niemela did not address Delaware’s two-prong test or set forth facts in support of
either prong. (See D.I. 92 at 16-17).
Instead, Niemela argues that the recapture rights are an unreasonable penalty, because
Berkley did not sustain any actual damages, and Berkley can recapture the stock units regardless
of whether it actually sustains damages. (Id. at 16). Under Delaware law, “[i]t matters not whether
actual damages are proven, or that the liquidated damages are substantially larger than the actual
damages, so long as the liquidated damages were a reasonable estimate of the damages which
would be caused.” S.H. Deliveries, 1997 WL 817883, at *2. Accordingly, Niemela has not shown
that Berkley’s recapture rights are unenforceable penalties.
3.
Scope of the Anti-Recruitment Covenant
Niemela contends that the anti-recruitment covenant does not apply to employees of
Berkley’s subsidiaries such as Berkley Aviation. (D.I. 92 at 17-18). Niemela’s interpretation of
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the Agreements is incorrect. The anti-recruitment covenant states, in relevant part, that the grantee
will be deemed to engage in a “Competitive Action” if he “solicits or induces, or in any manner
attempts to solicit or induce, any person employed by, or as an agent of, the Company to terminate
such person’s employment or agency relationship, as the case may be, with the Company.”
(D.I. 90 at A221, § 3(e)). Section 7(a) sets forth the definition of “Company” as “used in Section
3 or otherwise in [the] Agreement with reference to the Grantee’s employment” to “include the
Company and its subsidiaries.” (Id. at A222, § 7(a)).
Use of the conjunction “or” indicates that Section 7(a) provides two situations where the
term “Company” includes subsidiaries. The first is in the entirety of Section 3. The second is in
other sections of the Agreement when in reference to the Grantee’s employment. Because the antirecruitment covenant appears in Section 3, the definition of “Company” in that section includes
Berkley’s subsidiaries. Therefore, the anti-recruitment covenant applies to the employees of
Berkley Aviation.
4.
Scope of Judicial Review
Niemela argues that the Agreements improperly limit the Court’s authority to review the
validity of Berkley’s actions. (D.I. 113 at 11-15). A determination that Niemela engaged in
Competitive Action and that Berkley should exercise its recapture rights is committed, under the
Agreements, to the Committee’s “sole and absolute discretion.” (D.I. 90 at A221, § 3(e)). Under
Delaware law, “when a stock option committee is vested with final, binding and conclusive
authority to determine a participant’s right to receive or retain benefits, that decision made in
accordance with the provisions of the agreement will not be second guessed by the Court absent a
showing of fraud or bad faith.” W.R. Berkley Corp. v. Hall, No. Civ. A. 03C-12-146WCC, 2005
WL 406348, at *4 (Del. Super. Ct. Feb. 16, 2005).
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Contrary to Niemela’s assertions, the discretion clause does not improperly limit the
Court’s subject matter jurisdiction. (D.I. 113 at 12). Indeed, the discretion clause is irrelevant to
subject matter jurisdiction, as evidenced by the fact that Berkley itself asserts that the Court has
subject matter jurisdiction over this action pursuant to 28 U.S.C. § 1332. (See D.I. 1 ¶¶ 4-5). In
addition, there is nothing inherently improper, as Niemela suggests, about considering only
whether the Committee exercised its authority without fraud or bad faith. (D.I. 113 at 12). If the
Agreements had not designated a specific corporate actor as responsible for deciding whether the
Company should exercise its recapture rights, then a party testing whether the exercise of those
contract rights was proper would have to assert instead a claim for breach of the implied covenant
of good faith and fair dealing. Unsurprisingly, Niemela asserts just such a counterclaim. (See
D.I. 20 at Counterclaims, ¶¶ 36-40). Thus, regardless of whether the Court approaches this issue
through Berkley’s claim or Niemela’s counterclaim, the Court would be “limited,” if that is the
right word, to evaluating whether the Company exercised its recapture rights in good faith.
Niemela further argues that the discretion clause cannot prevent the Court from
determining whether the anti-recruitment covenant is reasonable. (D.I. 113 at 13). Under
Delaware law, restrictive covenants, like the anti-recruitment covenant, must be “reasonable in
scope and duration,” “advance a legitimate economic interest” of the former employer, and
“survive a balance of the equities.” Weichert Co. of Penn. v. Young, C.A. No. 2223-VCL, 2007
WL 4372823, at *3 (Del. Ch. Dec. 7, 2007). Niemela’s concerns are misplaced. There is nothing
in the plain language of the discretion clause that limits the Court’s ability to determine if the antirecruitment covenant is reasonable, if Niemela chooses to assert such a challenge. 5
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The Court did not understand Niemela to be arguing that the anti-recruitment covenant is
invalid under Delaware law, because Niemela did not present any facts or analysis, with
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B.
The Committee’s Exercise of Authority
Niemela contends that the Committee acted in bad faith because (1) Berkley determined
that Niemela violated the anti-recruitment covenant well before the Committee ever met; and
(2) the Committee made its determination based on inaccurate speculation without the benefit of
exculpatory evidence. (D.I. 92 at 19-20; D.I. 124 at 7). In support of his first contention, Niemela
claims that: (1) in October 2016, Phillip Welt, an Executive Vice President of Berkley, told Berkley
Aviation employees that they were going to “crush” Niemela; (2) also in October 2016, Berkley’s
General Counsel, Matthew Ricciardi, sent a cease and desist letter to Niemela alleging that
breaches had already occurred; and (3) in November 2016, Ricciardi held an off-the-record
meeting with the Committee. (D.I. 92 at 19-20). In support of his second contention, Niemela
claims that (1) Ricciardi withheld from the Committee Packet “Berkley’s own evaluation that the
Former Employees were not approached by any third parties”; and (2) the Committee made its
determination based solely on the “timing of the Former Employees’ applications and the mere
use of Craigslist.” (Id.).
As an initial matter, Niemela has not shown the relevance of some of these facts to a
determination of bad faith. For example, Niemela makes no connection between Welt’s alleged
“crush” him comments to Berkley Aviation employees and the Committee’s decision. Indeed,
Niemela has presented no evidence showing that Welt was consulted on or involved with the
Committee’s process or decision.
Moreover, Berkley has raised several genuine disputes regarding the material facts
Niemela cited in support of its bad faith argument. (See, e.g., D.I. 110 at 17-19; D.I. 123 at 7-9).
citations to supporting case law, regarding the scope and duration of the anti-recruitment
covenant, the economic interests of Berkley, or the balance of equities.
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Those factual disputes prevent the Court from granting summary judgment in Niemela’s favor.
See Fed. R. Civ. P. 56(a); Matsushita, 475 U.S. at 586 n.10 (stating that the moving party bears
the burden of demonstrating the absence of a genuine issue of material fact). Those same factual
disputes also prevent the Court from granting summary judgment in Berkley’s favor. Under
Delaware law, when a board committee is vested with the sole and absolute discretion to determine
an employee’s right to receive or retain benefits, that decision will not be second guessed by the
Court as long as it was made without fraud or bad faith. See W.R. Berkley Corp., 2005 WL 406348,
at *4. While the Court is unable to conclude at this time that the Committee acted with bad faith,
it also cannot conclude that the Committee acted without bad faith. In opposing Berkley’s motion
for summary judgment, Niemela’s has presented more than just bare assertions, conclusory
allegations or suspicions. (See, e.g., D.I. 92 at 19-20; D.I. 113 at 16-20). Accordingly, the Court
denies both motions for summary judgement.
IV.
CONCLUSION
For the foregoing reasons, each parties’ motion for summary judgment (D.I. 87; D.I. 91)
are DENIED. An appropriate order will be entered.
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