Some defendants in a suit over alleged breaches of an employment noncompete clause will be tried in New Jersey and others in California under a precedential ruling by the U.S. Court of Appeals for the Third Circuit Tuesday.
The appeals court in In Re: Howmedica Osteonics overturned an order transferring the entire case to the Northern District of California, finding the move violated the 2013 U.S. Supreme Court ruling in Atlantic Marine Construction v. U.S. District Court. That ruling calls for judges to honor forum selection clauses under most circumstances.
The appeals court ruled that five individual defendants should be tried in New Jersey because they agreed to forum selection clauses in their employment contracts. Their case was severed from two corporate defendants, whose cases will be heard in the Northern District of California.
The ruling provides guidance on application of Atlantic Marine Construction in a case where five individual defendants were subject to forum selection clauses—four designating New Jersey and one for Michigan. The two corporate defendants were not subject to any such clauses. The ruling offers a four-part test for resolving forum issues under such circumstances.
The suit involves five California residents who quit sales representative jobs for medical device maker Howmedica Osteonics Corp. of Mahwah, New Jersey, and joined Golden State Orthopaedics, a distributor for DePuy Orthopaedics. Howmedica and its parent company, Stryker Corp., sued the five representatives and DePuy for breach of contract in the District of New Jersey, and joined Golden State as a necessary party.
The defendants, citing their personal convenience, moved to transfer the case to the Northern District of California. U.S. District Judge Claire Cecchi granted the motion in August 2016.
Howmedica asked the appeals court to reverse Cecchi’s order transferring the case to California, claiming it violated the Supreme Court’s ruling in Atlantic Marine Construction. That decision held that, outside unusual cases, a District Court should honor a valid forum selection clause.
On appeal, Judges Cheryl Ann Krause, Anthony Scirica and Julio Fuentes said a framework was needed to determine how forum selection clauses impact analysis of transfer motions under 28 U.S.C. §1404(a), which allows a district court to transfer any civil case to another district where it might have been brought. In such cases, the interests of the parties not bound by any contract “run headlong into the presumption of Atlantic Marine,” Krause wrote for the court.
A decision by the Fifth Circuit in In Re Rolls Royce was a “helpful starting point,” Krause wrote. In that case, there were multiple defendants but only one, Rolls Royce, was subject to a forum selection clause. There, the court severed and transferred claims against Rolls Royce from the remaining counts, while saying that interests of noncontracting parties and interests of judicial economy may sometimes trump a forum selection clause.
Krause wrote that the Fifth Circuit approach has merit but requires modification to address some details in the present case, such as the lack of personal jurisdiction in New Jersey for Golden State, which is deemed a “necessary party.”
The appeals court called for a four-step inquiry that includes: The forum selection clauses, public and private interests relevant to noncontracting parties, threshold issues related to severance, and which transfer decision most promotes efficiency while minimizing prejudice to noncontracting parties’ private interests.
The appeals court said Cecchi erred by professing to address only public interests while considering the parties’ and witnesses’ convenience a private interest. She also failed to acknowledge Atlantic Marine only applies to parties that agreed to a forum selection clause, and instead implied the clause either applies to the whole case or not at all.
Severing claims against DePuy and Golden State satisfies Atlantic Marine Construction‘s prescription that forum selection clauses should be enforced in most cases, resolves the personal jurisdiction defect as to Golden State in New Jersey, and promotes efficient resolution of Howmedica’s claims without unduly prejudicing noncontracting parties’ private interests, the court ruled.
Jed Marcus of Bressler, Amery & Ross in Florham Park, who represents the five sales representatives, said he was disappointed in the ruling, but had not decided what steps to take next.
Jeffrey Brown of Payne & Fears in Irvine, California, who represented Golden State, said he’s pleased that the transfer of his client’s case to California was upheld, but he would not comment on other aspects of the case.
Robert Carty of Seyfarth Shaw in Houston, who argued for Howmedica Osteonics, and Anthony Haller of Blank Rome in Philadelphia, who represented DePuy Orthopaedics, did not respond to requests for comment.