Suing Your Employee? Don't Try This at Home

In Petter v EMC Corporation [2015] EWCA Civ 828, a U.K. subsidiary and its U.S. parent company were prevented by the English courts from continuing non-compete proceedings against an employee in the court of Massachusetts. The employee in question was protected by a European Union (EU) regulation, which stipulated that an employee may only be sued in the jurisdiction in which he is domiciled (in this case, in the U.K.); this overrode the express exclusive jurisdiction clause in the applicable contract in favour of Massachusetts.

What Happened?

James Petter was an employee of a subsidiary of EMC Corporation, EMC Europe Ltd (EMC). He resigned and took up a role with a company whose U.S. parent was a competitor of EMC Corporation.

Mr Petter’s contract of employment was with EMC and contained a 12-month non-compete clause with both EMC and EMC Corporation. In addition he held stock option agreements with EMC Corporation, which were expressly subject to Massachusetts law and the jurisdiction of the Massachusetts court.

Following Mr Petter’s resignation, EMC Corporation brought proceedings in Massachusetts to rescind recent awards of stock to him and to enforce the non-compete clause; Mr Petter in turn applied to the English court for an anti-suit injunction to restrain EMC Corporation from pursuing proceedings in the Massachusetts court.

Employment Elements

The most important point to note for employers from this judgment is the principle that employees should be sued in the jurisdiction in which they are domiciled, thus protecting them as the weaker party in employment agreements. With regard to cross-border disputes, this means that employees will benefit from the mandatory law of the jurisdiction in which they are based and employers may only bring proceedings in the jurisdiction in which the employee is domiciled.

Although not an employment contract, the stock option agreement was considered, following previous case law¹, to be part of Mr Petter’s contract of employment for the purpose of the proceedings.

Jurisdictional Elements

This case also highlights the difficulty of enforcing jurisdiction clauses within the EU. The Brussels I (Recast) Regulation 1215/2012 (Regulation), which governs jurisdiction issues in the EU, allows an employee to litigate against non-EU employers in the court of an EU member state, even if an employer has no EU presence.² The Regulation also provides that an employer can only sue an employee in the courts of the EU member state in which the employee is domiciled.³

Following the ruling in Petter, organisations should be aware that their jurisdiction clauses may not be enforceable against their EU employees. This may make the option of incentivising their employees through equity in the U.S. parent company less attractive.

What Now?

This case comes to light again firstly because, although the parties were given permission to appeal to the Supreme Court, the case subsequently settled out of court shortly before its scheduled hearing date. As a result of this relatively inconclusive finale, it is thought that a future case on similar facts may be able to leapfrog the Court of Appeal to be heard by the Supreme Court. This is therefore unlikely to be the last we will hear on these issues.

Secondly, the result of the 23 June 2016 referendum on the U.K.’s ongoing relationship with the EU means that the U.K. will be exiting the EU by March 2019. As the jurisdictional protection which assisted Mr Petter in his claim derives from EU law, in the form of the Regulation, it is unclear whether the same finding will be reached following this development.

There is great uncertainty in this area; some commentators have called for a complete revocation of the Regulation in order to allow the concept of “freedom to contract” to prevail. However, this would expose employees to tactical jurisdictional choices by employers. The U.K. Government has three potential options following Brexit. The first of these is to adopt the Regulation in full. Secondly, bilateral treaties could be adopted with other jurisdictions. Alternatively, the U.K. could decide to make no provisions as to this issue at all, i.e., allowing “freedom to contract” to prevail. The most likely route is that a similar regime to the Lugano Convention 2007 (Convention) will be adopted, which would provide stability for employers by limiting the power of employees to sue their employer outside the EU, Switzerland, Norway or Iceland, while maintaining the other effects of the Regulation. However, the Convention requires contracting states to take “due account” of the jurisprudence of the Court of Justice of the European Union, something that may be difficult to reconcile with the political thrust of Brexit.

As with most things related to Brexit, it will be a case of watching this space.

For further background on the Petter case please see our previous updates on the matter here and here.

¹ Samengo-Turner J&H Marsh and McLennan (Services) Ltd [2007] EWCA Civ 723
² Article 21.2
³ Article 22