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Contract – Forum Selection Clause – Employment Agreement – LLC Operating Agreement – ‘Shall’ – Not Mandatory

Roth v. Penguin Toilets, LLC (Lawyers Weekly No. 11-15-1210, 11 pp.) (Calvin E. Murphy, J.) N.C. Bus. Ct.

Holding: Although plaintiff’s employment contract with defendant referred to defendant’s operating agreement, the employment contract did not incorporate the operating agreement’s forum selection clause. In any event, the forum selection clause is not mandatory.

Defendant’s motion to dismiss for improper venue is denied.

Defendant hired plaintiff as its CEO, and the parties signed an employment contract. The employment contract refers to defendant’s original operating agreement, to which plaintiff was not a party.

Plaintiff was also made a member of defendant. When defendant adopted a new operating agreement, plaintiff signed it.

The employment contract does not include a forum selection clause; however, both of defendant’s operating agreements did include forum selection clauses, which stated that “any arbitration or litigation proceedings shall be conducted in Wayne County, Michigan unless the arbitrators identify a more suitable and agreeable venue and the members consent to the jurisdiction and venue of any state or federal court located therein.”

The miscellaneous section of the employment contract says in part, “This Agreement … recites, along with the [original operating agreement] and Penguin’s articles of organization, each term governing [plaintiff’s] relationship with Penguin….“ The court does not construe this to mean, as defendant argues, that the provisions in each of those documents were incorporated into each of the other documents. Rather, to the extent plaintiff held a relationship covered by one of the enumerated agreements, the terms of that particular document governed that particular relationship.

At the time the employment contract was entered into, there were at least two relationships created between the parties: the first as an employee (CEO-president) of defendant, and the second, as a member/director of Penguin Toilets, LLC. Accordingly, the original operating agreement controls the terms of plaintiff’s relationship as a member/director of defendant, at least through Sept. 17, 2010 when the parties mutually executed and entered into the current operating agreement, and the employment contract controls the terms of plaintiff’s relationship as an employee.

This interpretation is supported by a separate provision within the employment contract which continues plaintiff’s relationship as an owner/director “according to the [original operating agreement], even after the term of this [employment] Agreement.”

The employment contract’s language referencing the original operating agreement and Articles of Incorporation did not adequately incorporate the terms of those documents, either expressly or by reference, into the employment contract. This case concerns plaintiff’s relationship as an employee of defendant. Accordingly, the employment contract sets out the relevant obligations of the parties.

The employment contract provides “If … any term of this [employment] Agreement conflicts with the [original operating agreement], … then this [employment] Agreement will supersede the conflicting term, to the extent of such conflict.”

If, as defendant argues, the terms of the operating agreement were incorporated by reference, there would have been no need to include language in the employment contract addressing the problem of conflicting terms within the operating agreement; the operating agreement’s terms would have been included within the employment contract. The presence of the superseding clause suggests that the parties did not intend to incorporate the operating agreement’s terms into the employment contract. Instead, the employment

Contract was intended to control the terms of plaintiff’s employment relationship with defendant, and any inconsistent terms within the operating agreement were to have no effect on that relationship.

The current operating agreement gives defendant’s board of directors (BOD) the authority to appoint a CEO; it also allows the BOD to determine the length of the CEO’s employment, duties, and compensation. The reference to the employment contract only serves to illustrate how the BOD may exercise its powers and authority over management matters and does not make the employment contract the “subject matter” of the current operating agreement. Accordingly, the current operating agreement’s forum selection clause is not binding in disputes over plaintiff’s employment.

The absence of a forum selection clause within the employment contract, lack of intent between the parties to incorporate the operating agreement’s terms into the employment contract, and failure of the current operating agreement to incorporate the employment contract into its subject matter direct the court’s conclusion that there is no binding forum selection clause controlling plaintiff employment; therefore, plaintiff was not limited to bringing his action in Michigan.

In any event, the operating agreement’s forum selection clause is not mandatory. While the word “shall” indicates that the proceedings are to be conducted in Wayne County, Michigan, it does not say that this is the only venue where proceedings may be conducted. N.C. courts have found that mandatory selection clauses include words such as “exclusive” or “sole” or “only” which indicate that the contracting parties intended to make jurisdiction exclusive.

Motion denied.

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