As I’ve mentioned repeatedly in this space, I recently posted a new paper to SSRN: Inside Out (or, One State to Rule them All): New Challenges to the Internal Affairs Doctrine, forthcoming in the Wake Forest Law Review.  The paper is about the uncertain boundary between matters subject to the internal affairs doctrine, and matters subject to ordinary choice of law analysis, and one of the issues I tackle concerns LLC agreements.  Specifically, LLCs have increasingly included employment provisions in their operating agreements, leaving Delaware courts in somewhat of a quandary as to whether the operating agreement is subject to the internal affairs doctrine – and thus Delaware law – or whether instead it should be treated as an employment contract, subject to ordinary choice of law analysis. (I also blogged about one such case here; as longtime readers are aware, stuff I muse on in blog posts often ends up in papers).

Anyhoo, this is why VC Will’s new opinion in Hightower Holding LLC v. Gibson is so striking.  There, partners in a financial advisory firm sold their interests to Hightower, and were made LLC members and principals in Hightower.  The LLC agreement contained a noncompete clause and selected Delaware law; so did a separate “protective agreement” signed by the partners.  You can guess what happened next.  One partner quit and started a competing firm, and Hightower sued to stop him.  VC Will’s opinion refusing to enjoin the partner is striking for what it does not do, namely, even so much as mention the internal affairs doctrine.  Instead, the opinion treats the entire dispute as an ordinary contractual matter, concludes that Alabama has the greater interest in the dispute notwithstanding the selection of Delaware law, and ultimately holds that the noncompetes are likely invalid. 

I don’t disagree with that decision, of course, but the failure even to consider the role of the internal affairs doctrine sits uneasily alongside some of Delaware’s other caselaw – and the meta issue is just how far we can go in treating LLCs like ordinary contracts for choice of law purposes.  If LLCs are not subject to the internal affairs doctrine and still manage to sail along just fine, how necessary is the internal affairs doctrine itself (often justified on the grounds that absolute chaos would result if it were abandoned)?