There have been at least three recent opinions in the past months from the Delaware Court of Chancery which may be signaling that Delaware law is moving away from broadly enforcing non-competes and other restrictive covenants.
In Kodiak Building Partners, LLC v. Adams, 2022 Del. Ch. LEXIS 288 (Oct. 6, 2022), the Court denied a motion for a preliminary injunction to enforce restrictive covenants against a former employee of an entity acquired by the plaintiff. The Court held that the disputed restrictive covenants were overbroad and unreasonable, particularly with respect to geographic scope, and did not protect a legitimate economic interest because they sought to protect interests well beyond the acquired assets themselves. The Court rendered this holding, notwithstanding the parties’ contractual stipulation regarding the covenants’ reasonableness, reasoning that for public policy reasons parties cannot insulate restrictive covenants from judicial review via contractual waivers or stipulations regarding the covenants’ reasonableness. The Court also indicated that Delaware courts remain hesitant to “blue pencil” overbroad restrictive covenants to make them reasonable and that restrictive covenants used in connection with a business or asset sale should be reasonably tailored to protect the acquired assets and business.
Thereafter, in Ainslie v. Cantor Fitzgerald, L.P., 2023 Del. Ch. LEXIS 22 (Jan. 4, 2023), the Court refused to enforce restrictive covenants applicable to former partners who voluntarily left the limited partnership, finding that the covenants were unreasonable due to their excessive scope and they were unnecessary to protect the partnership’s goodwill and customer relationships. Under reasonableness review, the Court held that the restrictive covenants were facially overbroad for several reasons, including the worldwide geographic scope, the extension of the covenants to any affiliated entity, the over breadth of potentially competitive actions, and imposing a subjective good faith belief standard for the general partner to determine whether activity is competitive.
A few days ago, in Intertek Testing Services NA, Inc. v. Eastman, 2023 Del. Ch. LEXIS 66 (Mar. 16, 2023), the Court granted in full a motion to dismiss a complaint asserting breaches of non-compete, non-solicitation, and confidentiality provisions. With respect to the non-compete provision, the Court held that the five-year global non-compete signed by the co-founder of the business was invalid because it “far exceeds any legitimate economic interests” of the purchaser of that business. The Court reasoned that the non-compete inappropriately “extends to markets untouched by [the] business.” The Court also refused to “blue pencil” the agreements, finding that revising the non-compete to save a sophisticated party would be inequitable. The Court further found that the complaint failed to plead any viable breaches of the agreement's non-solicitation and confidentiality provisions.
The holdings in these cases and others, particularly against the backdrop of the FTC’s proposed rule, signal that such restrictive covenants in various agreements are subject to perhaps a “new” analytical approach and should be closely scrutinized because there may be less enforcement by Delaware courts of these restrictive covenants.