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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Does General Release Also Cover Noncompete Agreement?
In determining the proper scope of the general release, the court analyzed both the express contract language and the parties' negotiations. Regarding the express contract language, the court found that the general release was ambiguous, i.e., both parties offered reasonable interpretations. The plaintiffs argued that the general release broadly applied to any "obligation" entered into "in connection with the purchase agreement," which included the noncompete agreement. Under another provision, the plaintiffs argued that the general release relieved them of all future obligations, which would also include obligations under the noncompete agreement. In response, the defendants argued that the only obligations "in connection with the purchase agreement" were the obligations under the purchase agreement. The defendants also argued that the general release applied, by its express terms, to obligations as of the date of the general release. The obligations under the noncompete agreement extended beyond the date of the general release and, therefore, were not extinguished.
Upon finding that both parties offered reasonable interpretations, the court studied the extrinsic evidence to find that: "Evidence of the circumstances surrounding the negotiation and signing of the [general] release discredits plaintiffs' interpretation." First, the court found the pre-settlement circumstances did not indicate that the noncompete agreement would be considered as part of the settlement. Second, nothing during the settlement negotiations indicated that the parties were bargaining for the release of the noncompete agreement. Third, "the method by which the [general] release was drafted explains, to some extent, its awkward phrasing and disjointedness."
In discussing this evidence, the court found the noncompete agreement was a valuable asset that the parties would not have terminated without some comment or discussion. The court noted that, during the negotiation of the noncompete agreement, the defendants demanded an expansive restriction to protect themselves from a "credible competitive threat." The court also found that the consideration for the general release was close to the midpoint between the parties' respective positions regarding the warranty claim. There was no indication that the consideration was intended to cover the millions of dollars in sales that would be lost in the absence of the noncompete agreement. Finally, that the general release was ambiguous, and less than clear, was attributable to the fact that the attorney who drafted the general release was not aware of the noncompete agreement.
As such, although the plaintiffs offered a feasible interpretation of the general release as extinguishing the noncompete agreement, the court found the extrinsic evidence demonstrated that was not what the parties intended.