Posts in Restrictive Covenants

Chancery Finds Restrictive Covenant in Stock Purchase Agreement is Unreasonable and Unenforceable

Intertek Testing Servs. NA, Inc., C.A. No 2022-0853-LWW (Del. Ch. Mar. 16, 2023)
Delaware courts do not mechanically enforce non-competes. Instead, the non-compete must be reasonable in scope and duration and advance a legitimate economic interest of the party enforcing the covenant.  More ›

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Supreme Court Affirms Chancery’s Interpretation of Word “And” in Option Agreements

Weinberg v. Waystar, Inc., No. 274, 2022 (Del. March 16, 2023)
The appellant was a former chief marketing officer of the appellee, a Delaware corporation. Soon after her termination, the appellant timely exercised her equity options and converted them to partnership units. The appellee thereafter exercised its call rights to repurchase the units. The appellant filed suit, arguing that the use of the word "and” in the options agreements meant that both of two conditions (termination of employment and breach of a restrictive covenant) had to be satisfied before the appellee could exercise its call rights. The Court of Chancery ruled in favor of the appellee, finding that "and” meant either of the two conditions would trigger the appellee's call rights. More ›

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Chancery Finds Payment Condition, Non-Compete, and Non-Solicit Provisions Unenforceable

Ainslie et al. v. Cantor Fitzgerald, L.P., C.A. No. 9436-VCZ (Del. Ch. Jan. 4, 2023)
Under Delaware law, restrictive covenants generally are enforceable unless overly broad in the circumstances, and Delaware courts closely scrutinize them. Similarly, contractual conditions precedent generally are enforceable unless they result in a penalty, and Delaware courts construe ambiguous conditions narrowly to avoid forfeitures. In this decision from the Court of Chancery, a provision in a limited liability partnership agreement intended to discourage competitive activities by former partners was held unenforceable both because it was overly broad and resulted in a forfeiture.
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Chancery Denies Preliminary Injunction For Overly Broad Restrictive Covenants

Kodiak Building Partners LLC v. Adams, C.A. No. 2022-0311-MTZ (Del. Ch. Oct. 6, 2022)
Delaware courts review noncompete and nonsolicitation agreements to ensure that they “(1) are reasonable in geographic scope and temporal duration, (2) advance a legitimate economic interest of the party seeking its enforcement, and (3) survive a balancing of the equities.” And Delaware law recognizes that an acquirer has a legitimate economic interest in protecting what it purchases, including the purchased company’s assets goodwill. Here, the plaintiff argued that it not only had a legitimate business interest in protecting the goodwill of the company it purchased, but also had a legitimate business interest in protecting its other businesses, including those that pre-dated the acquisition, and, as a result, could restrict a former employee from participating in industries relating to any of those businesses. The Court of Chancery disagreed, finding that the plaintiff’s legitimate economic interest did not extend to goodwill and competitive spaces acquired in other transactions with other companies in different industries. The Court also found that the scope of the noncompete and nonsolicitation covenants at issue were unreasonable, ruling that the provisions’ geographical scope was unreasonably broad, as they covered areas surrounding the plaintiff’s subsidiaries, rather than only areas related to the acquired company. The Court, therefore, declined to enter a preliminary injunction, finding the plaintiff did have a reasonable likelihood of success on the merits. In reaching this conclusion, the Court held that the employee’s promise not to challenge the reasonableness of his restrictive covenants within the relevant contract could not circumvent the Court’s mandate to review those covenants for reasonableness.

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Chancery Rules That The Standard Of Proof For Contempt Motions Is The Preponderance Of The Evidence, Not Clear And Convincing Evidence

inTEAM Associates, LLC v. Heartland Payment Systems, LLC, C.A. No. 11523-VCF (Del. Ch. Oct. 29, 2021)
Court of Chancery Rule 70(b) empowers the Court to hold a party in contempt for, among other things, failing to obey an injunctive order. The standard of proof required to obtain a contempt order has not been uniformly applied. This recent decision applies the preponderance of the evidence standard, in contrast to certain decisions over the past decade applying the clear and convincing evidence standard. More ›

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Applying Plain Contract Language, Chancery Awards $147 Million in Damages to Start-Up Company for Breach of Joint Venture Agreement

Symbiont.io, Inc. v. Ipreo Hldgs., LLC, C.A. No. 2019-0407-JTL (Del. Ch. Aug. 13, 2021)
Delaware is a pro-contractarian state.  When fashioning an award for a breach of contract, a Delaware court can consider: (1) the bargained-for damages remedy; (2) whether at the time of contracting the damages from a breach would be uncertain or incapable of accurate calculation; and (3) whether the amount contractually called for would be unconscionable. More ›

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Chancery Holds California Statutory Bar to Choice-of-Forum Clauses in Employment Contracts Prevents Exercise of Personal Jurisdiction – Despite Parties’ Choice of Delaware Law and Agreement to Litigate in Delaware

Focus Fin. Partners, LLC v. Holsopple, C.A. No. 2020-0188-JTL (Del. Ch. Oct. 26, 2020).
Delaware law promotes freedom of contract, and Delaware courts enforce contractual choice-of-forum and choice-of-law provisions, including those in employment-related contracts. Recently, however, several Delaware cases have considered whether such provisions can be enforced against non-residents in the face of contrary substantive law or fundamental public policy in their home jurisdiction. In California, a statute (“Section 925”) makes choice-of-law and choice-of-forum provisions voidable by the employee if the provisions appears in an agreement signed as a condition of employment. Here, the Court addressed how to reconcile Section 925 with the parties’ agreement to resolve disputes in Delaware and to apply Delaware law. Specifically, when the defendant (a former employee who lives and works in San Francisco) was hired, he received incentive units pursuant to agreements that contained restrictive covenants and selected Delaware as the exclusive forum for disputes, and selected Delaware law as the applicable law. The plaintiff brought suit in Delaware to enforce the restrictive covenants, and the employee moved to dismiss for lack of personal jurisdiction. More ›

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Chancery Finds Corporation Fraudulently Induced Investor into Contract, Acting “Through Concealment and Silence”

Maverick Therapeutics Inc. v. Harpoon Therapeutics, Inc., C.A. No. 2019-0002-SG (Del. Ch. Apr. 3, 2020).

In this post-trial opinion, the Court of Chancery found that Harpoon Therapeutics, Inc., (“Harpoon”), a Delaware corporation in the business of developing novel cancer therapies, fraudulently induced an investor into acquiring an interest in one of its business divisions by intentionally drafting a non-compete narrowly to exclude certain opportunities Harpoon wished to pursue, in contrast with its representations to the investor about its future plans. More ›

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Chancery Denies Preliminary Injunction Based Upon Overbroad Restrictive Covenants

FP UC Holdings, LLC v. Hamilton, C.A. No. 2019-1029-JRS (Del. Ch. Mar. 27, 2020).

A party seeking a preliminary injunction must demonstrate a likelihood of success at trial. In a breach of non-compete action, this burden may not be met when economically unjustified restrictive provisions are “too broad as they would essentially prevent Defendant from operating … anywhere in the United States.” More ›

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Chancery Addresses the Implied Covenant in an At-Will Employment Relationship and Delaware’s Statutory Restriction on Physicians’ Non-Competes

Dunn v. Fastmed Urgent Care, C. A. No. 2018-0934 MTZ (Del. Ch. Aug. 30, 2019).

This case arises out of a physician’s sale of his limited liability company interest, and his subsequent attempts to enforce oral promises outside of – and sometimes in conflict with – written agreements governed by Delaware law.  In granting the defendants’ motions to dismiss for failure to satisfy pleading standards, the Court addressed two potentially noteworthy issues.  More ›

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