Delaware Business Litigation Report

Chancery Denies Application for Preliminary Injunction After Finding Restrictive Covenants Arose from Breach of Fiduciary Duty and Were Facially Unreasonable

Sunder Energy, LLC v. Jackson, C.A. No. 2023-0988-JTL (Del. Ch. Nov. 22, 2023)
The head of sales for a company that sold residential solar power systems nationwide resigned from his position after signing an independent contractor agreement with a corporate competitor. His former employer—headquartered in Utah and incorporated in Delaware—filed an action in Delaware seeking injunctive relief and enforcement of the restrictive covenants in its limited liability company agreement.

The Court of Chancery granted a temporary restraining order at the action’s outset. But the Court denied the company’s application for a preliminary injunction after determining for two reasons that the company had not established a reasonable likelihood of success on the merits. First, the restrictive covenants had originated in a one-sided amendment to the LLC agreement that constituted a breach of the fiduciary duty of disclosure; unbeknownst to defendant and several other minority members, the amendments they approved weakened their rights under the original agreement in favor of enhancing the rights of the two majority members. Under general legal principles, plaintiffs cannot enforce contractual terms they procured through a breach of fiduciary duty. Second, the covenants were facially unreasonable. The non-competition provision was overly broad; it would cover the entire door-to-door sales industry, apply to all of defendant’s affiliates (such as his own child), cover forty-six states, potentially apply indefinitely, and apply to any homeowner who lived in a state where the company did business before defendant’s departure from the company. The Court found the non-competition provision to be oppressive and more restrictive than any legitimate interest the company could have. The non-solicitation provision likewise was overly broad; it too would apply to all of defendant’s affiliates, potentially apply indefinitely, cover the same vast geographic area, and prohibit defendant from soliciting not only the company’s current employees but also anyone ever employed at the company no matter how long ago and for how long.

Notably, the Court’s opinion called attention to a perceived problem: the funneling of restrictive covenant disputes from across the globe to the Court of Chancery through the imbedding of covenants in the internal governance documents of Delaware-incorporated entities. 

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