Delaware Business Litigation Report

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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