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.
In this decision, the Court of Chancery reviewed a non-compete in connection with the sale of a business. The provision at issue purported to prevent the seller’s principal from competing against the business “anywhere in the world.” The principal moved to dismiss. Because the plaintiff only pleaded that its business was nationwide, a noncompete that purported to have a global scope did not, according to the Court, further Plaintiff's legitimate business interest. The Court held that, therefore, the noncompete was unreasonably broad geographically and unenforceable. The Court also declined to “blue pencil” the restrictions, expressing a hesitation to using equity to allow a sophisticated plaintiff to back away from an overly broad covenant that it secured.Share