- Two executives of an educational software company that joined a competitor didn’t violate the noncompete clause in their equity agreements because the contracts applied the restriction to competitors of the parent company, not the operating company that the executives worked for, the Delaware Court of Chancery ruled last month.
- “This case presents a textbook example of why parties should ensure their contracts say what they mean and mean what they say,” Vice Chancellor Lori Will said in her ruling dismissing the complaint.
- The plaintiffs’ effort in an amended complaint to seek equitable rescission also fails, Will ruled, because the ability of the executives to work for a competitor wasn’t based on a mistake that the two sides made.
Annamary Holbrook and Brian Murphy were executives at educational software company Frontline Technologies Group. Both of them entered into equity agreements with Frontline’s parent, owned by Thoma Bravo, the private equity giant. As part of the contracts they signed in exchange for equity stakes in the parent, they agreed not to compete against the company for a year. When they both left around the same time to join LINQ, a Frontline competitor, both the parent and Frontline sued.
In the plain language of the contracts, though, the noncompete clause applied to the parent, not Frontline.
“The Equity Agreements define the “Non-Competition Period” as that spanning the “Employee’s employment by or service to [Parent] and for a period of one (1) year thereafter,” the ruling says. “But the defendants were employed by Frontline—not Parent. The Equity Agreements make no mention of Frontline.”
“Even if the defendants provided ‘service’ to the parent through their work for Frontline,” the claims still fail, the ruling says, because “the noncompete provisions are expressly tailored to the ‘business’ or ‘business line’ of the parent—not Frontline.”
An effort by Frontline and its parent to save their deficient claims by pointing to restrictions on defendants’ sharing of confidential information of the parent’s affiliates also fails, the ruling says, because the contracts don’t link the restrictions to Frontline’s confidential information.
“A hypothetical illustrates the point,” Will said in a footnote. “Company A is a fast-food restaurant owned by Company B, a private equity firm. Company A’s business is making fried chicken using a special blend of herbs and spices. Company B’s business is investing in various companies. By the plaintiffs’ logic, [the confidentiality provision] would mean that Company B is engaged in the business of making fried chicken. But having access to the special blend of herbs and spices does not mean that Company B is a fried chicken maker.”
“Precise words matter,” James Levine and Tyler Wilson of Troutman Pepper say in an analysis of the ruling. “When a private equity company or its portfolio companies enter into restrictive covenants with portfolio company employees, extra care should be paid to ensure that the scope of the restrictions is drafted in the way the parties meant. Otherwise they risk a court enforcing the language as-written even where it does not fully reflect the intended scope.”