- For the second time this year, the Delaware Chancery Court has dismissed a suit seeking to enforce a business-sale noncompete agreement on the grounds that it’s too broad.
- The court last month struck down Intertek Testing Services’ effort to enforce its noncompete with Jeff Eastman, who sold his food-industry training company to Intertek in 2018. As part of the $10 million stock transaction, Eastman agreed not to compete with the company anywhere in the world, a restriction the court deemed to be facially unenforceable because of its unreasonable scope. Eastman’s former business, called Alchemy, operated inside the United States.
- “Although relatively broad restrictive covenants have been enforced in the sale of a business context, such covenants must be tailored to the competitive space reached by the seller and serve the buyer’s legitimate economic interests,” the court said, granting Eastman’s motion to dismiss the lawsuit.
Intertek sought to enforce the noncompete when Eastman, after selling the business, joined the board of a company founded by his son that used the same training method within the cannabis industry.
There was some contention over whether the son’s cannabis-focused company competed against Alchemy, under the new owner, but the question didn’t need to be solved because the geographic-scope argument “carried the day,” the judge said.
“The incongruity between the geographic scope of the covenant and that of Alchemy’s business leads me to conclude the non-compete is unreasonably broad and unenforceable,” wrote the judge, Lori Will.
Will also declined to blue-pencil the agreement.
“Revising the non-compete to save Intertek — a sophisticated party — from its overreach would be inequitable,” she said.
The decision follows a January ruling by another Chancery court judge denying injunctive relief to a private equity company that tried to stop a former manager of a business it bought from working at a competitor.
Although the manager took the job within the time period and geographic area subject to the restriction, the agreement more broadly was unreasonable because it included restrictions that extended to other companies the private equity firm owned that didn’t compete with the former manager’s company.
“Prohibiting [the manager] from engaging in ‘any activity or business which is similar to’ or competes with ‘the Business’ is unreasonable because the noncompetition provision is broader than necessary to protect the goodwill [the PE firm] purchased from [the former manager’s company],” said the judge, Morgan Zurn.
It doesn’t matter that the former manager, in signing the agreement, waived any issue with the noncompete’s reasonableness as a defense, the judge said.
The covenant language “does not preclude this Court from performing the reasonableness analysis our law mandates,” she said.
Zurn also declined to blue-pencil the agreement.
The language waiving challenge to a noncompete’s unreasonableness has become boilerplate in many business-sale agreements, a Troutman Pepper analysis says, but the two rulings show that, at least in the Chancery Court, it doesn’t stop a judge from deciding the agreement is in fact unreasonable.
“Mechanical submission to an employee’s promise not to challenge a restrictive covenant would fly in the face of the public policy that compels review of that covenant,” Judge Zurn said in the private equity case.