In this installment of LaborSpeak, we provide a quick update on the increasingly employee-friendly view that Delaware courts have been taking on restrictive covenants and how it affects employers’ non-compete agreements.
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Transcript
In a recent LaborSpeak video, we discuss the increasingly employee-friendly view Delaware courts have been taking on restrictive covenants. Intertek Testing Services NA, Inc. v. Eastman, decided last month, continues that trend. The case involved Intertek’s purchase of Alchemy, a provider of workforce training and related services for the food and cannabis industry. In connection with the sale, Eastman, who was the cofounder and CEO of, and a major stockholder in, Alchemy, agreed to a non-compete. The non-compete was global in scope and prohibited Eastman from competing with Alchemy for five years following the closing of the sale. After the sale, Eastman worked at Intertek for five months before resigning.
About two years later, Eastman became an investor in and a board member of a competing company. Intertek sued Eastman to enforce the non-compete. The Delaware Court of Chancery not only refused to enforce the non-compete, but also refused to modify it in a way that would make it enforceable. While the court recognized that relatively broad restrictive covenants have been enforced in the sale of business context, it noted that such covenants must be tailored to only cover the market area where the seller operates. In its complaint, Intertek alleged that Alchemy provided services nationally rather than globally. Therefore, the global non-compete was unreasonable and unenforceable. While the court recognized that judges occasionally modify overbroad restrictive covenants to the point where they’re enforceable, the court held that it would be inequitable to do so here because Intertek was a sophisticated party.
Based on recent case law, Delaware courts seem increasingly unwilling to enforce or modify overbroad non-competes in the sale of business context. As a result, businesses should consider tailoring such non-competes to ensure they are only as protective as they need to be, instead of the common practice of erring on the side of broader protections with “blue pencil” language that allows a court to later modify such provisions. Further, employers may need to carefully consider their choice of law provisions, as the landscape of employer-friendly jurisdictions has changed.
As always, we’ll continue to monitor developments relating to non-competes and restrictive covenants. Feel free to contact our team if you have questions about this case or any other issues relating to restrictive covenants.