Enforceability of Non-Compete Agreements in Delaware

Posted by Molly DiBiancaOn February 10, 2013In: Non-Compete Agreements

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Delaware's Court of Chancery is the court of choice for employers seeking to enforce non-compete agreements. As Delaware practitioners know, the Court has a long-standing practice of ruling from the bench, particularly in cases in which injunctive relief is being sought and where time is of the essence. See this post on the Delaware Corporate and Commercial Litigation Blog ("Regular readers will know that transcript rulings are often cited in this court as valid authority.") And this practice means that transcripts are an important, if not critical, source of information about how the court is likely to rule.

Vice Chancellor Glasscock served as a Master in the Court of Chancery for 12 years before being appointed to Vice Chancellor in 2011. Having been on the bench as Vice Chancellor for just a year, his non-compete opinions are limited. Which is why the transcript from a recent preliminary-injunction hearing offers Delaware counsel important insight.

Bridgeport Tank Trucks, LLC v. Smith, involved a non-compete agreement that resulted from the buyout of a business. As a result of the sale, the defendant, Mr. Smith, was subject to a restrictive covenant for a five-year period. The agreement did not contain a geographic restriction.

At the end of the five years, the plaintiff, Bridgeport Tank Trucks learned that Smith was in violation of the agreement and filed suit in the Court of Chancery seeking a preliminary injunction. At the preliminary injunction hearing, the Court addressed several important questions facing litigants in non-compete cases. Here are some of the highlights:

Temporal Restriction
In the employment context, a non-compete agreement is not usually enforceable for a period longer than two years. But when the agreement is tied to the sale of a business, the court general permits a longer period of restriction. That certainly was the case here, as the Court explained that it saw nothing "shocking" about the five-year limit.

Geographic Restriction
The Court did not make much of the absence of a geographic restriction in the agreement. In fact, the Court concluded that it would be able to "readily determine what area [the agreement] was meant to cover" from the "words of the agreement and extrinsic evidence." But perhaps more important to the Court's decision on this issue was the undisputed fact that Mr. Smith was competing in the area that the agreement would most certainly cover, even if construed narrowly.

Enforceability Provision
The Court found that the agreement was enforceable on its terms but noted that the parties had included a provision that they would not challenge enforceability. Although the Court did not expressly rely on this provision, it did seem to find the provision to be legitimate.

Extension of the Restricted Period
Parties seeking to enforce a non-compete agreement often request that the Court use its equitable powers to toll the restricted period. The Court does not commonly grant this request but, in Delaware, it is a potential component of the equitable relief. Here, the Court indicated that it would not toll the restricted period but acknowledged that it does have the discretion to do so.

The Court's indication that it would not toll the restricted period was really what decided the case. At the time of the hearing, there were just four months left before the covenant expired. The Court expressed concern that it was not likely to issue a decision before the end of the four months. Additionally, the Court explained that the injunctive relief sought by the plaintiff--that Mr. Smith either take his company out of business or sell his business--was not something that Court was inclined to order before a full trial on the merits.

Based on that Catch 22, the Court "suggested" to the parties that they consider reaching a settlement that would not be as drastic as the forced closure of Mr. Smith's business, while still protecting Bridgeport's rights. The Court stated that it would reconvene in one week's time. In the meantime, the Court explained, the parties should attempt to come up with some creative resolutions for their dispute, thereby avoiding the risks inherent in litigation.

The parties took the Court's advice and settled before the week had concluded. So, although we don't get a final ruling on the merits in this case, we do get some useful insight and commentary from Vice Chancellor Glasscock.

[H/T to Larry Cronin, who represented the Plaintiff in this case and who was kind enough to alert me to the case.]

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