Chancery Enforces Non-Competition Agreement

Simplexity, LLC v. Zeinfeld, C.A. No. 8171-VCG (Del. Ch. April 5, 2013) (Redacted Version)

Issue Addressed:  This case involves a dispute between two companies over the hiring of the former CEO of Simplexity, Andrew Zeinfeld.  (The publication of this opinion was delayed while confidential data was redacted.)

Short Overview

Simplexity contends that Zeinfeld’s employment with Brightstar Corp. would violate the non-competition agreement with Simplexity and that Zeinfeld has divulged confidential information about Simplexity that constitutes a breach of his fiduciary duties.

Brief Overview of Holding 

The court found that Simplexity has not shown that it will likely prevail on the breach of contract claim and has not shown that its alleged breach of fiduciary duty or breach of a confidentiality agreement justified enjoining the employment of Zeinfeld at Brightstar, but Simplexity has shown a reasonable probability of success and ultimately shown that the non-competition agreement is enforceable and that Brightstar’s proposed employment of Zeinfeld will violate the non-competition agreement.

Lastly, the court found that plaintiff demonstrated threatened imminent irreparable harm that outweighs the harm to the defendants of an improvidently granted injunction.  Therefore the court found that the plaintiff is entitled to preliminary injunction relief.  [Notably, this decision was redacted to delete the names of confidential third parties, and this public version was not released publicly until approximately a week or so after it was decided.] 

Short Summary of Analysis
Because the central issues in this 38-page decision, which are described in extensive factual detail, do not apply Delaware law for the most part we will give them short billing.  Several references to Delaware law in footnotes are noteworthy, however.

For example, in footnote 72 the Court refers to the 2006 decision by the Delaware Supreme Court in the case of In re: Walt Disney Co. Derivative Litigation, 907 A.2d 693, 758 (Del. Ch. 2005) aff’d, 906 A.2d 27 (Del. 2006) for the statement of Delaware law that:  “former directors and officers owe no fiduciary duties, and after [he was terminated] Ovitz cannot breach a duty he no longer has.”

Because the non-compete agreement involved in this case was governed by Virginia law, we will not discuss it on this blog devoted to Delaware corporate and commercial litigation.

The Court did apply Delaware law to the standards applied in the context of determining when a preliminary injunction will be granted.  For purposes of the elements of irreparable harm and balance of the equities, the court determined that there was ample evidence that the employment of Zeinfeld by Brightstar was in violation of Zeinfeld’s non-compete agreement and would cause Simplexity imminent, irreparable harm.

The Court of Chancery explained that it has

consistently found a threat of irreparable injury in circumstances when a covenant-not-to-compete is breached.

The parties acknowledged in their agreement that any threatened breach of the non-compete clause would be irreparable harm.  In Delaware, that contractual stipulation normally suffices to establish irreparable harm for the purposes of establishing the right to a preliminary injunction.  Third, the record indicates that a potential screen, to prevent irreparable harm, would be ineffective.  See footnotes 115 to 118 and related text.

The court also found that the balance of harms tips heavily in favor of Simplexity, and the harm to Simplexity would be difficult to mitigate absent an injunction.  The court explained in great detail why that harm could not be prevented without an injunction.

In sum, the Court granted the motion for preliminary injunction, and required the plaintiff to file a bond in the amount of $350,000.