A recent Chancery Court decision reaffirmed the traditional enforceability of agreements to restrict competition by ex-employees.
The recent decision by Vice Chancellor Noble limited the period of restriction against competition to two years instead of the three years that was in the agreement. The court upheld a bar to the ex-employee’s competition against his former employer, within the geographic area of northern Delaware. Although the court agreed in general with the principle of enforceability, it emphasized that there is no mathematically precise “one size fits all” form of agreement regarding the duration or scope terms that employers can use to restrict key employees from competing against them after either voluntary or involuntary termination of employment. The court stated that depending on the industry involved, or the specific type of confidential information that an employer is trying to prevent an ex-employee from using, the geographic area and the duration of time that competition is restricted will vary. The Court will consider the facts of the particular situation and the circumstances at the time that the agreement is sought to be enforced; as opposed to the time that the agreement was entered into between the employee and the employer.
The former employee involved was instrumental in developing a shuttle service that also encompassed limousine services and other ground transportation services such as charter buses and tour buses. The employee involved was the sales and marketing manager for the business. Upon the recommendation of a consultant to the company, the employee was terminated. The consultant, who was not a lawyer, prepared a “resignation agreement” that included a non-competition agreement. However, the agreement did not include a specific geographical area within which the non-competition provisions would apply. The approximately 73-page opinion contains many details regarding the specific types of information acquired by the ex-employee and the new business that he started as well as the comparison of the aspects of the new business that were allegedly in violation of the restrictions on competition. The Court reiterated the basic prerequisites that must be satisfied before covenants restricting future employment can be enforced, such as reasonable geographic areas and time periods, as well as a demonstrated legitimate economic interest of the former employer that is being advanced. The Court also noted that equity may decline to grant specific performance if the interests that the employer seeks to protect are ephemeral in contrast to the grave harm of the employee resulting from enforcing the restriction. The Court also noted that the restricted activity must be closely defined to mirror the former employer’s business.
Although the customer list in this specific case was deemed not to be protected as a “trade secret”, the Court noted other Delaware cases have held that detailed patient data, for example, may qualify as a trade secret.
The Court also mentioned in passing that there may be situations where a client base is national or international in scope, and that might allow a Court to prevent an employee who gained from his employment some advantage in the relevant market, from competing in a much broader geographic area. This business, however, was limited mostly to northern Delaware. In this particular case, the Court found that the ex-employee developed extensive personal contacts with the ex-employer’s clientele through his employment, and gained critical insights into the ex-employer’s plan for future business expansion and therefore the ex-employer had a significant and legitimate interest in trying to limit the ex-employee from competition with it, due to the substantial and continuing threat it posed. This outweighed the harm to the ex-employee of the major investment he made in his new venture.
This decision is of importance to any employer who seeks to prevent key employees, or any employee, with access to confidential information from using that sensitive data to compete against the employer after the employment relationship is terminated. The case is Delaware Express Shuttle, Inc. v. Older, 2002 WL 31458243 (Del. Ch. October 23, 2002).