An Eckert Seamans associate prepared this overview.

A recent Delaware Court of Chancery post-trial opinion held that while an ambiguous non-compete agreement was enforceable, the defendants had not violated its terms.  Therefore, the Court determined that its earlier injunction was improvidently granted. Brace Indus. Contracting, Inc. v. Peterson Enters., et al., C.A. No. 11189-VCG (Del. Ch. Oct. 31, 2016)

Background: This matter involves Peterson Enterprises, Inc.’s (“PEI”) sale of its scaffolding business, Peterson Industrial Scaffolding (“PIS”), to Plaintiff, Brace Industrial Contracting, Inc. (“Brace”).  PEI did not sell its scaffolding rental business (“Goedecke”), in the transaction.

The acquisition contracts contained a non-compete agreement prohibiting PEI from selling and renting scaffolding for five years within a specified geographic area.  However, the contract contained a “carve-out” allowing Goedecke to continue to sell and rent scaffolding equipment to other businesses who sold scaffolding equipment (business-to-business sales).  The parties stipulated that a breach of any restrictive covenant would cause irreparable harm and entitle Plaintiffs to injunctive relief.  Based in part on that stipulation, the Court granted a preliminary injunction to prevent Goedecke from selling and renting certain scaffolding equipment.

The acquisition agreements also provided that PEI would sell all of PIS’s assets to Brace.  PEI represented and warranted that the disclosure schedules incorporated into their agreement included an accurate and complete list of all PIS’s assets.  PEI was required to indemnify Brace for losses caused by a breach of this warranty.

Plaintiffs Allegations: Plaintiffs alleged that Defendants improperly sold certain scaffolding equipment in violation of the non-compete agreement.  Despite no explicit language indicating as much, Plaintiffs asserted that the carve-out was only meant to allow Goedecke to continue to sell to its “shoring customers,” not to all scaffolding businesses.  Plaintiffs based this argument on the fact that Goedecke regularly provided scaffolding, in part, to customers for use in holding shoring materials in place on a job site.

Plaintiffs also argued that Defendants committed fraud in misrepresenting their inventory on the disclosure schedules.

Court’s Analysis: While separate related matters were referred to a Special Master, in a post-trial Memorandum Opinion, the Court addressed the non-compete and inventory related claims.

The Court first noted that Delaware law “readily enforce[s]” covenants not to compete when they are part of a purchase agreement as opposed to an employment contract.  The Court then explained that the carve-out provision was ambiguous, and it was unclear whether Defendants were entirely prohibited from renting and selling all scaffolding equipment, and whether the carve-out allowed them to sell to specific businesses.  The Court noted that extrinsic evidence was appropriate in interpreting the parties’ intent with respect to the ambiguous language.

In examining the parties’ extrinsic evidence, the Court found that Defendants were not prohibited from renting and selling scaffolding all together, or only to shoring customers.

Accordingly, the Court held that its preliminary injunction was improvidently entered, and Defendants were entitled to losses they incurred up to the posted bond amount.

With respect to the inventory claims, while the Court found that the inventory disclosures were inaccurate, there was no evidence Defendants committed fraud, as Plaintiffs failed to meet their burden of proving scienter.  Specifically, Plaintiffs did not prove that Defendants acted with the knowledge or belief that their representations in the disclosures were false or intended to deceive Plaintiffs.

 Conclusion: In sum, the Court found that restrictive covenants are enforceable in sales contracts, but that Defendants had not violated the covenant not to compete.  Additionally, the Court allowed extrinsic evidence to interpret the ambiguous agreement.  Finally, the Court held that although Defendants misrepresented PIS’s assets, they had not gone so far as to act intentionally, and thus, they were not liable for fraud.