The Delaware Court of Chancery granted a TRO recently to enforce a covenant-not-to-compete, or non-compete agreement, notwithstanding a liquidated damages provision and the (unsuccessful) argument that such a provision created the absence of irreparable harm needed for injunctive relief. In Affinity Wealth Management LLC v. McPoyle, C.A. No. 2019-0441-JTL, transcript (Del. Ch. June 18, 2019), the court followed well-established Delaware law which generally enforces covenants-not-to-compete that are reasonable in duration and in geographic scope.
Key Aspects of Ruling:
The court rejected the argument that the irreparable harm necessary for granting injunctive relief was not present due to the presence of a liquidated damages clause that calculated the monetary loss from the clients whom the former employee was alleged to have taken.
The court explained that the non-competition agreement at issue included recognition by the parties that in addition to monetary damages, equitable remedies would be available in light of the inability of damages to address all forms of harm, including reputational damages and loss of goodwill.
In particular, the court explained that:
. . . the actual harm from individual clients [leaving] isn’t the only type of harm that a business can suffer. It can suffer loss of goodwill–and goodwill broadly takes in all kinds of factors, including reputation in the market place, future earning power, ability to attract new clients, etcetera. So it’s not only the loss of existing clients that’s problematic, which the Liquidated Damages clause seems to go some way to addressing, but also the other factors.
Some period after the TRO was entered, in response to a follow-up motion, the court clarified the scope of its TRO in light of apparent efforts of the ex-employee continuing to contact clients post-TRO, and the Court explained that the TRO should be read to prohibit the ex-employee from reaching out to contact clients of the former employer, and rejected a request to narrowly define the word solicit, used in the TRO.
N.B. Yours truly represented Affinity Wealth Management LLC in this matter.