In Weichert Co. of PA, v. Young, 2007 WL 4372823 (Del. Ch., Dec. 2007), read opinion here,  the Chancery Court upheld a covenant not to compete that lasted for 2 years and covered a 25 mile area, to restrict a real estate agent from opening a competing real estate agency. The court also upheld the provisions that prohibited the hiring, soliciting or retaining of any employees or independent contractors of the former employer. The court reasoned that legitimate business interests were being protected and that the restrictions on the former employee were not unreasonable.

 In Deloitte & Touche USA LLP v. Lamela, 2007 WL 1114075 (Del. Ch., April 6,2007), read opinion here, the Chancery Court applied Florida’s substantive law to address whether a 2-year covenant not to compete should be extended to cover the full 2 years, in light of the competition that allegedly occurred after the employment terminated. The Florida statute bases enforcement on legitimate business interests instead of a "contract enforcement" approach.  This opinion addressed cross motions for summary judgment, and the court required further factual development. Two prior decisions have been issued by the court in this case, one of them granting a a partial injunction based on the Delaware procedural rules for such relief. See summaries  here and here on my blog.

Elite Cleaning Company, Inc. v. Capel, (  read opinion online  here   ). This Chancery Court case involved a Covenant-Not-To-Compete and a claim for wages under the Federal Fair Labor Standards Act for failure to pay overtime. The plaintiff was a janitorial service. The court described the standards that apply for the enforcement of a Covenant-Not-To-Compete and was doubtful that there was a legitimate interest of the employer in enforcing a covenant against an unskilled janitor who was making little more than minimum wage. However, the janitorial service was a middleman that worked for another janitorial service and the court found precedent for protecting the role of the middleman.

If the employee were skilled and had trade secrets, there was a protectable interest to avoid disintermediation or eliminating the middleman. The court also discussed the statutory damages including attorneys’ fees and liquidated damages to which someone is entitled in a failure to pay overtime claim under Federal Fair Labor Standards Act. (There is a similar Delaware state statute that allows statutory damages for failure to pay wages due.) 

The Chancery Court once again upheld the enforceability in general of covenants not to compete, but based on the facts of the case determined that there was no breach proven, due to a prior settlement agreement. American Homepatient, Inc. v. Collier, et al. . The non-competition agreement in this matter was for one year and a radius of 50 miles, which the court found reasonable in scope and duration. (Footnotes also refer to other cases upholding similar temporal and geographic scopes.) The court listed the elements for enforceability in general of these agreements. The court balanced the equities and also found a legitimate interest being advanced. The industry involved was medical equipment services and in-home patient care, which relied heavily on referral networks. After finding no breach of the covenant, the court also rejected claims for tortious interference with a contract (hiring of an employee with a covenant); tortious interference with prospective economic advantage; and the common law tort of “unfair competition”.
As a reminder for new readers and those who may not have read the link that explains this blog, the theme of this blog is primarily to summarize recent cases fom the Delaware Chancery Court and Delaware Supreme Court on matters of corporate and commercial law. I also touch on legal ethics; e-discovery and related topics of interest to those who spend much of their time on business litigation. Most posts are very short blurbs about the issues addressed in a case with a link for the reader to download the entire case if the issues decided by the court are of interest.

Deloitte & Touche USA LLP and Deloitte Tax LLP v. Lamela , download file, involved a Motion for Reargument under Chancery Court Rule 59(f) regarding the scope of a preliminary injunction entered in October 2005. This case was based on substantive Florida law (though the procedural requirements for injunctive relief were decided on Delaware law), and involved the entry of a TRO and a subsequent preliminary injunction against a former financial consultant and tax advisor who left Deloitte. The court noted that Rule 59(f) does not contemplate a reply to a Motion for Reargument in the typical case. The court refused to change the substance of its original preliminary injunction that excluded from the clients that the former employee was prohibited from soliciting or accepting an engagement with, nine clients that “held out their multistate tax work for competitive bidding”.
The court concluded by saying that it would consider setting a final trial date within the next two or three months and ordered the parties to submit a proposed scheduling order within ten days of the date of the opinion.
A prior decision in this case involving the initial TRO and Preliminary Injunction, was summarized by my post found at this link. See also 2005 WL 2810719 (Del. Ch.).

In the first of two decisions on the same day addressing two separate covenants not to compete, in Lyons Insurance Agency, Inc. v. Wilson, C.A. No. 2017-0092-SG (Del. Ch., Sept. 28, 2018), the Delaware Court of Chancery explained the essential elements for enforceability of a non-competition provision in an agreement. The second case highlighted below deals with the interfacing and tension between California law and Delaware law on this topic. Many other decisions involving covenants not to compete, or non-competition agreements, in general have been highlighted on these pages over the last 13 years. 

Brief Overview:

The Lyons case involved a rather lengthy procedural history, but for purposes of this brief blog post the most notable facts involved an employee of an insurance agency who attempted to bring his “book of business” to a new agency notwithstanding a covenant not to compete.  A Pennsylvania court had granted an injunction to prevent the enforcement of the covenant not to compete, but after that injunction expired in two years, the employee left for another insurance brokerage.  The Lyons Insurance Agency sued to enforce the covenant not to compete that it had made the employee sign before he joined a third employer–which he joined in just over two years.

Notable Procedural Aspect:

The court in this case refused to grant a preliminary injunction because of a liquidated damages provision which raised questions about irreparable harm. This decision was presented on cross-motions for summary judgment.

Noteworthy Principles of Law:

This decision includes the familiar prerequisites under Delaware law for the enforcement of a covenant not to compete. See page 14.  The three basic elements familiar to most readers are that a covenant not to compete under Delaware law must: (1) be reasonable in geographic scope and temporal duration; (2) advance a legitimate economic interest of the party seeking its enforcement; and (3) survive a balancing of the equities in order to be enforceable. See footnote 85.

Notable about this case is the nuance involving the geographic scope of the territorial area that was restricted under the applicable clause. See page 15.

The employee argued that the covenant was not enforceable because the geographic scope was undefined and too broad. The court disagreed.  The most important aspect of this nuanced issue is that the court relied on prior case law to enforce non-competition agreements that limited activity that “competes” with a former employer, which is enforceable, as opposed to a provision that seeks to limit activity that is “merely similar to” the business of a former employer—which is not enforceable, even when a geographic area is not specified. See footnote 91.

The court also discussed the truism under Delaware law one cannot be liable for aiding and abetting a breach of contract. See footnote 115. The court also discussed the elements for tortious interference with contractual relationships. See footnote 116.

Lastly the court discussed the remedies available in this case, which required further clarification of factual issues by the parties. This decision includes many practical statements of law that have broad application for those who labor in the field of commercial litigation.

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The second Chancery decision on September 28, 2018 involving a covenant not to compete was styled NuVasive, Inc. v. Miles, C.A. No. 2017-0720-SG (Del. Ch., Sept. 28, 2018).  This second Chancery decision on the same date involving a covenant not to compete was most noteworthy for its discussion regarding choice of law principles.  This case should be contrasted with a prior Chancery decision in the matter of Ascension Insurance Holdings, LLC v. Underwood, in which a choice of law analysis was applied to prevent the application of Delaware law based on California public policy preventing the enforcement of a covenant not to compete.

By contrast, the instant decision in the NuVasive matter applied a new California law, that was enacted after the Ascension case was decided, now known as Section 925 of the amended California Labor Code.  Section 925 as amended exempts from the California law that restricts importing the law of another state for covenants not to compete, those instances where the employee is “represented by legal counsel in negotiating the terms of the choice of law provision in the covenant not to compete.” See page 2.  In this case, the former president and COO of NuVasive was represented by counsel in the negotiation of the choice of law and forum provisions of the employment agreement at issue.  Although Section 925 is not retroactive under California law, the court found that the California legislature strongly expressed the public policy of California which in this case allowed the enforcement of the choice of Delaware law by the parties, as well as the choice of Delaware forum.

Noteworthy Aspects of NuVasive, Inc. Decision:

• In a parallel action, a California court upheld the Delaware forum provision prior to this decision in NuVasive.
• The Court of Chancery in this matter based its analysis not only on the new exception under California law to the enforcement of the law of other states for covenants not to compete, but also the Restatement (Second) of Conflicts of Laws § 188 (1971). See also footnote 46. Based on the court’s analysis, the court found that in the narrow circumstances of this case where an employee had legal representation during the negotiation of a covenant not to compete, the public policy of California was not violated, nor did it violate comity, to uphold the parties’ choice of Delaware law and Delaware forum under the circumstances allowing for the enforcement of a covenant not to compete in this case.
• Because this decision only involved the issue of what state’s law would apply, the court did not decide the actual enforceability issue at this time.

In Concord Steel, Inc. v. Wilmington Steel Processing Co., Inc., 2008 WL 902406 (Del. Ch., April 3, 2008), read opinion here, the Chancery Court upheld the portion of an Asset Purchase Agreement (ASA) that prevented the seller from competing against the business it sold for 4 years. In the context of a preliminary injunction motion, the court found:  (i) a probability of success on the merits of the claim that the covenant of noncompetition was violated. The court also found that (ii) an imminent threat of irreparable injury was shown, and that (iii) the balance of equities tipped slightly in favor of the plaintiff.

 Procedurally, it is notable that, while not done at the lightening speed of a TRO motion, this PI motion was still decided quite expeditiously. Argument was heard in March 2008 after suit was filed in November 2007 and extensive discovery was taken and pre-trial briefs were submitted over the end of year holiday season.

 The standard for granting a preliminary judgment motion was carefully recited a pages 3 and 4 of the Westlaw version of  the 15 page opinion (that would be about 45 pages in the slip op. format.) The court reviewed the extensive factual background including what it referred to as:  "The ASA … a complicated, 53 page agreement, and the nonsolicitation and noncompetition covenants are particularly convoluted."

 The court also reiterated basic contract interpretation principles. Although these principles are well-known and often summarized on these pages, a few gems are worth repeating:

 " A contract is not rendered ambiguous solely because parties do not agree as to its construction." Also, "extrinsic, parol evidence cannot be used to manufacture an ambiguity in a contract that facially has only one reasonable meaning." However, under the parol evidence rule, "where the language of a written integration is susceptible to more than one reasonable interpretation, the court will consider profferred admissible evidence bearing upon the objective circumstances relating to the background of the contract".

 The opinion also includes at page 5 the essential elements of an enforeceable contract. Basic stuff but I find it helpful to periodically review fundamental principles.

At page 6 and footnotes 42 and 43, the court lists the prerequisites for enforceability of a covenant not to compete, and cites to several Delaware decisions upholding such agreements, the elements for which must be  proven by "clear and convincing evidence." See also footnote 52.

Several cases are cited at footnote 86 in which the Delaware courts have found the irreparabale harm necessary for a PI where a covenant not to compete is breached, in light of the "loss (or foreseeable loss) of client goodwill…" At footnote 89, the court collects cases that recognized, as here, a stipulation of the parties that irreparable harm would be suffered in the event of  a breach.

Finally, on an issue of apparent first impression in Delaware, the court observed that even  though Chancery Court Rule 65 requires that a bond be posted when an injunction is granted, in the agreement involved in this case, the parties agreed that the bond requirement would be waived, and the court enforced that provision–especially as the agreement was the result of protracted negotiations between sophisticated, well-represented parties.

However, the court cautioned in footnote 92 that: " I do not intend the absence of a bond requirement … to diminish in any way Concord’s potential liability for any damages Defendants incur, if the preliminary injunction proves to have been granted improvidently."