March 2023 – Duane Morris Delaware Business Law

March 22, 2023December 12, 2024 by Michael Gonen

Court of Chancery Refuses to Blue Pencil “Facially Unenforceable” Non-Compete Agreement

A few weeks ago, we wrote about a decision where the Court of Chancery denied injunctive enforcement to a non-compete agreement because the agreement was likely void under Alabama law, and Alabama’s much closer relationship to the labor market at issue overcame an otherwise-valid choice-of-law clause pointing to Delaware. This week, the Court of Chancery has once again found a non-compete agreement unenforceable in Intertek Testing Services NA, Inc. v. Jeff Eastman, 2022-0853-LWW (March 16, 2023), this time ruling that it was overly broad and ineligible for judicial narrowing under Delaware law.

New York-based Intertek purchased Alchemy Investment Holdings, Inc., a Texas-based workforce management services business of which Eastman was a stockholder-CEO in 2018. The acquisition agreement included a clause restricting a group of people, including Eastman, from competing with Alchemy “anywhere in the world” for five years from the date of transaction. More than two years later, Eastman’s son formed a company which provides services to clients in the cannabis industry analogous to Alchemy’s offerings. Eastman is a director and investor in his son’s company. Intertek filed suit, and Eastman moved to dismiss.

Vice Chancellor Will reasoned that while Delaware will enforce broad restrictive covenants accompanying the sale of a business, even including international restrictions, the covenants must still be “tailored to the competitive space reached by the seller and serve the buyer’s legitimate economic interests.” Because the global scope exceeded Alchemy’s at-most-nationwide market, the clause at issue was overbroad and thus “facially unenforceable.” The Court further refused on equitable grounds to “blue pencil” a more reasonable alternative geographic scope, citing prior Delaware cases which discussed the troubling incentivization to overreach that the Court creates when it permits a sophisticated employer/buyer to narrow an otherwise-overbroad clause post hoc.

Because the Vice Chancellor also found no well-pleaded allegations that Eastman breached the non-solicitation or confidentiality provisions of the agreement, she granted Eastman’s motion and dismissed the action.

March 15, 2023 by Sahba Saravi

Demand Futility Saves McDonald’s Former Executive from Potential Caremark Liability

We discussed in a prior Alert Vice Chancellor J. Travis Laster’s extension of oversight duties and liability therefrom upon corporate officers. While this decision provided answers to long-standing questions relating to the extension of oversight duties, it also brought about concerns regarding the potential increase of exposure to liability. Luckily for those who shared in this concern, Vice Chancellor Laster reminded us all that the requirement to plead demand futility under Court of Chancery Rule 23.1 will continue to serve as an important hurdle to a plaintiff’s success in the courtroom. In a short order released this month, Vice Chancellor Laster dismissed the same breach of oversight claims that previously withstood Court of Chancery Rule 12(b)(6) muster.

To read the full Alert, visit the firm website.

March 3, 2023 by Richard L. Renck

Consent to Jurisdiction Clauses–The Sequel

We recently wrote a post on this page discussing a new decision of the Court of Chancery holding that a consent to jurisdiction clause in a corporate acquisition agreement was not drafted such that its scope covered claims for breach of fiduciary duty–the lesson for drafters of agreements being to carefully consider how the provision being drafted actually covers the intended scope and types of claims.

In a decision issued on February 28, 2023, the Court of Chancery issued its decision in Golden v. Shootproof Holdings, LP, et al., C.A. No. 2022-0434-MTZ, in which the court considered whether the consent to jurisdiction clause in a merger agreement covered individuals (officers of the buying entities) who were not signatories to, or parties to, the merger agreement at issue. The court found that it did not have personal jurisdiction over the two individual defendants, both residents of Georgia, because it found–as non-parties to the merger agreement–they had not consented to jurisdiction in Delaware. The court, therefore, granted the individual defendants’ motion to dismiss.

In arriving at this result, the court noted that it may enforce a forum selection clause against those “who are not otherwise individually bound by the agreement” where it finds all three of the following present: “(i) the agreement contains a valid forum selection provision; (ii) the non-signatory has a sufficiently close relationship to the agreement . . .; and (iii) the claim potentially subject to the forum selection provision arises from the non-signatory’s standing related to the agreement.” In the litigation, only factor (ii) was contested.

The court ultimately found that the individual defendants were not intended third-party beneficiaries of the merger agreement and would not be bound by the principles of estoppel, and thus, they had not consented to the jurisdiction of Delaware’s courts.

As with last week’s post, this new decision highlights how the Delaware courts are content to apply consent to jurisdiction clauses–but will only do so where the clause clearly articulates that it covers both the intended parties and the intended conduct.

March 2, 2023 by Richard L. Renck

Delaware Choice of Law Clauses for Restrictive Covenants in Agreements

The Delaware Business Court Insider recently published my analysis of a decision of the Court of Chancery where the court declined to apply a Delaware choice of law provision in a dispute related to restrictive covenants where the application of Delaware law would thwart an express policy of the state (here, Alabama) with the greater interest in the dispute. That article may be read here.