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.