September 22, 2017

California Non-Competes: Delaware Governing Law Not a Fix

California is notoriously tough on non-competes. Sometimes, buyers try to work around California’s hard line approach by including the desired non-competes in a shareholders agreement governed by the laws of a less restrictive state – like Delaware. This Cooley blog reviews a recent Delaware Chancery Court decision refusing to enforce such a work-around.  Here’s an excerpt:

In EBP Lifestyle Brands v. Boulbain, the Delaware Court of Chancery declined to enforce covenants not to compete or solicit employees against Yann Boulbain, a former vice president of The Ergo Baby Carrier, Inc., a company based in California, due to lack of personal jurisdiction. Specifically, the court found that although the restrictive covenants were contained in a stockholders agreement that was governed by Delaware law, and the company’s ultimate parent and party to the agreement was incorporated in Delaware, such “contacts” between the former employee and the State of Delaware were not, in and of themselves, sufficient to establish personal jurisdiction over the former employee in a Delaware court.

Perhaps more importantly, the Court said that even if it had personal jurisdiction, Delaware conflicts of law principles would require dismissal of the case because California had a materially greater interest in the dispute.  Here’s the key takeaway from the case:

The decision serves as a clear warning to parties that, regardless of choice of law, it will be very difficult to enforce a non-compete against an individual in California in a simple stockholder purchase agreement under a statutory exception where (as here) the individual is merely purchasing, and not selling, stock. This is especially true where the person has no meaningful ties to or contacts with Delaware. Whether there are sufficient Delaware contacts will be a highly fact-specific inquiry for the Delaware court.

John Jenkins