February 2, 2023

Non-Competes: Delaware’s No Walk in the Park When It Comes to Enforceability

In early January, the Vice Chancellor Zurn’s issued her decision in Ainslie v. Cantor Fitzgerald, (Del. Ch. 1/24), which addressed the limitations on enforceability of non-compete covenants in partnership agreements. That decision followed on the heels of her decision in Kodiak Building Partners v. Adams, (Del. Ch.; 10/22), which invalidated a non-compete agreement entered into in connection with the sale of a business.

With all the attention being paid to the FTC’s proposed ban on non-competes, I thought these cases merited a blog. However, I also sincerely hoped somebody else would spare me the task of writing it, since now that I’m managing site in addition to this one, people expect me to do  actual work – and that leaves me less time to blog. Fortunately, Weil’s Glenn West recently came to my rescue with this blog, which reviews these two recent decisions and makes the point that the Delaware Chancery Court can be a very demanding place when it comes to enforcing non-competes:

Delaware courts are regarded as reliably contractarian in their interpretation and enforcement of written agreements. That means that Delaware courts do not re-write agreements that parties make, and will enforce both good deals and bad deals in accordance with the written terms. But Delaware’s contractarianism is mediated through long-standing common-law rules that sometimes do refuse to enforce the terms of an otherwise voluntary agreement, even one entered into by sophisticated parties.

Two recent Delaware Court of Chancery decisions, both by Vice Chancellor Zurn, illustrate the effect of a common-law override to strict contractarianism respecting the enforcement of non-compete agreements and forfeiture-for-competition provisions, both in the sale of business and in the employment context.

After reviewing the two decisions, the blog closes by observing that parties who want Delaware courts to enforce non-competes should follow Vice Chancellor Zurn’s advice in Ainslie and ensure “that they ‘(1) [are] reasonable in geographic scope and temporal duration, (2) advance a legitimate economic interest of the party seeking its enforcement, and (3) [will] survive a balancing of the equities.’”

John Jenkins