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It hasn’t been a good year for plaintiffs seeking to enforce non-compete clauses in Delaware Chancery Court, and things didn’t improve last month when Vice Chancellor Zurn issued her letter ruling in Centurion Service Group, LLC v. Wilensky, (Del. Ch.; 8/23).  In that case, the Vice Chancellor invalidated a nationwide non-compete with a former senior executive, finding that both the geographic and temporal scope of the restrictive covenant were excessive and unenforceable. Furthermore, in keeping with other recent Delaware Chancery decisions involving non-competes, she declined to “blue pencil” the restrictions to create an enforceable provision.

The non-compete at issue purported to impose a two-year obligation on the former executive to refrain from competing with the company in “any area within the United States of America, and any other countries within the world where the Company is then actively soliciting and engaging in (or actively planning to solicit and engage in)” its existing business or “any other business activities in which the Company, at any time during the Term, is engaged or is actively planning to engage in.”

This excerpt from the Vice Chancellor’s opinion explains why she found the scope & duration of these restrictions to be unreasonable:

Section 5(a) bans Wilensky for two years from competing nationwide, and in any additional “area” in which Centurion conducts, solicits, or plans to conduct or solicit any actual activity or activity planned at any time during Wilensky’s seventeen-year employment. Under a holistic assessment, this geographic and temporal scope is not reasonable. The “area” contemplated in Section 5(a) casts a limitless net over Wilensky in both scope of geography and scope of conduct. Wilensky is prohibited from working not just in “areas” where Centurion conducts its core business of medical equipment sales and surplus management, but also “areas” Centurion might have thought about entering, and where Centurion does or thought about doing any other activity.

Wilensky is similarly prohibited from working in not just Centurion’s actual field, but also any field Centurion planned to enter. Like in FP UC Holdings, “in light of the [Employment] Agreement’s failure to define precisely what [Centurion]’s ‘business’ is, one could argue that [Wilensky] would be in breach of the non-compete if he were employed [in the medical sale and surplus] field anywhere in the country” or abroad. “Given the vast geographic scope of the non-compete, [Centurion] must demonstrate it is protecting a particularly strong economic interest to persuade the Court that the non-compete is
enforceable.”

While acknowledging that Delaware has permitted nationwide non-competes in the sale of business context, this case did not arise in that setting. Instead, it was entered into during the former executive’s employment, and Centurion offered no facts supporting an argument that it was necessary to protect “a particularly strong economic interest.”  Accordingly, she invalidated the covenant and refused to blue pencil it.

While this is only a letter opinion and therefore not of precedential value, it does suggest that the Chancery Court continues to approach non-compete agreements, even with senior executives or those involving the sale of a business, with a high degree of skepticism.

– John Jenkins