December 18, 2024
Non-Competes: When Will Delaware Courts “Blue Pencil” Unenforceable Covenants?
In Sunder Energy, LLC v. Tyler Jackson, (Del.; 12/24), the Delaware Supreme Court addressed a plaintiff’s argument that the Chancery Court erred in refusing to blue pencil a non-compete agreement that the Court found to be impermissibly overbroad. The Supreme Court upheld the Chancery Court’s decision, and in doing so shed some light on the circumstances under which Delaware courts will use their discretion to blue pencil unenforceable non-competes.
The case involved arose out of one the company’s founder’s decision to depart and work for a competing business. The company and the founder were parties to a non-compete agreement, which the company sought to enforce. The Chancery Court ruled that the non-compete was overbroad in scope and unreasonable in duration and, as has happened in several recent cases, also refused to “blue pencil” its terms to make the agreement enforceable.
The plaintiff argued that the Chancery Court should have blue penciled the agreement because the founder’s actions would have clearly breached even the narrowest restrictive covenant. The Supreme Court rejected that argument, and this excerpt from a Sheppard Mullin blog on the case summarizes the rationale underlying the Supreme Court’s decision:
On appeal, the Delaware Supreme Court affirmed, reasoning that Sunder’s argument “turns the analysis on its head and creates perverse incentives for employers drafting restrictive covenants,” who would “be less incentivized to craft reasonable restrictions from the outset.” The Court explained, whether a restriction should be blue-penciled “cannot turn on the egregiousness of the employee’s conduct,” but rather “should be based on the covenants themselves and the circumstances surrounding their adoption.”
The Court noted that Delaware courts have exercised their discretion to blue-pencil restrictive covenants under circumstances that indicate an equality of bargaining power between the parties, such as where the language of the covenants was specifically negotiated, valuable consideration was exchanged for the restriction, or in the context of the sale of a business.
The Court concluded that the facts and circumstances of this case indicated that these criteria had not been satisfied, and that to provide the plaintiff with the relief it sought would in effect require the Court to create an entirely new agreement between the parties which neither bargained for.
– John Jenkins