DealLawyers.com Blog

This Troutman Pepper alert discusses a March Chancery Court decision — In Weil Holdings II, LLC, v. Jeffrey Alexander, DPM (Del. Ch.; 2025) — invalidating a non-compete provision in a sponsor-backed portfolio company’s LLC agreement, taking issue with its duration and scope.

In 2023, as part of a broader transaction, Dr. Jeffrey Alexander (defendant) purchased an ownership interest in Weil Holdings II, LLC (plaintiff), a holding company that owns multiple companies that operate in the podiatry industry, including Weil Foot and Ankle Institute (WFAI) and executed the plaintiff’s LLC agreement, which contained a noncompete provision that prohibited him from competing against the plaintiff or an “affiliate practice” within the “restricted territory” for so long as the defendant held an ownership interest in the company and for two years afterwards . . .

[After] WFAI terminated the defendant’s employment and the defendant subsequently began practicing podiatry at an alleged competing practice. The plaintiff brought suit, seeking, among other things, to enforce the noncompete.

The parties disputed whether the non-compete should be treated as one entered into in the sale of business context — which is “subject to a ‘less searching’ inquiry than if the covenant ‘had been contained in an employment contract.” On the one hand, it was included in an LLC agreement, as part of a private equity investment, and defendant made representations to his financial sophistication. On the other hand, it was not part of a sale of a business, and defendant did not negotiate the terms. There was a factual dispute about the degree to which the defendant could have negotiated the LLC agreement but the court decided it was immaterial — neither a “more” or “less” searching inquiry would change the outcome, which “not a close call.” The court found:

[T]he duration of the noncompete was potentially indefinite, rendering it invalid, because the LLC agreement did not afford members a mandatory redemption right. While the LLC agreement gave the plaintiff the option to repurchase the defendant’s ownership interest, this did not matter for purposes of the court’s analysis because the defendant did not have the power to divest himself of his ownership interests and therefore start the clock on the two-year tail period.

[P]reventing the defendant from practicing podiatric medicine in four states, including two where the defendant had never practiced, is not appropriately tailored to protecting the plaintiff’s legitimate business interests. The court was also concerned that the restricted territory could change because it was tied to affiliate practices as the defendant expanded the location of its practices or opened entirely new practices.

The alert notes that this term — ownership period plus a two-year tail — is common in private equity. The decision is on appeal but, if it stands, may mean that sponsor-backed companies should re-evaluate the scope of their restrictive covenants.

While it is standard practice to require members, including employees, to sign onto LLC agreements with noncompetes, these restrictions must still be reasonable in both duration and geographic scope, otherwise the restrictions are likely to be invalidated completely if challenged.

– If the durational scope of the provision is tied to the member’s ownership of interests in the company, the member must be able to divest their interest to start the clock on the noncompete tail. This could be accomplished with a put right that requires the company to repurchase the ownership interest upon termination of the employment relationship at a stated price depending upon the circumstances.

– If the noncompete is tied to a geographical area, those areas should ideally not be subject to change and should only prohibit competition in areas necessary to protect the company’s legitimate business interests.

– Meredith Ervine