Complying With Recent Guidance From Delaware Courts Regarding Enforcement of Noncompetes
In line with the national trend making noncompetes more difficult to enforce, a number of Delaware courts have recently refused to “blue pencil” overbroad noncompetition agreements and have stricken them in their entirety. As a practical matter, this means that, in order for a noncompete to be enforceable under Delaware law (the chosen law for many business disputes for companies outside of Delaware), they must be narrowly drafted to be reasonable in scope and designed to protect only the employer’s legitimate business interests. Employees with noncompetes under Delaware law can no longer rely on Delaware courts to “blue pencil” a noncompete to make it enforceable. Thus, as discussed herein, noncompete agreements should be drafted to comply with the specific guidance that Delaware courts have provided, most recently in the Delaware Supreme Court’s decision in Sunder Energy, LLC v. Jackson, C. A. 455 (Del. Dec. 10, 2024).
In Sunder Energy, the plaintiff sought to enforce a noncompete against one of its former founders who went to work for a competitor. The noncompete was deemed overly broad in that it prohibited the former founder and his “affiliates” from engaging in door-to-door sales activities in the market where the former employer operated or anticipated operating. The Delaware Court of Chancery held that the noncompete was overbroad because it “requires that [defendant] prevent his [a]ffiliates from engaging in any sales of products to consumers in their homes. As written, [defendant’s] daughter ‘cannot go door to door selling Girl Scout cookies.’” The court also found the noncompete’s duration was unreasonable because it expired two years after the former founder ceased to own certain incentive units, which he could only transfer when his former employer decided to trigger the restriction, thus making the noncompete potentially indefinite as to time.
Significantly, the Court of Chancery declined to “blue pencil” the noncompete to make it enforceable, and the Delaware Supreme Court affirmed the lower court’s ruling. The court found that to blue pencil the restriction would result in employers being “less incentivized to craft reasonable restrictions from the outset.” The court noted that, unlike the facts in Sunder Energy, Delaware courts have exercised their discretion to blue pencil noncompetes under circumstances when: (i) the language of the non-compete was specifically negotiated; (ii) valuable consideration was exchanged for the restriction, or (iii) in the context of the sale of a business. The court declined to “craft an entirely new covenant to which neither side agreed.”
The drafting lessons learned from Sunder Energy are that noncompetes under Delaware law must be drafted narrowly as to scope of activities, geographic area, and time of limitation in order to be enforceable, and because Delaware courts may not “blue pencil” a noncompete, it would be prudent to draft with alternatives so that courts can strike without having to rewrite or blue pencil the agreement to make it enforceable. Lastly, the Sunder Energy decision reminds employers that valuable consideration and sufficient time to consider and understand the restriction (with the advice of counsel) makes it more likely that the noncompete will be enforceable or that a Delaware court might exercise its discretion to blue pencil the restrictive covenant.
