As beforehand reported (right here and right here), some Delaware courts have not too long ago declined to “blue pencil,” i.e., modify and slim overbroad restrictive covenants. As a substitute, they’ve stricken of their entirety covenants deemed overbroad and declined to implement them. On December 10, 2024, in Sunder Power, LLC v. Tyler Jackson, et al., the Delaware Supreme Court docket affirmed that Delaware courts have the discretion to say no to blue pencil overbroad restrictive covenants, even when the defendant’s conduct would violate a extra narrowly circumscribed covenant.
In Sunder Power, the plaintiff, a photo voltaic gross sales seller, sought to implement a noncompete towards one in every of its founders, Tyler Jackson, after he departed to Photo voltaic Execs, a competitor. The noncompete prohibited Jackson, as a holder of incentive items, and his “associates” from participating in any door-to-door gross sales enterprise within the markets the place Sunder operated or fairly anticipated working. The Delaware Court docket of Chancery held that the noncompete was overbroad as a result of it “requires that Jackson forestall his [a]ffiliates from participating in any gross sales of merchandise to shoppers of their properties. As written, Jackson’s daughter can not go door to door promoting Woman Scout cookies.” As well as, the court docket opined the noncompete’s length was probably indefinite as a result of it lasted for 2 years after Jackson ceased to personal incentive items, which Jackson couldn’t freely switch. As a substitute, solely Sunder may determine when and if to buy the items, which meant that Jackson was certain by the noncompete till Sunder determined to set off the restriction. As a minority member, Jackson didn’t have the rights of an proprietor, corresponding to voting and knowledge rights and, per the court docket, was successfully an worker, not a associate.
Sunder argued that the court docket ought to “blue pencil” the noncompete as a result of Jackson’s actions would have constituted a breach of even probably the most narrowly circumscribed restrictive covenant. The Court docket of Chancery declined to take action, and denied Sunder’s movement for a preliminary injunction.
On attraction, the Delaware Supreme Court docket affirmed, reasoning that Sunder’s argument “turns the evaluation on its head and creates perverse incentives for employers drafting restrictive covenants,” who would “be much less incentivized to craft affordable restrictions from the outset.” The Court docket defined, whether or not a restriction ought to be blue-penciled “can not activate the egregiousness of the worker’s conduct,” however slightly “ought to be primarily based on the covenants themselves and the circumstances surrounding their adoption.” The Court docket famous that Delaware courts have exercised their discretion to blue-pencil restrictive covenants below circumstances that point out an equality of bargaining energy between the events, corresponding to the place the language of the covenants was particularly negotiated, worthwhile consideration was exchanged for the restriction, or within the context of the sale of a enterprise. On this case, the Court docket discovered:
- Jackson was not concerned in any negotiations or discussions regarding the restrictive covenants or their scope. Moderately, whereas Sunder’s attorneys defined the phrases of the working agreements to the bulk members, Jackson was not current for that assembly and even invited to it. Additional, the bulk members testified they might not have been in a position to perceive the settlement with out the assistance of counsel.
- The bulk members despatched Jackson and the minority members the working settlement for digital signature on New Yr’s Eve and inspired Jackson to signal the working settlement “earlier than midnight.” Jackson signed the settlement lower than an hour later.
- Jackson obtained “minimal-to-no separate compensation in change for his settlement to be certain by the Covenants.” As a substitute, he was given incentive items that might not be freely transferred and have been later repurchased by Sunder for $0 as a result of he left Sunder with out “good purpose,” i.e. “dangerous leaver standing.”
The Court docket defined that the reduction Sunder sought was not merely a constraint on the restrictive covenants’ temporal or geographic scope, however slightly, would have required the court docket to “craft a wholly new covenant to which neither aspect agreed.” This, the Court docket held, was “the alternative of the liberty of contract rules which might be esteemed by Delaware’s authorized system.”
The Sunder choice affirms a development in Delaware: Courts are more and more refusing to change overreaching and overbroad restrictive covenants.
This choice is a reminder that employers ought to narrowly tailor noncompetition provisions and different restrictive covenants to guard solely their professional enterprise pursuits, and should resist the temptation to develop past that assemble. Employers ought to make sure that the restricted occasion is offered sufficient consideration, has enough time to think about the settlement, understands the restrictions, and is given a chance to acquire the recommendation of counsel. The case additionally calls into query the usage of dangerous leaver forfeiture provisions.