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E-MailGail Weinstein is a Senior Counsel, Philip Richter is a Partner, and Steven Epstein is the Managing Partner, at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Richter, Mr. Epstein, Steven J. Steinman, Randi Lally, and Adam B. Cohen, and is part of the Delaware law series; links to other posts in the series are available here.
In Cleveland Integrity Services v. Byers (Feb. 28, 2025), the Court of Chancery held that a non-compete provision entered into in connection with the sale of an oil and gas pipeline inspection company was unenforceable as it was overbroad. The non-compete restricted the executive from competing with the company, anywhere in North America, for two years following termination of his employment with the company. The non-compete’s duration combined with its geographic scope was unreasonable, the court found, as it was “facially broader than necessary to protect [the company]’s U.S. business interests.” The court emphasized that, although the company may have had customers with operations or assets in Canada or Mexico, it “only service[d] such customers within the U.S.” The court stressed that: (i) the company’s business was “geographically rooted: its employees must physically see a pipeline to inspect it…” ; and (ii) while at the time of the sale of the company in 2013, the non-compete “may have been reasonable as a means to protect [the company’s] interest in expanding its services beyond the U.S. free from Defendants’ interference,” the company had not in fact expanded beyond the U.S. and had offered no evidence that it now planned to do so (thus, in 2025, at the time of enforcement of the provision, there was no evidence that the company had “a legitimate economic interest that was advanced by the geographic scope of the covenant”).
In Weil Holdings (Mar. 2, 2025), the Court of Chancery held that a non-compete provision entered into in connection with the investment by a doctor in the limited liability company employing him was unenforceable as it was overbroad. The non-compete, contained in the LLC agreement, prohibited any unit holder of membership units in the LLC from competing with the company until two years after the unitholder no longer held any units. The geographic scope included any area within 15 miles of the principal place of business of any “Affiliate” of the company. The court found that the duration, as well as the geographic scope, was unreasonable.
With respect to the duration, the court emphasized that, as the unitholders had no mandatory redemption right for any reason under the LLC agreement, the non-compete potentially was of “indefinite duration.” The court rejected the company’s argument that a definite duration could be implied given that this was a private equity investment and such investments almost invariably have a three-to-ten-year duration. Even if so, the court responded, a potentially twelve-year non-compete (ten years of the investment plus an additional to years) would be unreasonable. With respect to the geographic scope, the court stressed that the restricted area was “constantly subject to change,” as Affiliates might move or expand over time and the doctor could find himself “suddenly in breach” of the non-compete. The court rejected the company’s argument that this was merely a speculative concern. “For a person seeking stable housing and employment, [it was] unworkable,” the court wrote.
In both cases, the court declined to blue-pencil the non-competes to make them enforceable. In Cleveland Integrity, the court rejected the company’s contention that blue-penciling would be appropriate because “any overreaches were only in the margins.” The court stated that blue-penciling “creates confusion, encourages employers to overreach, and encourages litigation by building a degree of uncertainty into every employment agreement.” In Weil Holdings, the court rejected the company’s argument that equal bargaining power between the parties supported blue-penciling their agreement. The court found the facts did not indicate equal bargaining power. “[T]he Noncompete was not negotiated in the context of a sale of a business, the parties did not negotiate the Noncompete in any substantive way, and, even accepting Plaintiff’s position that Defendant was a sophisticated investor with an opportunity to negotiate the Noncompete, his position as a unitholder employee placed him in a disparate bargaining position.”
