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Delaware Non-Compete Agreement Template

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A Delaware non-compete agreement is a contract that allows a business owner to prohibit competition from the signing party. The agreement is often used in an employer-employee relationship, or during the sale of a company to ensure the selling party doesn’t start a similar business. The document establishes the agreement’s geographic scope and time frame, as well as specific activities the restricted party must refrain from carrying out. In order to ensure a non-compete agreement is upheld by the court, the terms should be reasonable and limited to protecting the owner’s “goodwill” or confidential information.

Contents

Enforceability in Delaware

In Delaware, non-compete agreements are enforceable, but they are not governed by state statutes.[1]  Instead, courts rely on common law to ascertain an agreement’s validity. In order for an agreement to be upheld, the restrictions must:

  • Comply with common law contract requirements.
  • Set reasonable geographic and time constraints.
  • Defend a legitimate financial interest (e.g., client base, trade secrets, region of operations, etc.)
  • Protect the employer from a financial loss greater than the hardship imposed on the employee (“survive a balance of equities”).[2] 

When it IS Enforceable

  • Workplace. Non-compete agreements may be enforced against an employee to protect the employer’s goodwill or sensitive information.[3] 
  • Selling a company. Non-compete covenants are regularly used in purchase contracts for businesses and are enforced provided they adhere to common law requirements.[4] 

When it’s NOT Enforceable

  • Attorneys. A non-compete clause or other restrictive covenant may not limit an attorney’s ability to practice law or represent clients. Restrictive covenants, however, are valid in agreements about an attorney’s retirement benefits.[5] 
  • Physicians. A non-compete covenant may not be enforced against a physician.[1] 

Maximum Time Period

As Delaware statutes do not provide laws for regulating non-compete agreements, the courts rely on previous cases and their judgment to evaluate the reasonableness of a non-compete’s time restrictions, taking into account:

  • The position held by the employee;
  • The employer’s financial interest; and
  • The area covered by the agreement.[6][7] 

Non-compete agreements with a time restriction of one (1) to two (2) years are deemed reasonable for skilled workers and those in management, and courts have upheld agreements with durations of up to 3 years.[8][9] 

Geographical Area

Delaware courts consider a geographic scope reasonable if it is limited to where the employer has a protectable interest. The courts will uphold restrictions that meet this condition, even if the range is significant. In one case where the business operated on a national level, the courts enforced a covenant not to compete prohibiting a former company owner from competing anywhere in the U.S.[10]

Consideration

A non-compete agreement must include consideration to be valid.[8]

In the past, the courts have deemed the following as appropriate consideration:

  • A job offer[2]
  • Going from a probationary position to a permanent one[11]
  • Continuation of an at-will worker’s employment[2]
  • Financial compensation[10]
  • Restricted stock units (RSU)[12]

Sources

  1. 6 Del. C. § 2707
  2. All Pro Maids, Inc. v. Layton, Civil Action No. 058-N, 2004 WL 1878784 (Del. Ch. Aug. 9, 2004)
  3. Elite Cleaning Co. v. Capel, No. CIV.A. 690-N, 2006 WL 1565161, at *4 (Del. Ch. June 2, 2006)
  4. Tristate Courier & Carriage, Inc. v. Berryman, No. C.A. 20574-NC, 2004 WL 835886, at *10 (Del. Ch. Apr. 15, 2004)
  5. Rule 5.6 of the Delaware Rules of Professional Conduct
  6. Delaware Express Shuttle, Inc. v. Older, No. CIV.A. 19596-NC, 2003 WL 1903577, at *14 (Del. Ch. Apr. 9, 2003)
  7. Singh v. Batta Env’t Assocs., Inc., No. CIV.A. 19627, 2003 WL 21309115, at *7-8 (Del. Ch. May 21, 2003)
  8. Faw, Casson & Co., v. Cranston, 375 A.2d 463 (Del. Ch. 1977)
  9. Weichert Co. of Pennsylvania v. Young, No. CIV.A. 2223-VCL, 2007 WL 4372823, at *3 (Del. Ch. Dec. 7, 2007)
  10. O’Leary v. Telecom Res. Serv., LLC, No. 10C-03-108-JOH, 2011 WL 379300, at *5 (Del. Super. Ct. Jan. 14, 2011)
  11. RHIS, Inc. v. Boyce, No. CIV. A. 18924, 2001 WL 1192203, at *4 (Del. Ch. Sept. 26, 2001)
  12. Newell Rubbermaid Inc. v. Storm, No. CV 9398-VCN, 2014 WL 1266827, at *9 (Del. Ch. Mar. 27, 2014)
  13. WebMD Health Corp. v. Dale, No. CIV.A. 11-5827, 2012 WL 3263582, at *9 (E.D. Pa. Aug. 10, 2012)
  14. KNOWLES-ZESWITZ MUSIC, INC. v. CARA, 260 A.2d 171 (Del. Ch. 1969)
  15. Delaware Elevator, Inc. v. Williams, No. CIV.A. 5596-VCL, 2011 WL 1005181, at *11 (Del. Ch. Mar. 16, 2011)

Related Forms (1)

Delaware Non-Disclosure Agreement – Prevents a person with access to trade secrets from disclosing them.

Download: PDF, Word (.docx), OpenDocument

 


Frequently Asked Questions

Is blue penciling allowed in Delaware?

Yes. The courts may either disregard excessively broad provisions while enforcing the rest of the agreement or create a new agreement with reasonable provisions.[13][14]

However, the courts favor voiding unreasonable non-competes rather than blue-penciling to encourage employers to create non-compete agreements limited to protecting legitimate interests.[15]