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.
In Delaware, non-compete agreements are enforceable, but they are not governed by state statutes. 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”).
- Workplace. Non-compete agreements may be enforced against an employee to protect the employer’s goodwill or sensitive information.
- Selling a company. Non-compete covenants are regularly used in purchase contracts for businesses and are enforced provided they adhere to common law requirements.
- 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.
- Physicians. A non-compete covenant may not be enforced against a physician.
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.
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.
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.
A non-compete agreement must include consideration to be valid.
In the past, the courts have deemed the following as appropriate consideration:
- A job offer
- Going from a probationary position to a permanent one
- Continuation of an at-will worker’s employment
- Financial compensation
- Restricted stock units (RSU)
- 6 Del. C. § 2707
- All Pro Maids, Inc. v. Layton, Civil Action No. 058-N, 2004 WL 1878784 (Del. Ch. Aug. 9, 2004)
- Elite Cleaning Co. v. Capel, No. CIV.A. 690-N, 2006 WL 1565161, at *4 (Del. Ch. June 2, 2006)
- Tristate Courier & Carriage, Inc. v. Berryman, No. C.A. 20574-NC, 2004 WL 835886, at *10 (Del. Ch. Apr. 15, 2004)
- Rule 5.6 of the Delaware Rules of Professional Conduct
- Delaware Express Shuttle, Inc. v. Older, No. CIV.A. 19596-NC, 2003 WL 1903577, at *14 (Del. Ch. Apr. 9, 2003)
- Singh v. Batta Env’t Assocs., Inc., No. CIV.A. 19627, 2003 WL 21309115, at *7-8 (Del. Ch. May 21, 2003)
- Faw, Casson & Co., v. Cranston, 375 A.2d 463 (Del. Ch. 1977)
- Weichert Co. of Pennsylvania v. Young, No. CIV.A. 2223-VCL, 2007 WL 4372823, at *3 (Del. Ch. Dec. 7, 2007)
- O’Leary v. Telecom Res. Serv., LLC, No. 10C-03-108-JOH, 2011 WL 379300, at *5 (Del. Super. Ct. Jan. 14, 2011)
- RHIS, Inc. v. Boyce, No. CIV. A. 18924, 2001 WL 1192203, at *4 (Del. Ch. Sept. 26, 2001)
- Newell Rubbermaid Inc. v. Storm, No. CV 9398-VCN, 2014 WL 1266827, at *9 (Del. Ch. Mar. 27, 2014)
- WebMD Health Corp. v. Dale, No. CIV.A. 11-5827, 2012 WL 3263582, at *9 (E.D. Pa. Aug. 10, 2012)
- KNOWLES-ZESWITZ MUSIC, INC. v. CARA, 260 A.2d 171 (Del. Ch. 1969)
- Delaware Elevator, Inc. v. Williams, No. CIV.A. 5596-VCL, 2011 WL 1005181, at *11 (Del. Ch. Mar. 16, 2011)
Delaware Non-Disclosure Agreement – Prevents a person with access to trade secrets from disclosing them.
Delaware Non-Solicitation Agreement – Restricts a worker’s ability to solicit, recruit, or hire their former employer’s customers or employees.