Plaintiffs sought injunctive relief and enforcement of restrictive covenants against former employees who left to set up a competing business. The Court of Chancery determined the restrictive covenants were overly broad and therefore unenforceable, and thus denied the plaintiffs’ motion for a preliminary injunction. The plaintiffs then amended their complaint to seek money damages. The defendants moved for summary judgment on the grounds that the restrictive covenants were unenforceable, as the Court had found at the preliminary injunction phase.
Noting it may be a matter of first impression, the Court explained that regardless of whether claims for breach of restrictive covenants sought injunctive relief or money damages, the Court would apply a reasonableness standard in its review of the covenants. Plaintiffs argued that money damages for breaches of restrictive covenants are equivalent to loss of a supplemental benefit under a forfeiture-for-competition provision—and they pointed to recent Delaware Supreme Court holdings that forfeiture-for-competition provisions are not subject to reasonableness review. Yet the Court of Chancery explained that contractarian principles require the Court to honor the differences between such forfeiture provisions and restrictive covenants, regardless if the remedy sought is money damages. Whereas forfeiture-for-competition provisions do not prohibit former employees from competing, restrictive covenants do. The Court noted the Delaware Supreme Court had explained this key difference between the two; a promise not to compete differs from a promise to give up money upon competing. The former inspires reasonableness review, while courts enforce the latter as written. Having found the covenants were unreasonable and unenforceable, the Court granted summary judgment in favor of the defendants.
[View source.]
