United States: Delaware Court Of Chancery Holds Non-Competes Unenforceable Against Subsidiaries

In Frontline Technologies Parent LLC et al. v. Brian Murphy et al., the Delaware Court of Chancery recently stated that when negotiating a contract, the parties must "say what they mean and mean what they say." In this case, the court rejected enforcement of former employees' noncompetition restrictions because the agreement language did not prohibit competition with the company, only the company's private equity owner.

Background

Frontline Technologies Group, LLC ("Frontline") and its parent company Frontline Technologies Parent, LLC ("Parent," with Frontline, "Plaintiffs") filed an action for breach of contract against two former employees for allegedly violating the noncompetition provision outlined in the Incentive Equity Grant Agreements ("Equity Agreements"). However, the Defendants were former employees of Frontline, not Parent, and the noncompetition language was tailored to the "business" or "business line" of Parent, not Frontline. In April 2023, Defendants resigned from Frontline to join LINQ, Inc. ("LINQ"), a competing school administration software company.

On May 19, Plaintiffs filed claims for breach of contract against the Defendants for allegedly violating the restrictive covenants in the Equity Agreements. After unsuccessfully pursuing a temporary restraining order to enjoin Defendants from working at LINQ, Plaintiffs filed an amended complaint reasserting the breach of contract claims and adding claims seeking equitable rescission of the Equity Agreements.

Analysis

The court held that Plaintiffs failed to demonstrate Defendants breached their obligation because the non-compete provisions are "expressly tailored" to prohibit competition with Parent's "business or business line" – not Frontline's. The court explained that if Plaintiffs wanted the non-compete provisions to apply to Frontline's business or business line, they should have defined "Competition" to include "a business or business line that the Company [or its Affiliates] is conducting."

Further, the court also noted that the Equity Agreements "make no mention of Frontline" and the complaint failed to describe Parent's business or allege that LINQ competes with Parent in any way. Therefore, the Equity Agreements do not prevent Defendants from working at LINQ.

Finally, "given the absence of any alleged mutual mistake of fact," the court held that equitable rescission was unavailable, because "rescission simply cannot save a party from its agreement to unambiguous contract provisions that later prove disadvantageous."

Takeaway

Delaware is a "freedom of contract" jurisdiction, meaning that Delaware courts will give priority to the parties' intentions as reflected in the four corners of the document. The precise words matter, even if one or more parties may have had other intentions. Parties negotiating agreements under Delaware law should take extra care to ensure that the scope of the restrictions is drafted in the way the parties actually mean, because a Delaware court will enforce the language as-written even where it does not fully reflect the intended scope.

This article is presented for informational purposes only and is not intended to constitute legal advice.