NON-COMPETE CLAUSES IN M&A DEALS FACE AN UNCERTAIN FUTURE
A suit was brought by the buyer against the principal of the seller alleging that the seller-principal had breached its non-compete. The non-compete sought to prevent the seller's principal from competing with the company "anywhere in the world." (Intertek Testing Servs. NA, Inc., C.A. No 2022-0853-LWW (Del. Ch. Mar. 16, 2023)
Traditionally, non-competes signed by sellers in connection with the acquisition of a business have received less attention from agencies and courts than non-competes that focus on post-employment restrictions. Here, however, that wasn't the case.
A Motion to Dismiss was submitted by the seller's principal. The plaintiff claimed that its business was nationwide. The court found the non-compete to be geographically unreasonably broad and unenforceable.
The decision sent a clear message that the Chancery Courts will not "rubber-stamp" Non-Competes whether in the context of a merger or otherwise.
Interestingly, the Court chose not to limit the scope of the disputed provision to the United States. The practice of limiting the scope and term of Non-Competes (as opposed to rejecting them outright) is often referred to as "blue penciling".
The Federal Trade Commission (FTC), on January 3, 2023, published a proposed Rule which, if adopted, would prohibit nearly all employee non-compete agreements and void all existing non-competes. A vote is expected in the Spring of 2024.
By Antonio M. Ocasio