Agreements To Prevent Disintermediation May Protect Company’s Role As “Middleman”

Disintermediation is the removal of intermediaries in a supply chain or “cutting out the middleman.” Companies are most likely to engage in this practice in markets of high transparency where they are aware of supply prices direct from the intermediary supplier or provider. In these instances, the intermediary or “middleman” will often try to protect its business by requiring the end user to execute a non-solicitation clause to prevent disintermediation. Not all courts, however, will enforce such a clause.

The principal argument for non-enforcement of these clauses is that they prevent legitimate, ordinary competition. However, at least one Delaware court has recognized that certain intermediaries may have a legitimate business interest in preventing disintermediation.

In Elite Cleaning Co. v. Capel, the intermediary argued that its agreement with its employees not to work for a customer protected a legitimate interest of preserving its role as the “middleman” in the marketplace. 2006 Del. Ch. LEXIS 105 (Del. Ch., June 2, 2006). The Court recognized there was a split in authority in various states whether such agreements were enforceable, and that it was aware of no Delaware case addressing the issue. It went on to reason that the jurisdictions that have held that disintermediation is a legitimate economic interest made better sense.

The Court went on to conclude, however, that the intermediary in its case had little, if any, legitimate economic interest to protect. The Court noted that there was no evidence that the company had to train its employees, or that the employees possessed a high level of skill. In addition, the Court found no evidence that the employees had knowledge of trade secrets or valuable proprietary information. As a result, while the Court found the intermediary had a legitimate interest in preventing disintermediation, the interest was slight given the nature of the employees’ employment.

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