Court Applies Delaware Law to Noncompete Agreement and Refuses to Enforce Under “Employee Choice” Doctrine

Most agreements not to compete provide for injunctive relief as the primary remedy against a departing employee who joins a competitor.  In some cases, however, companies will condition the payment of post-employment or deferred compensation on the employee’s compliance with a noncompete agreement.  These arrangements are often referred to as the “employee choice” doctrine. Under this doctrine, an employee who departs and subsequently violates his noncompete obligations will forfeit any right to the post-employment compensation. The doctrine is based on the premise that a departing employee is given the choice of either preserving his right to compensation by refraining from engaging in competitive activities, or forfeiting that right by choosing to compete with the former employer.

Although Delaware courts have not specifically addressed this doctrine, a recent New York decision applying Delaware law applied the doctrine and refused to grant the former employer’s request for injunctive relief. In NBTY, Inc. v. O’Connell Vigliantethe plaintiff NBTY was a vitamin and nutritional product distributor. Beginning in 2014, a number of NBTY employees resigned and went to work at Piping Rock Health Products, LLC – a competitor run by NBTY’s former CEO. All of the departing NBTY employees had signed stock-option agreements with NBTY’s parent which allowed them to purchase stock options over a period of time, and the agreements contained restrictive covenants prohibiting them from competing with NBTY for a one-year period following the end of their employment. Notably, the agreements all contained Delaware choice of law provisions.

After the employees resigned and went to Piping Rock, NBTY sued to enforce the non-compete agreements and sought to permanently enjoin the employees from working at Piping Rock. The defendants moved to dismiss the complaint, arguing that they had not exercised any of the stock options in question and thus there was no consideration.

The court, applying Delaware law, found that the non-compete restrictions were not supported by valid consideration, since the options had expired, unexercised, 90 days after they left NBTY. The court held that because the individuals had a choice between their continued employment with NBTY and exercising their benefits, or foregoing those benefits and competing, which they did, the end result was the individuals received no benefit in exchange for the non-compete agreements. The court noted further that while Delaware law allows consideration to be in the form of continued employment, the language of the agreements with NBTY specifically provided that NBTY made no promise of continued employment.

The court went on to find that even if there had been consideration, the scope of the restrictions were overly broad and imposed an undue hardship on the individual defendants. In making this finding, the court noted Delaware law requires an employer to show that the restrictions sought to be enforced were reasonable in scope and duration and narrowly tailored to protect a legitimate interest.

The court’s decision in NBTY is an example of where even under Delaware law an employer must make certain that all of the elements of a binding contract are present in its noncompete – including adequate consideration. In this case, the employer could have easily met the consideration requirement by simply adding a provision that made the employee’s continued employment conditioned upon signing the agreement.  The case also illustrates the importance of drafting restrictions that are reasonable and not overly broad – an element particularly relevant if the entity seeking to enforce the agreement wants some form of injunctive relief.

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