IS THE STIPULATED IRREPARABLE HARM CLAUSE IN YOUR COVENANT NOT TO COMPETE WORTH THE PAPER IT IS WRITTEN ON?

Business agreements often contain a provision that provides the parties agree that a breach constitutes irreparable harm entitling the non-breaching party to injunctive relief to enforce the agreement.  These provisions are designed to protect the terms of the agreement and make it easier for the non-breaching party to secure an injunction while a claim is pending.  In Martin Marietta Materials v. Vulcan Materialsthe Delaware Supreme Court held that contractual provisions as to irreparable harm suffice to establish that element for the purpose of issuing injunctive relief.

In the area of noncompete agreements, employers often use these provisions as a means to “stipulate” that a violation would cause irreparable harm and thus entitle the company to an injunction preventing the employee from working competitively.   Whether a court applying Delaware law will honor such a provision contained in an employment noncompete — and issue a preliminary injunction in the case of a breach — is another matter.  While no Delaware court has formally ruled on this issue, here are a few key points to keep in mind.

First, it is clear that not all contractual provisions stipulating to irreparable injury will be automatically enforced.  While generally Delaware courts give the parties broad leeway to determine the terms of an agreement, they will not enforce stipulated harm provisions where there is a danger that they could have the effect of “confer[ring] equitable jurisdiction” when there is none, or if there is clearly an available remedy of law. Gildor v. Optical Solutions, Inc., C.A. No. 1416-N (Del. Ch. June 5, 2006) (“Delaware courts do not lightly trump the freedom to contract and, in the absence of some countervailing public policy interest, courts should respect the parties’ bargain. … [A]s long as the parties did not include the irreparable harm stipulation as a sham, i.e., when an adequate remedy at law clearly exists, or simply as a means to confer jurisdiction on this court, then the stipulation will be upheld”).

Second, the stage of the proceeding likely has some bearing on whether such provisions will be enforced. For example, if the party is seeking permanent injunctive relief at a trial on the merits, there appears to be more likelihood that such a provision would be enforced.  On the other hand, if the injunctive relief sought is a temporary restraining order, when the burden of showing irreparable harm is at its greatest, a Delaware court is likely to require the party seeking relief to meet the traditional showing of imminent irreparable injury.

Finally, it is important to remember that Delaware courts have repeatedly declined to mechanically enforce restrictive covenants contained in employee noncompetition agreements.  This is because of the sensitivity to the potential harm that could result by granting injunctive relief where the covenant arises out of the employer-employee relationship.  It seems likely then that a Delaware court would be reluctant to mechanically enforce a contractual agreement to irreparable injury, particularly at an early stage of a case and where there is little evidence that the agreement was negotiated at arms-length.

There is no doubt that attorneys will continue to insert stipulated irreparable harm provisions in employee noncompete agreements.   Parties seeking injunctive relief against a former employee, however, should understand that such provisions may be ignored and that a Delaware court likely will require them to show adequate proof of irreparable harm.

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