Balance of Equity Considerations for Non-Compete Agreements

scales.jpgThe Court of Chancery is often hesitant to enforce a covenant that would preclude an individual from earning a living. Where a restriction on the ability to be gainfully employed is involved, the customary sensitivity of the Court to the particular interest affected by its remedies is heightened. As a result, parties seeking to enforce covenants not to compete must use caution so as not to request relief that would essentially render the defendant unable to work.

In balancing the equities, the Chancery Court will analyze whether the consequences of enforcement to the employee are grave and/or whether the interests of the employer are “slight or ephemeral.” Disproportionate hardship is often a reason for refusing equitable remedies. If the equities balance in the employee’s favor, even a well-drafted covenant may not be enforced.

When determining the balance of hardships, only actual harm is relevant to this determination. Actual harm normally requires there to be specific economic harm. A technical violation of a noncompete that causes no cognizable injury may leave the plaintiff without equitable relief.

The amount of actual harm is also considered. The pilfering of one or two customers may not be enough while evidence of wide spread solicitation will normally prompt action from the Court. The Court may examine whether there is evidence that the former employee is using the employer’s customer lists or other proprietary information before granting injunctive relief.

Other considerations include the level and sophistication of the former employee. The Court of Chancery has noted that the more skilled, the higher positioned the former employee, the greater the harm that would inure to the employer if the covenant were not enforced.

Similarly, there may be a presumption that a high level employee is more capable of finding alternative work. In addition, if there is evidence that the employee had previously received job offers that would not violate the covenant, the harm he would suffer appears to be substantially reduced. Other considerations include whether the employee has prior training and experience that would enable him to work in an alternative field, even if only for the duration of the restrictive period.

The length of the injunction also will be considered. Minimal harm will occur if the employee will suffer only a short lay-off before being able to start his new job at the expiration of the covenant. If the Court determines that the employee would be financially stable even if he did not work until the expiration of the covenant, he may be subjected only to minimum harm. And, of course, if the restrictions are reasonable and the employee would be able to obtain new clients or clients in other areas, the harm to him is deemed minimal and the covenant is enforced.

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