When determining the enforceability of a covenant not to compete, Delaware courts typically spend most of their time analyzing whether the scope of the restrictions are reasonable and necessary to protect a legitimate business interest, and also whether the balance of harm favors enforcement. It is important to remember, however, that covenants not to compete are contracts and thus are subject to fundamental principles of contract law. A recent Delaware Court of Chancery decision highlights the importance of fulfilling your contractual obligations before seeking to enforce a non-compete agreement.
In Physiotherapy Corporation v. Moncure, C.A. No. 2017-03960-TMR (Del. Ch. Mar. 12, 2018), the Court of Chancery refused to enforce a non-compete provision against a former employee because the former employer had unilaterally discontinued a bonus plan. Physiotherapy employed Moncure to manage its physical therapy clinics in southern Delaware. Moncure was subject to an employment agreement with Physiotherapy which included a non-compete provision prohibiting him from conducting certain competitive activities. Moncure subsequently resigned and commenced employment with a competitor resulting in Physiotherapy filing suit against Moncure to enforce the non-compete.
Among the various defenses raised by Moncure was that Physiotherapy was barred from enforcing his non-compete due to a prior breach of his employment agreement. Specifically, Moncure claimed that Physiotherapy had cancelled the bonus plan which he was entitled to under the terms of his employment agreement. Physiotherapy argued that under his employment agreement it had a right to “amend” the bonus plan at any time and that it had in fact simply replaced his old bonus plan with a new one. The Court questioned whether discarding one bonus plan and substituting another constituted an “amendment”, but nevertheless found that Physiotherapy failed to show that it adopted a new plan under which Moncure was eligible for a bonus. The Court thus found that Physiotherapy’s prior material breach of the employment agreement through its cancellation of the bonus plan excused Moncure’s performance of the non-compete.