Injunction Hearings

June 12, 2017

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 Materials, the 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”).

August 10, 2016

Delaware Chancery Court Blocks Former Exec’s Effort to Invalidate Noncompete in a Massachusetts Court

by Scott Holt

When litigation involving the same dispute and parties has been commenced in two different venues, many courts adhere to the “first-filed rule” which provides that the litigation should be confined to the forum in which it is first commenced. This often results in a race to the courthouse by litigants seeking to have the dispute heard in their preferred choice of venue.

Delaware courts, as a general matter, have followed this common law rule and allow judges broad discretion to grant a stay when there is a prior action pending in another state and involving the same parties and issues. There is, however, one important exception to this rule.

In cases where contracting parties have expressly agreed to a legally enforceable forum selection clause, the Delaware Supreme Court has held that courts must honor the parties’ contract and enforce the clause, even if, absent any forum selection clause, the first-filed rule might otherwise require a different result. As a result, a party’s effort to avoid a Delaware forum selection clause by commencing suit in a different state can be defeated if the proper steps are taken. A recent proceeding in case pending in the Delaware Court of Chancery provides guidance.

January 29, 2014

Survey of Chancery Court Cases Shows Most Litigants Obtain Expedited Relief

by Scott Holt

A recent survey conducted by several of my colleagues demonstrates the speed in which litigants can obtain preliminary relief from the Court of Chancery. The survey included a sampling and analysis of approximately 200 cases between 2009 and 2011, in which the court ruled upon a motion for temporary restraining order or a motion for preliminary injunction. The results reflect the frequency and speed at which the court has granted injunctive relief in recent years:

For cases in which the court ruled on a motion for temporary restraining order, the court granted the motion 58 percent of the time. On average, the court granted the motion 7 days after its filing.
For cases in which the court ruled on a motion for preliminary injunction, the court granted the motion 30 percent of the time. On average, the court granted the motion 26 days after its filing.
The survey also looked at cases from the sample that involved trade secret claims and in which the court ruled on a motion for temporary restraining order or preliminary injunction. In those cases, the court granted the motion for temporary restraining order 88 percent of the time and granted the motion for preliminary injunction 75 percent of the time.

Based on these statistics, there seems to be little doubt that the court will order injunctive relief on an expedited basis in cases where circumstances require expedition, including those involving noncompete agreements and misappropriation of trade secret.

A copy of the full article drafted by my colleagues and published by BNA can be obtained on the Young Conaway Stargatt & Taylor website.

March 16, 2012

Settlement Discussions Not An Excuse for Delayed TRO Application To Enforce Noncompete

by Scott Holt

One of the most critical points in the enforcement of a noncompete is when a company first learns that a former employee may be engaging in unfair competition. Indeed, the steps taken by the company in the first few days can often determine whether it will be successful in limiting the amount of harm done.

In many case, the company will act quickly and seek emergency injunctive relief to stop imminent irreparable harm to its business. In other cases, the company may try to resolve the dispute with the competitor by engaging in settlement discussions at the outset. The benefit of the latter strategy, of course, is that a business resolution is often preferable to the expense and uncertainty of litigation.

But companies that chose the settlement route need to be aware that the passage of time can compromise their ability to get relief from a court should discussions break down, particularly if it needs an emergency injunction. In a recent Chancery Court hearing on an application for a temporary restraining order, the court was quick to point out plaintiff’s apparent four month delay after learning of the defendants activities before seeking the TRO. The plaintiff responded that the delay was due in part to its efforts to work out a standstill agreement with the defendants. As noted in the transcript excerpt below, the court was not sympathetic to this argument:

September 27, 2011

Court Denies Preliminary Injunction Based on Insufficient Record

by Scott Holt

While the Court of Chancery will frequently enjoin parties from engaging in unfair competitive activities, the standard for obtaining preliminary injunctive relief remains high. It is important for parties seeking injunctive relief to be able to provide the court with specific, admissible evidence of unfair competitive activities. Generalized allegations normally will be insufficient to allow the court to grant relief. Take for example a recent case involving the purchaser of a company’s assets who sought to enforce a noncompete against one of the company’s former employees.

In that case, Geovesi Holdings, Ltd. purchased certain assets of Earthwater Global, LLC as part of a court-ordered liquidation. The purchased assets include “all employment, non-disclosure agreements and confidentiality agreements entered into by [EW Global].” Following the sale, Geovesi filed suit in Chancery Court against one of EW Global’s former employees, Robert Bisson, to enforce noncompete and non-solicitation covenants in his employment agreement. There also was pending litigation between Bisson and Geovesi in Virginia and an arbitration proceeding.

As evidence of Bisson’s competitive activities, Geovesi relied exclusively on allegations in Bisson’s Virginia pleadings that he competed with Geovesi. The Court noted that while these generalized allegations are admissible evidence of competition, they did not provide a sufficient evidentiary foundation to support injunctive relief.

June 11, 2010

Employees Exiting with Trade Secrets May Open the Door for Civil Conspiracy Claim

by Scott Holt

A mass exodus of employees from a company often results in the employees joining a competitor or starting up a competing business. Often the employees do not leave empty handed, and involve a concerted effort to use the company’s confidential or proprietary information to obtain an unfair competitive advantage. Such acts may give rise to a common law claim of civil conspiracy.

To be successful on a civil conspiracy claim, a plaintiff must usuallys show that two or more persons engaged in an unlawful act done in furtherance of the conspiracy and some form of actual damages. The court will require that there be some underlying wrongful act, such as a tort or a statutory violation. In Delaware, a breach of contract is not an underlying wrong that can give rise to a civil conspiracy claim.

One of the advantages of a civil conspiracy claim is it provides recourse against parties who may not have participated in the initial wrongful act, but nonetheless participated in the conspiracy. This is significant since each conspirator is jointly and severally liable for the acts of co-conspirators committed in furtherance of the conspiracy.

Civil conspiracy claims have led to the award of injunctive relief in the Court of Chancery. Most recently, in Zrii, LLC v. Wellness Acquisition Group, Inc., the Court of Chancery awarded a preliminary injunction against various individuals after finding a their former employer had a reasonable likelihood of success in proving the existence of an unlawful act in furtherance of the alleged conspiracy.
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