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Disintermediation is the removal of intermediaries in a supply chain or “cutting out the middleman.” Companies are most likely to engage in this practice in markets of high transparency where they are aware of supply prices direct from the intermediary supplier or provider. In these instances, the intermediary or “middleman” will often try to protect its business by requiring the end user to execute a non-solicitation clause to prevent disintermediation. Not all courts, however, will enforce such a clause.

The principal argument for non-enforcement of these clauses is that they prevent legitimate, ordinary competition. However, at least one Delaware court has recognized that certain intermediaries may have a legitimate business interest in preventing disintermediation.

In Elite Cleaning Co. v. Capel, the intermediary argued that its agreement with its employees not to work for a customer protected a legitimate interest of preserving its role as the “middleman” in the marketplace. 2006 Del. Ch. LEXIS 105 (Del. Ch., June 2, 2006). The Court recognized there was a split in authority in various states whether such agreements were enforceable, and that it was aware of no Delaware case addressing the issue. It went on to reason that the jurisdictions that have held that disintermediation is a legitimate economic interest made better sense.

A Free 90-Minute Webinar sponsored by the Employment Law Alliance will address the use of noncompete agreements in various jurisdictions, including Delaware. The conference is entitled “Your Top Talent Walks Out the Door: Now What? How to Stop Your Competitors from Raiding Your Workforce and Engaging in Unfair Competition in the U.S. and Canada” and will be held on June 9, 2010 from 3:00 to 4:30 p.m. EDT.

In addition addressing the treatment of noncompete agreements in various states, the webinar will offer practical and concrete strategies on:

• Drafting and enforcing restrictions on employee competition when doing business in multiple jurisdictions at one time • How the “duty of loyalty” can be used to stop employees from setting up competing businesses while still employed by you.

The Court of Chancery may award exemplary damages only where it is explicitly authorized to do so by statute. Section 2003(b) of Delaware Uniform Trade Secret Act allows the Court of Chancery to award exemplary damages (up to twice the actual monetary award) in cases where the misappropriation of trade secrets was willful and malicious. A showing of both willful and malicious misappropriation is necessary in order to obtain this relief.

The standard for willfulness only requires actual or constructive knowledge of the conduct and a realization of its probable consequences. Malicious conduct, on the other hand, requires a showing of ill-will, hatred or intent to cause injury. The latter is often more difficult to prove, normally requiring some showing of an intent to cause commercial injury.

If the Court finds willful and malicious misappropriation exists, it also may award reasonable attorney’s fees to the prevailing party under 6 Del. C. § 2004. The award will usually be limited to those fees actually incurred in connection with litigation of a misappropriation of trade secrets claim.

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