On August 31, 2023, the Delaware Court of Chancery held, with respect to a non-compete provision in an employment agreement, that: (1) the choice of law provision selecting Delaware was “not necessarily binding”; and (2) the non-compete was unenforceable. Centurion Service Group, LLC v. Wilensky, No. 2023-0422-MTZ. This is that court’s second decision in a week invalidating a non-compete.

Factual Background

Earlier this year, Centurion Service Group filed a breach of contract action and motion for a preliminary injunction against its former Vice President of Marketing and Operations after he left Centurion and acquired another business that Centurion viewed as a direct competitor. Centurion sued to enforce the non-compete contained in his employment agreement, claiming the former employee violated its terms.  The non-compete prevented him from engaging in business for (1) two years following termination of employment, (2) anywhere in the United States, (3) that was competitive with Centurion’s business. The former employee argued the provision was unenforceable based on its broad geographic scope and duration, that it failed to advance a legitimate business interest, and that the provision was vague.

The employment agreement contained a Delaware choice of law provision.  And it prevented the former employee from directly or indirectly engaging in business that Centurion was actively involved in and prevented him from engaging in business that Centurion was “planning to design, develop, sell or provide.” The employment agreement defined “business” as not only “the buying and selling of medical equipment” and “providing medical surplus management” but also as “activities in which … [Centurion] is actively planning to engage in.”  The employment agreement also defined the “Restricted Area” as any area within the United States where Centurion currently engages and actively plans to engage in business, and defined the “Restricted Time” as the two year period following the former employee’s termination.

Ruling

Though the agreement selected Delaware as the choice of law, the court held that Illinois law should apply because the choice of law provision was not necessarily binding on the court’s decision.  The court pointed to various facts showing Illinois’ materially greater interest in the issues than Delaware, including: Centurion is an Illinois LLC with its principal place of business in Illinois; the former employee is in Illinois resident; the employment agreement was executed in Illinois; the alleged breach occurred in Illinois; and the competitive business is headquartered in Illinois.  But despite finding Illinois law governed, the court concluded that Illinois and Delaware common law are “mostly in step” concerning the enforceability of restrictive covenants.[1]

The court then found that the above-noted geographic scope and duration taken together “casts a limitless net over [the former employee] in both geography and scope of conduct.” The court took particular issue with prohibiting the former employee from working in any geographic field where Centurion “planned to enter.”

The court concluded that a non-compete with “a greater scope must be supported by a greater interest” to be enforceable.  However, the court was unpersuaded by Centurion’s argument that the former employee “f[ound] deals, foster[ed] relationships” and had “access to Centurion’s confidential information including lists of buyers, sellers, and vendors”; the court characterized them as “vague and everyday concerns.”

Implications

This ruling is yet another example of this court heavily scrutinizing a choice of law provision and a non-compete in an executive-level employment agreement.  We will continue to monitor the Delaware Court of Chancery’s rulings in the non-compete context.

[1] The court’s rejection of the parties’ choice of law provision is the second notable example of such a rejection this year, with the Court of Chancery similarly rejecting a choice of law provision in February for similar reasons as those articulated here. See Hightower Holding, LLC v. Gibson, No. 2022-0086-LWW (Feb. 9, 2023).

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Photo of Steven J. Pearlman Steven J. Pearlman

Steven J. Pearlman is a partner in the Labor & Employment Law Department and Co-Head of the Whistleblowing & Retaliation Group and the Restrictive Covenants, Trade Secrets & Unfair Competition Group.

Steven’s practice covers the full spectrum of employment law, with a particular…

Steven J. Pearlman is a partner in the Labor & Employment Law Department and Co-Head of the Whistleblowing & Retaliation Group and the Restrictive Covenants, Trade Secrets & Unfair Competition Group.

Steven’s practice covers the full spectrum of employment law, with a particular focus on defending companies against claims of employment discrimination, retaliation and harassment; whistleblower retaliation; restrictive covenant violations; theft of trade secrets; and wage-and-hour violations. He has successfully tried cases in multiple jurisdictions, and defended one of the largest Illinois-only class actions in the history of the U.S. District Court for the Northern District of Illinois. He also secured one of only a few ex parte seizures orders that have been issued under the Defend Trade Secrets Act, and obtained a world-wide injunction in federal litigation against a high-level executive who jumped ship to a competitor.

Reporting to boards of directors, their audit committees, CEOs and in-house counsel, Steven conducts sensitive investigations and has testified in federal court. His investigations have involved complaints of sexual harassment involving C-suite officers; systemic violations of employment laws and company policies; and fraud, compliance failures and unethical conduct.

Steven was recognized as Lawyer of the Year for Chicago Labor & Employment Litigation in the 2023 edition of The Best Lawyers in America. He is a Fellow of the College of Labor and Employment Lawyers.  Chambers describes Steven as an “outstanding lawyer” who is “very sharp and very responsive,” a “strong advocate,” and an “expert in his field.” Steven was 1 of 12 individuals selected by Compliance Week as a “Top Mind.” Earlier in his career, he was 1 of 5 U.S. lawyers selected by Law360 as a “Rising Star Under 40” in the area of employment law and 1 of “40 Illinois Attorneys Under Forty to Watch” selected by Law Bulletin Publishing Company. Steven is a Burton Award Winner (U.S. Library of Congress) for “Distinguished Legal Writing.”

Steven has served on Law360’s Employment Editorial Advisory Board and is a Contributor to Forbes.com. He has appeared on Bloomberg News (television and radio) and Yahoo! Finance, and is regularly quoted in leading publications such as The Wall Street Journal.

The U.S. Chamber of Commerce has engaged Steven to serve as lead counsel on amicus briefs to the U.S. Supreme Court and federal circuit courts of appeal. He was appointed to serve as a Special Assistant Attorney General for the State of Illinois in employment litigation matters. He has presented with the Solicitor of the DOL, the Acting Chair of the EEOC, an EEOC Commissioner, Legal Counsel to the EEOC and heads of the SEC, CFTC and OSHA whistleblower programs. He is also a member of the Sedona Conference, focusing on trade secret matters.

Photo of E. Sydney Cone E. Sydney Cone

Sydney Cone earned her J.D. from Tulane University Law School, where she was the Senior Online Editor of the Tulane Maritime Law Journal and co-president of Tulane Women in the Law.

Prior to law school, Sydney was a paralegal for Lankler, Siffert, and…

Sydney Cone earned her J.D. from Tulane University Law School, where she was the Senior Online Editor of the Tulane Maritime Law Journal and co-president of Tulane Women in the Law.

Prior to law school, Sydney was a paralegal for Lankler, Siffert, and Wohl, LLP, focusing on white collar criminal and civil litigation.