Restrictive covenants—once primarily associated with employment contracts—are becoming more prevalent in alternative entity agreements such as LLC operating agreements and limited partnership agreements. Recent rulings in Delaware courts signal a shift in how these provisions are scrutinized, making it essential for businesses to stay informed.
Expanding Use of Restrictive Covenants in Alternative Entity Agreements
Traditionally, restrictive covenants have been used in employment agreements to prevent unfair competition. However, businesses are increasingly embedding these provisions in alternative entity agreements, which has led to a rise in litigation. Delaware courts are now considering the enforceability of such covenants beyond the employment context, often weighing contractual freedom against public policy concerns.
Delaware Courts Are Actively Shaping the Legal Landscape
Recent case law demonstrates an evolving approach to restrictive covenants:
These cases underscore the increasing judicial focus on whether restrictive covenants are narrowly tailored and necessary to protect legitimate business interests.
Practical Considerations for Businesses
Given the heightened scrutiny, businesses should take a proactive approach:
- Draft Carefully – Ensure restrictive covenants are specific, reasonable, and justified by legitimate business interests.
- Assess Enforceability – Review agreements in light of evolving case law to mitigate legal risks.
- Monitor Legal Trends – Stay updated on court decisions to anticipate potential challenges to restrictive covenants.
Final Thoughts
Delaware courts continue to uphold contractual freedom but are increasingly cautious about enforcing restrictive covenants that impose undue restraints. Businesses must carefully draft and evaluate these provisions to withstand judicial review. As case law evolves, staying informed is critical to navigating these legal complexities.
