Non-compete agreements between businesses and their employees are often the subject of intense scrutiny when enforcement is sought in the courts. As someone who has litigated dozens of these cases on behalf of businesses, they can often be difficult to navigate for a host of reasons, typically because the non-compete language is too broad, the company terminated the employee and gave no consideration for the non-compete, proof of loss to the company is lacking or the court flat out does not want to deny employment.

An exception to the courts’ usual reluctance to enforce non-competes is when a business is acquired and, as part of the transaction, the prior owner(s) of the acquired company is subject to a non-compete. It makes sense that the company that just paid potentially millions to acquire a business would not want the prior owner going back to the marketplace to start a competing business. Courts typically look favorably on these non-compete agreements for that reason and because the prior owner was presumably well-compensated for the agreement not to compete.

However, a recent decision from a case in Delaware may have thrown this concept into flux. In the DE case, BluSky Restoration Contractors acquired Sharp, Robbins & Popwell (SRP), a general contracting firm, in early 2020. The two co-founders of SRP worked at BluSky after the acquisition until 2024 but then left and formed a competing entity. Litigation ensued with BluSky claiming the SRP founders were in breach of their employment agreements with BluSky, which were part of the original acquisition.

In a surprising decision, Magistrate Hume IV dismissed BluSky’s case in favor of the SRP founders, holding that even though this type of non-compete was subject to less scrutiny, and BluSky had a legitimate interest in protecting its business, the language in the non-compete was too broad because it was for a five-year period and covered the entire U.S. and worldwide geographically.

The fact that the SRP founders acknowledged the reasonableness of the terms in the agreement did not matter. Additionally, the Judge noted that the millions paid to acquire SRP was not sufficient to adequately compensate the SRP founders for the overly broad non-compete.

The Judge also rejected the idea of modifying (or blue-penciling) the non-compete language because he said it would not help businesses properly tailor non-compete language in the future if they essentially could just rely on the courts to fix them when there is overreach.

This decision presents a warning shot for all business owners, especially those that have or are looking to acquire other businesses. Even if you are spending millions to acquire a business, you still need to be careful to not overstep the bounds of protecting the company’s legitimate business interests.