Law School Case Brief
Ascension Ins. Holdings, Ltd. Liab. Co. v. Underwood - 2015 Del. Ch. LEXIS 19 (Ch. Jan. 28, 2015)
Delaware follows the Restatement (Second) of Conflict of Laws, under which the parties' choice of law will generally control an agreement. An exception is recognized to that general principal, however: where the parties enter a contract which, absent a choice-of-law provision, would be governed by the law of a particular state, and the default state has a public policy under which a contractual provision would be limited or void, allowing the parties to contract around that public policy would be an unwholesome exercise of freedom of contract. In other words, the policy is generally supportive of choice-of-law provisions, but recognizes that allowing parties to circumvent state policy-based contractual prohibitions through the promiscuous use of such provisions would eliminate the right of the default state to have control over enforceability of contracts concerning its citizens.
Defendant Roberts F. Underwood participated in a sale of the assets of Paula Financial to plaintiff, Ascension Insurance Holdings, LLC ("AIH") in 2008. That transaction was governed by an asset purchase agreement ("APA"). In connection with the APA, Underwood entered into an accompanying employment agreement ("Employment Agreement"), and pursuant to both contracts he agreed to refrain from engaging in the business of the AIH, the parent, or its subsidiaries, including Underwood's former employer, Ascension Insurance Services, Inc., ("Subsidiary"), for a period of five years. Those contractual arrangements were entered into in January and February of 2008, and the covenants by which Underwood agreed not to compete for five years after the transaction closed eventually lapsed. However, as part of the asset sale, the parties to that sale contemplated that a subsequent arrangement would be reached between Underwood and AIH permitting Underwood to purchase an interest in AIH. That agreement, the employee investment agreement ("EIA"), was entered into in July 2008, some five or six months after the Employment Agreement and APA, respectively, were entered into and became effective. As part of the EIA, Underwood agreed not to compete with the Parent or Subsidiary for a period of two years after leaving employment with the Subsidiary. In the EIA, the parties agreed to both Delaware venue and Delaware choice of law. AIH filed an action in a Delaware chancery court seeking preliminary injunctive relief barring Underwood and his current employer, the Subsidiary, from breaching Underwood's non-compete agreement. Underwood and the Subsidiary argued that the non-compete covenant was unenforceable as against the public policy of California, the state where the contract was entered.
Was the non-compete clause enforceable under Delaware law?
The chancery court held that the non-compete clause in the EIA that designated Delaware law was not enforceable, as California law otherwise would have applied to the EIA and enforcement of the non-compete provisions violated a fundamental policy of California under Cal. Bus. & Prof. Code § 16600. California's interest in preventing the enforcement of such a covenant was greater than Delaware's general interest in vindicating freedom of contract. Lastly, the court ruled that since AIH could not show a reasonable likelihood that it would prevail upon the merits, it was not entitled to a preliminary injunction based on the non-compete clause.
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