Well, you certainly don't see decisions like this every day.

In a rare decision that was handed down earlier today, August 23, in Frontline Technologies Parent LLC v. Murphy & Holbrook, a Chancery Court in Delaware laid the blame for its decision to dismiss the complaint seeking damages against two former executives that had purportedly breached their noncompete agreements squarely at the feet of the folks who drafted the underlying agreements, summarizing its holding as follows:

This case presents a textbook example of why parties should ensure their contracts say what they mean and mean what they say.  A holding company entered into equity agreements with two (former) employees, including non-compete provisions barring the employees from working for a competitor of the holding company.  What it intended, though, was to prevent the employees from working for a competitor of its operating subsidiary.  The equity agreements say nothing of the sort. The employees now work for the operating subsidiary’s competitor. They are being sued for breaching the restrictive covenants in their equity agreements.  But the plain terms of the agreements do not bar their continued employment.  The plaintiffs’ breach of contract claims necessarily fail. Perhaps acknowledging that it struck a bad deal, the holding company also seeks equitable rescission.  Its agreement to unambiguous restrictive covenants does not, however, constitute a mutual mistake warranting that relief. The defendants’ motion to dismiss is granted. 

In the body of the opinion granting the defendants' motion to dismiss, the Court provided some greater level of detail, stating:

As an initial matter, the defendants argue that the non-compete provisions never applied to them.43  The Equity Agreements define the “Non-Competition Period” as that spanning the “Employee’s employment by or service to [Parent] and for a period of one (1) year thereafter.”  But the defendants were employed by Frontline—not Parent.  The Equity Agreements make no mention of Frontline.46 Even if the defendants provided “service” to Parent through their work for Frontline, the claims still fail.   The non-compete provisions are expressly tailored to the “business” or “business line” of Parent—not Frontline.

In fact, the only allegations about Parent in the Complaint concern its status as a party to the Equity Agreements and its issuance of equity to the defendants.  As a result, the Equity Agreements do not prevent the defendants from working at LINQ. The plaintiffs attempt to save their deficient claims by pointing to the defendants’ acknowledgements in Section 7(a) of the Equity Agreements about access to confidential information of Parent’s “Affiliates.” These provisions do not say that the defendants would have access to Frontline’s confidential information.  In any event, there are no allegations in the Complaint stating that Frontline’s confidential information is used in the business or business line of Parent.  This argument therefore cannot support a claim for breach of the noncompete provisions, which prohibit competition with Parent’s “business or business line.”  If the plaintiffs wanted the non-compete provisions to apply to Frontline’s business or business line, they could have defined Competition to include “a business or business line that the Company [or its Affiliates] is conducting.”  They did not ...  The plaintiffs must now live with the restrictive covenants they agreed to.

What Will Likely Come Next in Frontline Parent - and Some Takeaways

If I were a betting person, the safe money would be on the plaintiffs appealing this decision and/or seeking to file an amended complaint that at least from an allegations standpoint tries to bridge the purported shortcomings in its initial complaint. To be sure, I wouldn't be surprised if this decision gets overturned on appeal, particularly given the courts' general preference to have cases determined on their merits rather than dismissed on what certainly appears to have been a drafting oversight by the plaintiffs' earlier counsel.

That said, I truly empathize with the attorneys who drafted the underlying agreement and noncompete provisions; even if this ultimately gets overturned on appeal, you never want to be called out publicly by a judge for dropping the ball like this. 

Jonathan Cooper
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Non-Compete, Trade Secret, Unfair Competition and School Negligence Lawyer
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