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By Michael Greene
Jan. 29 — The Delaware Chancery Court Jan. 27 denied a request to enforce a covenant not to compete on the grounds that California public policy disallows such restrictions on employment, even though the parties agreed that the underlying contract would be governed by Delaware law.
Vice Chancellor Sam Glasscock III found that Delaware's broad interest in allowing parties the freedom to contract will not always trump another state's public policy concerns.
“[M]ost if not all jurisdictions have determined as a matter of public policy that some contractual obligations are so pernicious that they must be removed from the self-ordering realm,” he opined.
“To protect those policy interests, and for reasons of comity, states embracing the Restatement approach recognize that necessary to the right of a jurisdiction to limit contractual ordering for its citizens is a limitation on the ability of contracting parties to choose the law of a foreign jurisdiction which does not impose that limitation, and which itself has little or no interest in the enforcement of the contract at hand.”
In what is the latest decision in which a court declined to apply its own law in favor of another state's public policy, Vice Chancellor Glasscock denied the plaintiff's motion for a preliminary injunction.
The plaintiff Ascension Insurance Holdings LLC filed a motion for a preliminary injunction in Delaware seeking to prevent the defendant from breaching a covenant not to compete.
The parties agreed that both Delaware venue and choice of law would apply.
Unlike Delaware, California favors a contracting party's right to be freely employed over the freedom to contract. Thus, if California law applied, the covenant would be unenforceable.
Moreover, following the Restatement (Second) of Conflicts of Law, in Delaware the parties' choice of law will generally control an agreement, Vice Chancellor Glasscock wrote.
However, the Restatement recognizes an exception to this general principle when enforcement of the contract would conflict with a “fundamental policy” of another state that has a materially greater interest in the enforcement.
After determining that but for the choice-of-law provision, the non-compete provision would violate a “fundamental policy” of California, Vice Chancellor Glasscock held that California’s specific interest in prohibiting the non-compete interest was “materially greater than Delaware's general interest in the sanctity of a contract that has no relationship to [the] state.”
“Without minimizing that significant interest, it seems to me that, where it is clear that the policy of the default state is that the contract at issue is abhorrent and void, and where, as here, the formation and enforcement of the contract relate overwhelmingly to the default state, a general interest in freedom of contract is unlikely to be the equal of that public policy under the Restatement analysis,” he opined
He wrote that to hold otherwise would undermine the entire purpose of the Restatement analysis because “in every instance where the parties seek to circumvent application of the law of the default state, the state whose law was chosen and is asked to enforce the contract will have the interest of protecting freedom to contract.”
Accordingly, the court denied the plaintiff's motion for a preliminary injunction on the grounds that it had not demonstrated a reasonable likelihood that it would prevail on the merits.
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The opinion is available at http://www.bloomberglaw.com/public/document/ASCENSION_INSURANCE_HOLDINGS_LLC_a_Delaware_limited_liability_com.
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