Readers know that I previously have blogged on the importance of forum selection and applicable law clauses in plans and employment agreements. Some plans and agreements will specify Delaware law as the choice of governing law, as a default, because it is their state of incorporation and it is presumed to be company-friendly. However, the Delaware courts may not be as favorable to employers as is typically thought. In Delaware Elevator, Inc. v. John Williams, 2011 Del. Ch. LEXIS 47, March 16, 2011, the Chancery Court spoke out forcefully against the common practice of employers including "blue pencil" provisions in non-compete provisions – and courts following such provisions.
The court eventually held that "Maryland law thus compels me to carve back the restrictive covenant and enforce it to a judicially determined degree." However, Vice Chancellor Laster first devoted several paragraphs to describing why he would not have enforced the covenant under Delaware law:
In my view, a court should not allow an employer to back away from an overly broad covenant by proposing to enforce it to a lesser extent than written. More importantly, a court should not save a facially invalid provision by rewriting it and enforcing only what the court deems reasonable. Doing so puts the employer in a no-lose position. If an employer knows that the court will enforce a reasonable covenant as a fallback, the employer has every reason to start with an overbroad provision.1
An employer gains significant advantages from an overly broad restrictive covenant. Such a provision chills employees from leaving: "an employee may pass up a competing job offer (or the rival employer might not make the offer in the first place) if the existence of the clause suggests that there is risk of a lawsuit." Sullivan, supra, at 1138-39 (internal footnotes omitted); accord Pivateau, supra, at 690 (discussing in terrorem effect of provisions). Employees who do leave may not compete with their former employers to the extent the law would allow, thereby harming consumers and interfering with the proper functioning of labor and product markets. If an employee chooses to litigate, uncertainty about the provision's invalidity, together with the costs of litigation, help the employer achieve a more favorable settlement.
Therefore, you might reconsider whether to specify Delaware law as governing if restrictive covenants are a critical part of the plan or employment agreement you are drafting.