For decades, private equity firms and their portfolio companies have reflexively selected Delaware as the governing law and venue for their corporate agreements, including employment agreements and equity incentive plans containing restrictive covenants for executives and other employees. This default choice is understandable. Delaware’s well-developed body of corporate law, its sophisticated judiciary, and its business-friendly reputation make it a natural home for commercial disputes.

However, when it comes to non-competition, customer non-solicitation, and employee non-solicitation provisions, that reflexive choice may need to be reassessed. Since 2022, Delaware courts have taken an increasingly skeptical – and at times hostile – approach regarding the enforceability of restrictive covenant agreements governed by Delaware law, both in the employment context and in connection with the sale of businesses. Private equity sponsors and their portfolio companies should take notice.

Delaware’s evolving stance on restrictive covenants

Delaware courts have long recognized that restrictive covenants are restraints on trade and, as such, are subject to careful judicial scrutiny. The party seeking to enforce a restrictive covenant against an employee or executive bears the burden of demonstrating that it is reasonable in scope, duration, and geographic reach, and that it protects a legitimate business interest. While this framework is common across most jurisdictions, Delaware courts have recently applied it with a rigor that has caught many employers off guard – particularly employers backed by large, multi-entity private equity platforms.

One area of particular concern involves the scope of non-competition provisions. Private equity-backed companies frequently include restrictive covenants that prohibit departing employees or executives from working for any entity that competes not only with their direct employer, but also with any of the employer’s subsidiaries, affiliates, or parent entities. On paper, this broad drafting approach may seem like a prudent way to protect the entire enterprise. In practice, Delaware courts have found such provisions overbroad and unenforceable. The rationale is straightforward: an employee who worked in a discrete role at a single portfolio company should not be barred from an entire universe of competitors spanning a corporate family of unrelated businesses. When the restriction sweeps in entities with which the employee had no meaningful contact or relationship, Delaware courts generally have been unwilling to save the provision by reforming or “blue penciling” it judicially. Instead, they have struck the covenant entirely.

This trend in Delaware law presents a critical risk for private equity firms, which by their very nature operate through complex, multi-layered corporate structures. A fund’s portfolio may span dozens of companies across various industries and geographies. A noncompete that ties the restricted activity to competition with “the Company and its affiliates” or a “Group Company” could, in the eyes of a Delaware court, be so broad as to be facially unenforceable.

Non-solicitation provisions under the microscope

The judicial scrutiny does not stop at noncompetes. Delaware courts have also taken a hard look at customer and employee non-solicitation provisions, particularly those that extend beyond traditional solicitation concepts. Provisions that prohibit a departing employee from not only “soliciting” but also “encouraging” or “inducing” customers or employees to leave have drawn judicial skepticism. Delaware courts have found that language such as “encourage” expands the restriction beyond what is necessary to protect a legitimate business interest, effectively transforming a non-solicitation provision into a broader no-contact or no-hire clause. When courts determine that the language overreaches, they have not hesitated to invalidate the provision rather than reform it.

This is a meaningful departure from the approach taken in other jurisdictions, where courts may blue pencil or reform overbroad restrictive covenants to render them enforceable. Delaware’s reluctance to engage in judicial reformation (except in limited circumstances) means that a poorly drafted provision is more likely to be struck down entirely, leaving the employer with no protection at all.

Practical recommendations for private equity firms and portfolio companies

All is not lost, however. Recent rulings signal there are still ways to enforce restrictive covenant agreements so long as they are narrowly tailored, supported by sufficient consideration, and reflective of the parties’ relative bargaining power. But private equity firms and their portfolio companies should approach restrictive covenant drafting with far greater care – and far less reliance on boilerplate Delaware templates. The following guidelines can help:

• Limit temporal scope – Courts generally disfavor restrictions lasting longer than two years, except in exceptional circumstances or business sales. 
• Tailor geographic reach – Nationwide or worldwide restrictions are generally unenforceable. Employers should tie geographic limitations to actual markets and the employees’ scopes of work.
• Narrow activity restrictions – Blanket prohibitions against “working for competitors in any capacity” or “in the same business” will likely fail. Restrictions also cannot expand beyond the work that employees performed during their employment. For example, employees should not be prohibited from working in locations, becoming employed by businesses, or interacting with customers with which they had no involvement during their employment.
• Refine non-solicitation clauses – Employers should restrict solicitation provisions to customers and employees who recently interacted with the departing employee. Generalized prohibitions against contacting “any company employee” risk invalidating the entire agreement.
• Consider alternative choice-of-law and forum provisions – Given Delaware’s unpredictability, employers may benefit from selecting a different state’s law, such as that of the employer’s headquarters or the employee’s location. 

Conclusion

The instinct to default to Delaware law across all corporate agreements is ingrained in the private equity community. But when it comes to restrictive covenants in employment agreements and equity plans, that instinct warrants reexamination. Delaware’s increasingly rigorous approach to these provisions – particularly its willingness to void overbroad noncompetes tied to affiliates and non-solicitation clauses that go beyond mere solicitation – poses a real enforcement risk. Private equity firms and their portfolio companies that take the time to tailor their restrictive covenants carefully, or to select a more favorable governing law where appropriate, will be better positioned to protect the value of their investments and the competitive advantages those covenants are designed to preserve.