Reed Smith Client Alerts

In Kodiak Building Partners, LLC v. Adams, 2022 Del. Ch. LEXIS 288 (October 6, 2022) (Kodiak), the Court of Chancery denied the plaintiff’s motion for a preliminary injunction to enforce restrictive covenants against its former employee. Specifically, the Court held that the disputed restrictive covenants, which were entered into in the context of a business sale, were overbroad and did not protect a legitimate economic interest because they sought to protect aspects of the plaintiff’s business that were unrelated to the acquired assets.


The parties

Defendant Philip D. Adams was a general manager of Northwest Building Components, Inc. (Northwest), a Washington corporation. Northwest only has a single facility in Idaho, where it “manufacture[s] and sell[s] and deliver[s] roof trusses and … mostly lumber-based building products.” In addition to serving as a general manager, Adams also held an 8.33 percent interest in Northwest.

Plaintiff Kodiak Building Partners, LLC (Kodiak), on the other hand, is a Delaware limited liability company that, “[o]ver the course of several years, … has acquired at least nineteen wholly owned subsidiaries around the country through which it operates four business lines[.]” One such business line is “lumber and building materials, which may or may not include roof trusses, depending on the location[.]” Kodiak’s other three business lines are gypsum, construction supplies, and kitchen interiors.

The Acquisition

On June 1, 2020, Kodiak acquired Northwest (the Acquisition) pursuant to the terms of a stock purchase agreement (SPA) among Kodiak, Northwest, and Mandere Construction, Inc. (MCI), “an Idaho corporation that sells, manufactures, and delivers roof trusses.” Through the Acquisition, Kodiak acquired Northwest and MCI’s “Company Capital Stock” and “all of the assets, properties, rights, licenses, interests, Customer Deposits, Contracts and business, of every kind and description, wherever located, real, personal or mixed, tangible or intangible, owned, held or used by [Northwest or MCI] or in the conduct of [Northwest or MCI’s] business.” Kodiak also acquired “Northwest’s goodwill and Adams’s 8.33% interest in Northwest.”

The RCA’s restrictive covenants

In connection with the Acquisition, Kodiak also entered into a restrictive covenant agreement (RCA) with Adams and three other Northwest stockholders. The RCA ‒ which was intended to be effective for 30 months following the closing of the Acquisition ‒ contained the following restrictive covenants: “Non-Competition,” “Non-Solicitation,” “Confidentiality,” “Non-Interference,” and “Non-Disparagement.” The RCA also contained “language providing that Adams acknowledged the reasonableness and necessity of the restrictive covenants” and, further, that Adams waived any defense regarding the reasonableness of the covenants.

Adams resigns and starts working for BFS

Over a year after the Acquisition, in October 2021, Adams resigned from his position as a general manager at Northwest. Approximately two months later, he started working as a general manager for another company, Builders FirstSource, Inc. (BFS). Although not strictly relevant to the Court’s decision, BFS “supplies building materials such as lumber, roof trusses, and I-joists, and provides design services for roof trusses.”