Delaware courts traditionally scrutinize restrictive covenants in employment agreements but apply a more deferential standard when those covenants arise from the sale of a business. Even so, recent decisions make clear that covenants tied to a transaction must still be reasonably tailored to the goodwill and competitive space actually conveyed.
A recent decision highlights this principle. In BluSky Restoration Contractors, LLC v. Robbins, C.A. No. 2025-0726-DH (Del. Ch. Mar. 4, 2026), Magistrate Hume held that non‑competition, non‑solicitation, and confidentiality provisions in a purchase agreement, employment agreements, and later equity incentive agreements were unenforceable because they were overly broad in geography, duration, and scope. The court also refused to “blue pencil” the provisions – i.e., to narrow the overly broad covenants so that the remainder could be enforced in a limited form – reiterating that Delaware courts will not rewrite overreaching restrictions and will instead deem the entire agreement unenforceable.
Key Point
Even in the sale-of-business context – where broader restrictions are generally tolerated – covenants must remain tied to the competitive footprint and goodwill of the acquired business, not the buyer’s larger enterprise.
Background
BluSky Restoration Contractors, a national restoration company, acquired a Tennessee-based restoration business founded by the defendants in 2019 for a price described as “tens of millions.”
As part of the deal, the defendants agreed to several restrictive covenants: a five‑year non‑compete and non‑solicitation covenant in the purchase agreement; two‑year covenants in employment agreements, and additional restrictions in later equity incentive agreements.
After nearly five years with BluSky, the defendants resigned and launched a competing restoration company in the same regional market. BluSky sued in the Court of Chancery, alleging breach of the covenants and seeking a preliminary injunction. The defendants moved to dismiss, arguing the covenants were unenforceable because they were overly broad.
The Court’s Decision
Magistrate Hume granted the motion to dismiss and denied the preliminary injunction, holding that each covenant failed Delaware’s reasonableness standards.
Non‑Compete
The purchase agreement’s non‑compete barred the defendants from engaging in competing activities anywhere in the world for five years. Although sale‑of‑business covenants receive more lenient review, they must still protect only the goodwill of the acquired business.
The acquired company operated primarily in a regional Tennessee market. A worldwide restriction therefore exceeded the competitive space BluSky purchased. Because the covenant was not tied to a legitimate business interest, it was unenforceable.
Non‑Solicitation and Related Covenants
The non‑solicitation provisions in the purchase agreement were also struck down. They lacked meaningful geographic limits, applied to BluSky’s affiliates, and prohibited even attempts to solicit customers or employees. These features expanded the covenants far beyond the acquired business and risked capturing conduct unrelated to the defendants’ former roles.
The court reached the same conclusion regarding the restrictive covenants in the employment agreements and incentive unit agreements. BluSky argued these agreements should benefit from the sale‑of‑business standard and BluSky’s nationwide operations. The court rejected that position, holding that BluSky could not invoke the sale‑of‑business framework while simultaneously expanding the covenants to cover its broader enterprise. If the covenants were tied to the acquisition, the relevant competitive space was the acquired regional business – not BluSky’s national footprint.
The confidentiality provisions were also unenforceable because they lacked a meaningful time limit and defined proprietary information so broadly that they encompassed information belonging to BluSky affiliates and third‑party partners.
Finally, the court declined to blue pencil the covenants, finding the defects too extensive to cure through judicial narrowing.
The Takeaways for Deal Counsel
The decision offers several practical lessons for drafting restrictive covenants in M&A transactions:
- Anchor covenants to the acquired business. Restrictions must reflect the goodwill and competitive space actually purchased.
- Be cautious with affiliate coverage. Broad affiliate definitions can dramatically expand a covenant’s reach.
- Avoid “attempt to solicit” language. Delaware courts increasingly view such provisions as overbroad.
- Draft confidentiality provisions narrowly. Definitions should match the information the individual actually accessed.
- Do not rely on blue penciling. Delaware courts are reluctant to salvage covenants that overreach.
In short, BluSky reinforces that even in sophisticated M&A transactions, the Court of Chancery will enforce restrictive covenants only when they are carefully drafted and closely tied to the goodwill and competitive space conveyed in the deal.
For more information, please contact Gary Lipkin or any member of Flaster Greenberg’s Business and M&A and Labor & Employment Practices.
