Intertek Testing Services NA, Inc. v. Jeff Eastman ( 2023 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
INTERTEK TESTING SERVICES )
NA, INC., )
)
Plaintiff, )
)
v. ) C.A. No. 2022-0853-LWW
)
JEFF EASTMAN, )
)
Defendant. )
MEMORANDUM OPINION
Date Submitted: December 7, 2022
Date Decided: March 16, 2023
Francis G.X. Pileggi & Sean M. Brennecke, LEWIS BRISBOIS BISGAARD &
SMITH LLP, Wilmington, Delaware; William S. Helfand & Nickoloz Snovely,
LEWIS BRISBOIS BISGAARD & SMITH LLP, Houston, Texas; Attorneys for
Plaintiff
Jesse L. Noa, POTTER ANDERSON & CORROON, LLP, Wilmington, Delaware;
Attorney for Defendant
WILL, Vice Chancellor
This dispute arises from plaintiff Intertek Testing Services NA, Inc.’s
purchase of a business cofounded by defendant Jeff Eastman. In connection with
the sale, Eastman agreed not to compete—anywhere in the world—with the business
that was sold. He further agreed not to solicit the business’s employees and to hold
in confidence its confidential information.
Three years after the sale closed, Eastman invested in and joined the board of
a startup formed by his son. Intertek believes that these acts violate Eastman’s
promise not to compete. The non-compete provision, however, is unreasonable and
unenforceable. Its geographic scope far exceeds any legitimate economic interests
that Intertek might have in protecting the assets and goodwill it acquired. I decline
Intertek’s invitation to blue pencil the provision.
Intertek’s claims regarding purported breaches of the non-solicitation and
confidentiality provisions are even weaker. The complaint lacks a single allegation
suggesting that Eastman has engaged in conduct violating either covenant.
Accordingly, Eastman’s motion to dismiss is granted and this action is
dismissed.
1
I. FACTUAL BACKGROUND
The following background is drawn from the plaintiff’s Verified Complaint
for Injunctive Relief (the “Complaint”) and the documents it incorporates by
reference.1
A. The Sale of Alchemy to Intertek
Before July 27, 2018, Texas-based Alchemy Investment Holdings, Inc. was
engaged in “the business of providing workforce training, management, compliance,
and consulting services through its proprietary Learning Management System
(‘LMS’) platform and related products.”2 Alchemy “provide[d] services to clients
within the food industry” and “also serve[d] businesses within the cannabis
industry.”3 Defendant Jeff Eastman, a Texas resident, was Alchemy’s cofounder
and a major stockholder, and served as its Chief Executive Officer.4
1
Verified Compl. Inj. Relief (“Compl.”) (Dkt. 1); see In re Books-A-Million, Inc. S’holders
Litig., 2016 WL 5874974, at *1 (Del. Ch. Oct. 10, 2016) (explaining that the court may
take judicial notice of “facts that are not subject to reasonable dispute” (citing In re Gen.
Motors (Hughes) S’holder Litig., 897 A.2d 162, 170 (Del. 2006))); Omnicare, Inc. v. NCS
Healthcare, Inc., 809 A.2d 1163, 1167 n.3 (Del. Ch. 2002) (“The court may take judicial
notice of facts publicly available in filings with the SEC.”).
2
Compl. ¶¶ 4, 17. This allegation is made with respect to “Intertek Alchemy,” which is
defined as the post-closing successor to Alchemy. Id. at Preamble. At times, the plaintiff
appears to refer to Alchemy as “Intertek Alchemy.”
3
Id. ¶ 4.
4
Id. ¶¶ 2, 5.
2
On July 27, 2018, plaintiff Intertek Testing Services NA, Inc.—a Delaware
corporation with its principal place of business in New York—purchased Alchemy
and its subsidiaries pursuant to a Stock Purchase Agreement.5 Eastman received $10
million in exchange for his ownership interests in Alchemy.6 The post-closing
successor entity to Alchemy now does business as “Intertek Alchemy.”7
B. The Restrictive Covenants
The Stock Purchase Agreement contains several restrictive covenants that
circumscribe the sellers’ post-sale activities.8
Section 7.6(a)(iii) contains a non-compete provision. It purports to prohibit
“Restricted Sellers,” including Eastman, from competing with Alchemy’s business
as of closing—anywhere in the world.9 The provision states that:
from the Closing until the five-year anniversary of the
Closing, each Restricted Seller shall not, and shall cause
each of its Affiliates not to, anywhere in the world, own
manage, control, undertake, participate in or carry on or be
engaged in, or in any other manner advise or knowingly
assist any other Person in connection with the operation
of, any business or Person competitive to any portion of
5
Id. ¶ 7. Exhibits A and B to the Complaint are excerpts of the Stock Purchase Agreement.
For simplicity, both exhibits are cited to as the “SPA.”
6
Id. ¶ 7.
7
Id. at Preamble.
8
Id. ¶ 8; SPA §§ 7.6(i), 7.6(iii), 7.11.
9
SPA § 7.6(a)(iii).
3
the business of [Alchemy] or [Alchemy’s subsidiaries] as
conducted as of the Closing Date.10
Section 7.6(a)(i) contains a non-solicitation provision. It prohibits the
Restricted Sellers from “solicit[ing], entic[ing], encourage[ing] or influenc[ing] or
attempt[ing] to solicit, entice, encourage or influence” certain of Alchemy’s
employees and counterparties for five years.11
Section 7.11 contains a confidentiality provision. It generally obliges the
Restricted Sellers to “hold in confidence any and all confidential, non-public or
proprietary information . . . concerning the business of [Alchemy]” for seven years.12
C. Rootwurks’s Formation
After the sale of Alchemy, Eastman worked at Intertek Alchemy for five
months.13 He voluntarily resigned on December 31, 2018.14
10
Id.
11
Id. § 7.6(a)(i).
12
Id. § 7.11.
13
Compl. ¶ 10.
14
Id. ¶ 11.
4
More than two years later, in February 2021, Chase Eastman (Eastman’s son)
incorporated a company called Rootwurks, Inc. under Texas law.15 Chase Eastman
was a former Alchemy employee.16 He presently serves as Rootwurks’s CEO.17
Rootwurks “serves clients nationwide” by providing “world-class
educational/training, safety, and compliance services to the cannabis industry
workforce.”18 Rootwurks’s clients use Rootwurks’s Learning Experience Platform
(“LXP”), which is a competitive counterpart to Alchemy’s LMS platform.19
Rootwurks’s website advertised LXP as being crafted from the “ground up using the
know-how and experience of the founders of Alchemy Systems.”20
“[A]t some point” after his December 2018 resignation from Intertek
Alchemy, Jeff Eastman became a Rootwurks investor and a member of its board of
directors.21
15
Id. ¶ 15. All references to “Eastman” refer to Jeff Eastman. The plaintiff has not brought
claims against Chase Eastman.
16
Id.
17
Id.
18
Id. ¶ 17.
19
Id.
20
Id. ¶ 18.
21
Id. ¶ 16.
5
D. This Action
On September 22, 2022, Intertek filed the Complaint, along with a motion to
expedite and a motion for a preliminary injunction.22 The Complaint alleges that
Eastman breached Sections 7.6(a)(i), 7.6(a)(iii), and 7.11 of the Stock Purchase
Agreement because of his affiliation with Rootwurks. On October 10, Eastman filed
an opposition to the motion to expedite and a motion to dismiss.23 I granted, in part,
the motion to expedite and set a schedule for briefing on the motion to dismiss.24 I
heard oral argument on December 7.25
II. LEGAL ANALYSIS
Eastman moved to dismiss the Complaint under Court of Chancery
Rule 12(b)(6) for failure to state a claim upon which relief can be granted. The
standard that governs a Rule 12(b)(6) is well-settled:
(i) all well-pleaded factual allegations are accepted as true;
(ii) even vague allegations are “well-pleaded” if they give
the opposing party notice of the claim; (iii) the Court must
draw all reasonable inferences in favor of the non-moving
party; and [(iv)] dismissal is inappropriate unless the
“plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of
proof.”26
22
Dkts. 1-3.
23
Dkt. 10.
24
Dkt. 17.
25
Dkts. 27-28.
26
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (citations omitted).
6
Although I “must draw all reasonable inferences in favor” of the plaintiff, I am “not
required to accept every strained interpretation of the [plaintiff’s] allegations.”27
Eastman argues that the plain terms of the non-compete provision preclude a
claim for breach because Alchemy did not conduct business in the cannabis industry
as of closing and Rootwurks operates exclusively in that industry.28 To the extent
that Alchemy and Rootwurks operated in separate industries, Eastman asserts that
Intertek’s attempt to enforce the non-compete amounts to an unlawful restraint on
trade.29 I need not address either argument because Eastman’s next contention—
that the non-compete provision is facially unenforceable due to its unreasonable
geographic scope—carries the day.30
With regard to the non-solicitation and confidentiality provisions, Eastman
maintains that the Complaint lacks facts indicating that an alleged breach occurred.31
Because Intertek’s opposition brief omits any argument about the non-solicitation
In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 168 (Del. 2006) (quoting
27
Malpiede v. Townson, 780 A.2d 1075, 1083 (Del. 2001)).
28
Def.’s Opening Br. Supp. Mot. Dismiss (“Def.’s Opening Br.”) at 6-8 (Dkt. 19). More
specifically, Eastman argues that the Complaint contains nothing more than a single
conclusory allegation that “Intertek Alchemy” “serve[d] businesses within the cannabis
industry.” Id. at 7 (quoting Compl. ¶ 4).
29
Id. at 8-13.
30
See id. at 13-16.
31
Id. at 16-17.
7
provision, it is waived. Intertek’s attempt to bolster the deficient allegations about
the confidentiality provision also fails.
The motion to dismiss is therefore granted in full.
A. The Non-Compete Provision
I begin with Eastman’s argument that the non-compete provision in
Section 7.6(a)(iii) of the Stock Purchase Agreement is unenforceable as a matter of
law due to its geographic overbreadth. “Delaware courts do not ‘mechanically’
enforce non-competes.”32 Instead, “[t]o be enforceable, a covenant not to compete
must,” among other things, “be reasonable in scope and duration, both
geographically and temporally,” and “advance a legitimate economic interest of the
party enforcing the covenant.”33 “[T]he reasonableness of a covenant’s scope is not
determined by reference to physical distances” but by “the area in which a
covenantee has an interest the covenants are designed to protect.”34
Although relatively broad restrictive covenants have been enforced in the sale
of a business context, such covenants must be tailored to the competitive space
32
FP UC Hldgs., LLC v. Hamilton, 2020 WL 1492783, at *6 (Del. Ch. Mar. 27, 2020)
(quoting McCann Surveyors, Inc. v. Evans, 611 A.2d 1, 3 (Del. Ch. 1987)).
33
All Pro Maids, Inc. v. Layton, 2004 WL 1878784, at *5 (Del. Ch. Aug. 9, 2004), aff’d,
880 A.2d 1047 (Del. 2005) (TABLE).
34
Weichert Co. of Pa. v. Young, 2007 WL 4372823, at *3 (Del. Ch. Dec. 7, 2007).
8
reached by the seller and serve the buyer’s legitimate economic interests.35
Delaware courts have declined to enforce non-compete provisions that are not. In
Kodiak Building Partners, LLC v. Adams, for example, the challenged provision
prohibited the defendant from competing in two states “and within a 100-mile radius
of any other location” served by the purchased business or its subsidiaries.36 The
court held that the provision was overbroad because it covered areas not essential to
the protection of the buyer’s legitimate interests in the acquired company.37
The provision here similarly extends to markets untouched by Alchemy’s
business. The geographic scope of the non-compete is as broad as one can imagine:
it restricts Eastman’s employment “anywhere in the world.”38 The legitimate
35
See FP UC, 2020 WL 1492783, at *7 (observing that, in the sale of business context, a
buyer has a legitimate interest in “clear[ing] the seller from the competitive space” where
the seller operated while “the buyer strives to make the business he just bought
successful”); see also O’Leary v. Telecom Res. Serv., LLC, 2011 WL 379300, at *5 (Del.
Super. Ct. Jan. 14, 2011) (upholding a nationwide non-compete in connection with the sale
of a business that operated nationwide); Kan-Di-Ki, LLC v. Suer, 2015 WL 4503210, at
*20 (Del. Ch. July 22, 2015) (enforcing a non-compete covering 23 states where the scope
was “reasonably calibrated to accomplish” the “mutually agreed upon goal[]” of preventing
the seller “from competing or interfering in the [buyer’s] business operations after” the
sale).
36
2022 WL 5240507, at *12 (Del. Ch. Oct. 6, 2022). Intertek attempts to distinguish
Kodiak on its facts. Pl.’s Answering Br. 15. Intertek asserts that Kodiak concerned a
low-level employee who suffered from a power imbalance when he signed the covenant.
Id. Not so. Like the present case, Kodiak concerned a senior executive who received
significant compensation from the sale of a business. 2022 WL 5240507, at *13 n.103.
37
Id. at *13.
38
SPA § 7.6(a)(iii).
9
economic interests that Intertek might have to support such a restraint, however, are
measured only by “the goodwill and competitive space it purchased from [Alchemy]
in the market [Alchemy] serve[d].”39 Intertek does not allege that Alchemy provided
services globally. The Complaint—viewed in the light most favorable to Intertek—
states that Texas-based Alchemy served clients “nationwide.”40 The incongruity
between the geographic scope of the covenant and that of Alchemy’s business leads
me to conclude the non-compete is unreasonably broad and unenforceable.41
39
Kodiak, 2022 WL 5240507, at *12; see also Rsch. & Trading Corp. v. Pfuhl, 1992 WL
345465, at *12 (Del. Ch. Nov. 18, 1992) (“While most judicial opinions regarding the
reasonableness of the geographic extent of employee non-competition agreements speak
in terms of physical distances, the reality is that it is the employer’s goodwill in a particular
market which is entitled to protection.”).
40
Compl. ¶ 17 (making this allegation as to Intertek Alchemy); see also Oral Arg. Tr. (Dkt.
27) 22-23 (“The Court: But do you allege in the complaint that Intertek has a worldwide
business? . . . Attorney: Worldwide, no.”); Pl.’s Mot. Prelim. Inj. (Dkt. 3) ¶ 25 (stating that
Intertek Alchemy’s “business . . . covered the full breadth of the North American market”).
At oral argument, Intertek argued that the non-compete was geographically
appropriate because Alchemy advertised itself “on the internet . . . to the entire world.”
Oral Arg. Tr. 22. This was not alleged in the Complaint; oral argument cannot rescue
pleading deficiencies. See Standard Gen. L.P. v. Charney, 2017 WL 6498063, at *25 (Del.
Ch. Dec. 19, 2017) (“[I]t is impermissible to attempt to amend one’s pleading through a
brief.”); Dunn v. FastMed Urgent Care, P.C., 2019 WL 4131010, at *7 n.56 (Del. Ch. Aug.
30, 2019) (explaining that a “brief cannot patch pleading deficiencies”). Even if Intertek
were able to cure its pleading deficiencies through oral argument, internet advertising alone
does not establish that a business serves the global market so as to justify a limitless
non-compete provision. If that were so, every company with a website could be considered
a global business.
41
See EBP Lifestyle Brands Hldgs., Inc. v. Boulbain, 2017 WL 3328363, at *8 n.43 (Del.
Ch. Aug. 4, 2017) (noting that a two-year, global restrictive covenant would be
“unreasonable in scope and duration”); Caras v. Am. Original Corp., 1987 WL 15553, at
*2 (Del. Ch. July 31, 1987) (concluding that the covenantor was reasonably likely to prevail
10
In an effort to save the covenant, Intertek cites Research & Trading Corp. v.
Pfuhl to argue that “international restrictions” can be enforced.42 But the court in
Pfuhl merely remarked that “[g]iven the broad distribution” of the plaintiff’s
“customers geographically,” it would not be “unreasonable to restrict defendants
from dealing with [the plaintiff’s] customers wherever located.”43 Other cases have
likewise explained that a non-compete provision with an expansive geographic reach
is reasonable only if the covenant appropriately covers the market where the
covenantee has economic interests.44 The non-compete at issue here, however,
covers a geographic area much larger than that where the plaintiff’s economic
interests lie.
in demonstrating a restrictive covenant was unreasonable given the lack of any geographic
restriction in the relevant agreements).
42
Pl.’s Answering Br. Opp’n Mot. Dismiss (“Pl.’s Answering Br.”) at 12 (citing Pfuhl,
1992 WL 345465, at *12 (Del. Ch. Nov. 18, 1992)).
43
Pfuhl, 1992 WL 345465, at *12. Pfuhl is also distinguishable on the basis that the
covenant there contained no express geographic limitation. Id. at *2; see Oral Arg. Tr. 8
(making the same distinction); cf. Del. Exp. Shuttle, Inc. v. Older, 2002 WL 31458243, at
*13 (Del. Ch. Oct. 23, 2002) (limiting enforcement of non-compete to where the
non-compete contained no geographic limitation); Gas Oil Prod., Inc. of Del. v. Kabino,
1987 WL 18432, at *2 (Del. Ch. Oct. 13, 1987) (same).
44
Brace Indus. Contracting, Inc. v. Peterson Enters., Inc., 2015 WL 5097240, at *3 (Del.
Ch. Aug. 28, 2015) (enforcing a restrictive covenant covering the United States and Canada
where the defendants did “business worldwide”); O’Leary, 2011 WL 379300, at *5
(enforcing a restrictive covenant covering the United States where the plaintiffs’ “business
operated nationwide before the sale [to the defendant]” and “that nationwide business
continued after the sale”).
11
Intertek urges me to “blue pencil” the non-compete provision if I conclude
that it is unreasonable in breadth.45 Although the Court of Chancery has, at times,
blue penciled expansive non-competes to supply judicious limitations, it “has also
exercised its discretion in equity not to allow an employer [or covenantee] to ‘back
away from an overly broad covenant by proposing to enforce it to a lesser extent
than written.’”46 In my view, revising the non-compete to save Intertek—a
sophisticated party—from its overreach would be inequitable. “[A] court should not
save a facially invalid provision by rewriting it and enforcing only what the court
deems reasonable.”47
B. The Confidentiality and Non-Solicitation Provisions
Eastman next avers that Intertek has failed to plead a viable claim for breaches
of the non-solicitation provision in Section 7.6(a)(i) and the confidentiality provision
in Section 7.11 of the Stock Purchase Agreement. The Complaint lacks any
allegation that Eastman breached—or even threatened to breach—either provision.
45
Pl.’s Answering Br. 13.
46
FP UC, 2020 WL 1492783, at *8 (first citing Knowles-Zeswitz Music, Inc. v. Cara, 260
A.2d 171, 175 (Del. Ch. 1969); then quoting Del. Elevator, Inc. v. Williams, 2011 WL
1005181, at *10 (Del. Ch. Mar. 16, 2011)); see also Kodiak, 2022 WL 5240507, at *4
(“Where noncompete or nonsolicit covenants are unreasonable in part, Delaware courts are
hesitant to ‘blue pencil’ such agreements to make them reasonable.”).
47
Del. Elevator, 2011 WL 1005181, at *10; see also Kodiak, 2022 WL 5240507, at *4
n.49 (citing authorities that describe the negative incentives created by blue penciling
unreasonable non-competes).
12
Rather, it asserts—without supporting facts—that Eastman “violat[ed] his various
duties under Sections 7.6(a)(i) . . . and 7.11.”48
In its answering brief, Intertek neglected to advance any argument in support
of its claim for breach of the non-solicitation provision. “Issues not briefed are
deemed waived.”49
With respect to the confidentiality provision, Intertek’s answering brief points
to an allegation in the Complaint that Rootwurks’s website “advertises its LXP as
having been crafted from the ‘ground up using the know-how and experience of the
founders of Alchemy Systems.’”50 Intertek argues that the “reasonable and natural
inference” to be drawn is that Eastman disclosed proprietary information to
Rootwurks.51 But Intertek cannot rely on unpleaded assertions in its answering brief
to cure its deficient Complaint.52 Even if it could, that allegation is directed towards
48
Compl. ¶ 22; see Klein v. ECG Topco Hldgs., LLC, 2022 WL 2659096, at *5 (Del. Ch.
July 8, 2022) (dismissing a claim for breach of restrictive covenants where the plaintiff
“simply restate[d] the covenants themselves” and did not suggest that the defendant was
breaching or attempting to breach them).
49
Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999); see also Larkin v. Shah, 2016
WL 4485447, at *2 n.5 (Del. Ch. Aug. 25, 2016) (explaining that a plaintiff’s failure to
raise an argument in opposition to a motion to dismiss constituted waiver).
50
Pl.’s Answering Br. 17 (quoting Compl. ¶ 18).
51
Id.52
Standard Gen., 2017 WL 6498063, at *25 (“[I]t is impermissible to attempt to amend
one’s pleading through a brief.”); Dunn, 2019 WL 4131010, at *7 n.56 (explaining that a
“brief cannot patch pleading deficiencies”).
13
Eastman’s “breach[ of his] contractual obligations under the Non-Compete
Agreement.”53 That is, Intertek alleges that Rootwurks’s platform competes with
Alchemy’s—not that Eastman is divulging confidential information. Moreover,
Intertek has not demonstrated that the generalized “know-how and experience”
referenced in the Complaint are confidential information within the ambit of
Section 7.11.54 Intertek has therefore not pleaded a viable claim.
III. CONCLUSION
For the foregoing reasons, Intertek has failed to state a claim against Eastman
for breaches of Sections 7.6(a)(i), 7.6(a)(iii), and 7.11 of the Stock Purchase
Agreement. The defendant’s motion to dismiss is therefore granted.
53
Compl. ¶ 18. The Complaint defines “Non-Compete Agreement” as “a companion
non-compete and non-solicitation agreement.” Id. ¶ 8. That definition makes no reference
to any confidentiality restriction.
54
Id. ¶ 18; see In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 65-66 (Del. 1995)
(“Conclusory allegations will not be accepted as true without specific supporting factual
allegations.”).
14