Court ruling exposes fatal flaws in how companies structure restrictive covenants

Delaware court tosses worldwide non-compete spanning 68 countries, finding profits interests insufficient to ban employee from working in his field.

The January 22 ruling from the Delaware Court of Chancery should grab the attention of any HR leader using non-competes to protect company secrets and client relationships. The decision makes clear that worldwide restrictions backed by equity compensation might not hold up when tested in court.

Benjamin Timm spent five years climbing the ladder at Daxco, a company that sells software to gyms and fitness studios. He started in digital marketing and eventually ran worldwide sales for Zen Planner, one of the company's member management products targeting boutique fitness businesses.

When Daxco promoted Timm to Vice President in December 2023, the company sweetened the deal with 150,000 Class P Units, a type of profits interest that would vest over time. In exchange, Timm signed a restrictive covenant that prohibited him from working for competitors for two years after leaving. The restriction covered any company providing software-as-a-service to health and wellness businesses in any location where Daxco or its affiliates operated. According to the company, that meant 68 countries including the United States, Canada, the United Kingdom, Australia, New Zealand, and essentially the rest of the world.

Timm lasted just one year in the VP role before...

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