March 04, 2026|Franchise Frontlines
March 4, 2026 | Delaware Court of Chancery | Unpublished Opinion
Executive Summary
In an unpublished decision, the Delaware Court of Chancery refused to enforce multiple restrictive covenants imposed after a national restoration company acquired a regional restoration business. BluSky Restoration Contractors purchased a Tennessee-based restoration company founded by the defendants and required the founders to enter into a series of agreements containing non-compete, non-solicitation, and confidentiality provisions. After the defendants left the company and formed a competing business, BluSky sought a preliminary injunction and asserted breach-of-contract claims based on those restrictions. The defendants moved to dismiss, arguing that the covenants were unenforceable because they were overly broad. The court agreed, concluding that the restrictions extended far beyond the legitimate business interests arising from the acquisition. Because the restrictive covenants were unenforceable, the court granted the defendants’ motion to dismiss and denied the request for injunctive relief.
Relevant Background
BluSky Restoration Contractors operates a nationwide restoration services platform providing mitigation, construction, renovation, environmental services, and disaster-response work across multiple industries. In December 2019, BluSky acquired Sharp, Robbins & Popwell, LLC (“SRP”), a Tennessee-based restoration company founded by the defendants. The acquisition occurred through an equity purchase agreement for a purchase price described as being in the “tens of millions of dollars.”
As part of the transaction, the founders agreed to a series of restrictive covenants. First, the equity purchase agreement included non-competition and non-solicitation provisions intended to protect the goodwill and customer relationships associated with the acquired business. Second, the founders signed employment agreements with BluSky after the acquisition, which also contained restrictive covenants governing post-employment competition and solicitation. Finally, BluSky’s parent company later granted the founders equity incentive units that were subject to additional restrictive covenants.
After nearly five years of employment with BluSky, the defendants resigned and formed a new restoration services company operating in Tennessee. BluSky alleged that the new venture competed directly with BluSky and sought a preliminary injunction to enforce the restrictive covenants contained in the purchase agreement, the employment agreements, and the equity incentive agreements.
The defendants responded by moving to dismiss the complaint, arguing that the restrictive covenants were unenforceable because they were overly broad in their geographic scope, duration, and substantive reach.
Decision
The Delaware Court of Chancery agreed with the defendants and dismissed BluSky’s claims.
The court began by emphasizing that restrictive covenants are subject to careful scrutiny because they restrain competition. Even in the context of a business sale—where courts typically apply a less demanding standard than in ordinary employment cases—restrictive covenants must still be tailored to protect the buyer’s legitimate business interests.
The court concluded that the non-compete provisions contained in the equity purchase agreement were overbroad. The agreement prohibited the defendants from competing anywhere in the world for five years. The court found this restriction unreasonable because the acquired business operated only in a regional market. Although BluSky operated nationwide, the legitimate business interest arising from the acquisition was limited to protecting the goodwill and competitive footprint of the acquired regional company.
The court reached similar conclusions regarding the employment agreements. Those agreements restricted the defendants from competing anywhere BluSky or its subsidiaries conducted business, which effectively created a nationwide restriction. The court found that this restriction exceeded the scope necessary to protect the goodwill associated with the acquired business.
The non-solicitation provisions suffered from similar problems. The agreements prohibited the defendants from soliciting customers and employees not only of BluSky but also of BluSky’s “affiliates.” Because the term “affiliates” included a broad range of upstream and downstream entities within the corporate structure, the restrictions extended well beyond the business relationships connected to the acquired company.
The court also identified additional overbreadth in provisions that prohibited “attempts” to solicit customers or employees. According to the court, such language risked capturing noncompetitive conduct and could expose a former employee to liability even when no actual solicitation occurred.
The court declined BluSky’s request to modify the agreements through “blue penciling.” Although Delaware courts sometimes narrow overbroad restrictive covenants, the court explained that doing so here would effectively require rewriting the agreements. Allowing such extensive modification would encourage parties to draft overly broad restrictions with the expectation that courts would later revise them.
Because the restrictive covenants were unenforceable, BluSky could not establish a reasonable probability of success on the merits of its claims. The court therefore granted the defendants’ motion to dismiss and denied BluSky’s request for a preliminary injunction.
Looking Forward
The decision highlights an issue that frequently arises when companies expand through acquisitions or multi-location growth strategies: restrictive covenants must be carefully tailored to the legitimate interests created by the transaction.
Courts often recognize broader restrictions in the sale-of-business context because buyers are entitled to protect the goodwill they purchase. At the same time, the scope of those protections must still reflect the actual competitive footprint of the acquired business. When restrictions extend far beyond that footprint—such as by applying globally or covering all affiliates within a large corporate structure—courts may find them unenforceable.
The opinion also illustrates how expansive definitions of “affiliates” can significantly broaden the reach of restrictive covenants. When restrictions apply to all affiliated entities within a corporate family, they may capture competitive conduct unrelated to the business that was actually acquired.
For franchisors and other operators of multi-unit systems, the case provides a useful reminder that restrictive covenants should be drafted with precision. Geographic scope, duration, and the definition of covered business relationships should be aligned with the specific interests the covenant is intended to protect. Overly expansive restrictions may not only fail to protect those interests but may also risk invalidation in their entirety.
This article is based solely on the opinion of the Court in this matter. The author has not conducted any independent investigation into the facts. For the avoidance of doubt, each statement related to the law and facts in this article is drawn from the Court’s opinion in this case.
Thomas O’Connell is a Shareholder at Buchalter LLP and Chair of the firm’s Franchise Practice Group. For questions about this article or media inquiries, you can contact Tom at toconnell@buchalter.com.
This communication is not intended to create, and does not create, an attorney-client relationship or any other legal relationship. No statement herein constitutes legal advice, nor should it be relied upon or interpreted as such. This communication is for general informational purposes only and is not a substitute for legal counsel. Readers should not act or refrain from acting based on any information provided without seeking appropriate legal advice specific to their situation. For more information, visit www.buchalter.com.
