Sunder Energy v. Jackson

305 A.3d 723

SUNDER ENERGY, LLC, Plaintiff,

v.Tyler JACKSON, Freedom Forever LLC, Brett Bouchy, Chad Towner, Freedom Solar Pros, LLC, and Solar Pros LLC, Defendants.

C.A. No. 2023-0988-JTL

Court of Chancery of Delaware.

Date Submitted: November 17, 2023

Date Decided: November 22, 2023

Raymond J. DiCamillo, Chad M. Shandler, Steven J. Fineman, Kelly E. Farnan, Kevin M. Gallagher, Christine D. Haynes, Alexander M. Krischik, Sara M. Metzler, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Joshua Berman, Jackson Herndon, Paul C. Gross, Ben Nicholson, Michael H. Rover, PAUL HASTINGS LLP, New York, New York; Attorneys for Plaintiff Sunder Energy, LLC.

Timothy R. Dudderar, Aaron R. Sims, Abraham C. Schneider, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Maureen M. Stewart, FOLEY & LARDNER LLP, Tampa, Florida; Jordan C. Bledsoe, Tyler Dever, Bryce W. Talbot FOLEY & LARDNER LLP, Salt Lake City, Utah; Attorneys for Defendant Tyler Jackson.

Paul J. Lockwood, Jenness E. Parker, Jessica R. Kunz, Matthew R. Conrad, Eric M. Holleran, Mallory V. Phillips, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Wilmington, Delaware; Karen Hoffman Lent, Evan R. Kreiner, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, New York, New York; Attorneys for Defendants Freedom Forev- er LLC, Brett Bouchy, Chad Towner and Freedom Solar Pros, LLC.

OPINION DENYING PRELIMINARY INJUNCTION

LASTER, V.C.

Sunder Energy, LLC ("Sunder") sells residential solar power systems. Sunder does not install the systems. Once a Sunder salesperson signs up a deal, the installer takes over the process. Until September 2023, Sunder had an exclusive dealer agreement with Freedom Forever LLC ("Freedom"), one of the nation’s largest installers.

Tyler Jackson was Sunder’s head of sales. During 2022 and 2023, Sunder’s relationship with Freedom deteriorated. In summer 2023, Freedom’s principals encouraged Jackson to join Solar Pros LLC, an up-and-coming Freedom dealer.

Between Monday, September 11, 2023, and Tuesday, September 19, nine of the twelve Senior Regional Managers, Regional Managers, and Co-Regional Managers who reported to Jackson joined Solar Pros. Over three hundred Sunder sales personnel followed them. None of the managers or sales personnel have any restrictions on their ability to work for a competitor or to solicit Sunder personnel.

On Friday, September 22, 2023, Jackson signed an independent contractor agreement with Solar Pros. Four hours later, he resigned from Sunder. On Monday, September 25, Solar Pros announced that Jackson had joined as its new President.

Sunder maintains that Jackson is bound by restrictive covenants. He received Incentive Units in Sunder, and the attorneys who drafted Sunder’s LLC agreement embedded in its terms a set of restrictive covenants (the "Covenants") that bind any holder of Incentive Units. The Covenants consist of:

• A restriction prohibiting the holder from engaging in any competitive activity (the "Competition Restriction");

• A restriction prohibiting the holder from soliciting Sunder’s employees and independent contractors (the "Personnel Restriction");

• A restriction prohibiting the holder from soliciting, selling to, accepting any business from, or engaging in any business relationship with any of Sunder’s customers (the "Customer Restriction"); and

• A restriction prohibiting the holder from inducing, influencing, causing, advising, or encouraging any Sunder stakeholder to terminate its relationship with Sunder (the "Stakeholder Restriction").

The LLC agreement also imposes an expansive restriction on the use of Sunder’s confidential information, broadly defined.

Each Covenant applies not only to the holder of the Incentive Unit but also to that person’s "Affiliates," defined to include the holder’s spouse, parents, siblings, and descendants, both natural and adopted. The Covenants thus purport to bind Jackson’s wife and children. The Covenants apply during the period when the holder owns the Incentive Units and for two years afterward. A holder has no ability to transfer the Incentive Units, but Sunder can repurchase them for zero dollars if the holder is terminated or leaves other than for good reason. Because Sunder can decide not to repurchase the Incentive Units, the Covenants could be perpetual.

The Incentive Units are a form of incentive compensation. Jurisdictions other than Delaware have a significant interest in how businesses compensate employees and independent contractors and the extent to which businesses can attach restrictive covenants to those arrangements. Sunder has its headquarters in Utah, which has an obvious interest in that subject and has passed legislation to regulate it. Jackson lives in Texas, which has an interest in the extent to which its citizens can earn a living. Freedom has its headquarters in California, and Solar Pros has its headquarters in Nevada, so those jurisdictions have interests as well.

But Sunder filed suit here—in Delaware—because Sunder is a Delaware LLC and its lawyers deployed the now widespread legal technology of inserting restrictive covenants into an internal governance document. Businesses and their lawyers do that so they can invoke Delaware’s contractarian regime and argue that it should override how other jurisdictions regulate restrictive covenants.

That legal technology calls on the Delaware courts to adjudicate post-employment disputes for the country and potentially the world. In the past five years alone, the Court of Chancery has issued written decisions addressing disputes over restrictive covenants for businesses operating in Hong Kong,¹ Italy,² Alabama,³ Arizona,⁴ California,⁵ Colorado,⁶ Idaho,⁷ Illinois,⁸ Louisiana,⁹ Nebraska,¹⁰ New Jersey,¹¹ New York,¹² Oklahoma,¹³ and Texas.¹⁴ Only two businesses operated in Delaware, one of which filed two cases.¹⁵ That list excludes transcript rulings.

For Delaware courts to address these matters is problematic because the Delaware franchise depends on other states deferring to Delaware law to govern the internal affairs of the entities that Delaware charters. Delaware risks jeopardizing that deference if Delaware accommodates efforts to use the internal governance documents of its entities to override the law of other states on issues of great importance to them.¹⁶

For Delaware courts to address these matters is unsustainable because the Court of Chancery will never have sufficient resources to adjudicate restrictive covenant cases for Delaware entities throughout the world. The court’s core role is to resolve internal governance disputes for Delaware entities. To Delaware’s good fortune, the number of its entities has grown year over year. At the end of 2017, the starting point for the five-year lookback that this decision has used, Delaware had chartered more than 1.3 million entities.¹⁷ At the end of 2022, there were over 1.9 million, reflecting aggregate growth of 46% and compound annual growth of nearly 8%. At that rate, the number of Delaware entities should easily crest 2 million in 2023.¹⁸ Because some number of entities have disputes each year, more Delaware entities means more disputes. It thus should come as no surprise that the court’s expansion from five to seven constitutional judges in 2018 was not a permanent fix. It enabled the court to meet 2018 demand, not future demand.

For the Court of Chancery to entertain restrictive covenant cases from far and wide diverts the court’s attention from its core mission. And it generates considerably more work. As this case shows, restrictive covenant cases often start with an emergency application for a temporary restraining order, followed by a highly expedited motion for a preliminary injunction. Rulings on those preliminary matters do not end the case, which can continue to a trial on requests for permanent injunctive relief and damages. The factual issues are difficult because they frequently involve assertions about surreptitious activity and betrayal, and the discovery disputes regularly involve questions about spoliation. The legal questions are equally complex because they require determining what law applies, parsing dense contractual clauses, and balancing competing interests.

A solution needs to be found, and the market is unlikely to provide it. This is an area where Delaware’s interests and the interests of its bar as a whole conflict with the individual interests of clients and their lawyers. For any single business, it makes sense for a lawyer to advise the client to embed restrictive covenants in an internal governance document. And for any single business faced with a dispute over those restrictions, it makes sense for a lawyer to advise the client to file a lawsuit in the Court of Chancery. In the aggregate, that is a recipe for a tragedy of the commons.

A judicial solution is also unlikely, because judges decide specific cases. Doubtless there are many combinations of fixes involving choice of law, personal jurisdiction, and subject matter jurisdiction that could address this burgeoning problem. But a cure requires the involvement of policymakers beyond the courts.

In an ideal world, this case would have been filed in Utah, Nevada, or Texas. But the case is here, and it must be decided.

Sunder’s application for a preliminary injunction against Jackson is denied because Sunder cannot establish a reason- able likelihood of success on the merits. The Covenants are part of an agreement that cannot be enforced against Jackson because the agreement originates in an egregious breach of fiduciary duty. The Covenants are also facially unreasonable in their own right.

Sunder’s application for a preliminary injunction against the other defendants for tortiously interfering with the Covenants is denied for lack of an underlying breach of contract. Relief is also denied because Utah law governs that claim, and Utah requires conduct that is inherently tortious. The defendants engaged in conduct that could support a claim under the multi-factor...