Sunder Energy, LLC v. Tyler Jackson
This text of Sunder Energy, LLC v. Tyler Jackson (Sunder Energy, LLC v. Tyler Jackson) is published on Counsel Stack Legal Research, covering Supreme Court of Delaware primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
IN THE SUPREME COURT OF THE STATE OF DELAWARE
§ SUNDER ENERGY, LLC, § § Plaintiff Below, § No. 455, 2023 Appellant, § § Court Below: v. § Court of Chancery of the § State of Delaware TYLER JACKSON, FREEDOM § FOREVER, LLC, BRETT BOUCHY, § CHAD TOWNER, FREEDOM SOLAR § C.A. No. 2023-0988 PROS, LLC, and SOLAR PROS LLC, § § Defendants Below, § Appellees. §
Submitted: September 18, 2024 Decided: December 10, 2024
Before SEITZ, Chief Justice; VALIHURA, TRAYNOR, LEGROW, and GRIFFITHS, Justices, constituting the Court en Banc.
Upon appeal from the Court of Chancery and the Superior Court of the State of Delaware. AFFIRMED in part, REVERSED in part.
Raymond J. DiCamillo, Esquire, Chad M. Shandler, Esquire, Steven J. Fineman, Esquire, Kelly E. Farnan, Esquire, Kevin M. Gallagher, Esquire, Christine D. Haynes, Esquire, Alexander M. Krischik, Esquire, Sara M. Metzler, Esquire, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware, Joshua Berman, Esquire (argued), Jackson Herndon, Esquire, Paul C. Gross, Esquire, Ben Nicholson, Esquire, Michael H. Rover, Esquire, PAUL HASTINGS LLP, New York, New York, for Appellant Sunder Energy, LLC.
Timothy R. Dudderar, Esquire, Aaron R. Sims, Esquire, Eric J. Nascone, Esquire, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware, Maureen M. Stewart, Esquire (argued), FOLEY & LARDNER LLP, Tampa, Florida, Jordan C. Bledsoe, Esquire, Tyler Dever, Esquire, Bryce W. Talbot, Esquire, FOLEY & LARDNER LLP, Salt Lake City, Utah, for Appellee Tyler Jackson.
Paul J. Lockwood, Esquire (argued), Jenness E. Parker, Esquire, Jessica R. Kunz, Esquire, Matthew R. Conrad, Esquire, Eric M. Holleran, Esquire, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Wilmington, Delaware, Karen Hoffman Lent, Esquire, Evan R. Kreiner, Esquire, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, New York, New York, for Appellees Freedom Forever LLC, Brett Bouchy, Chad Towner and Freedom Solar Pros, LLC.
LEGROW, Justice: This interlocutory appeal arose from the Court of Chancery’s decision
denying an employer’s motion for a preliminary injunction that sought to enforce
restrictive covenants against its former employee and minority member. The Court
of Chancery refused to issue the requested injunction because it found that the
restrictive covenants at issue were unenforceable for two independent reasons: first,
because they were part of an agreement that “originate[d] in an egregious breach of
fiduciary duty”; and second, because the covenants were “facially unreasonable.”1
In light of those conclusions and its factual findings, the court declined the
employer’s invitation to “blue pencil” the restrictive covenants to make them
reasonable.
On appeal, the employer does not challenge the Court of Chancery’s factual
findings or its conclusion that the restrictive covenants were facially unreasonable.
Instead, the employer argues that the court’s refusal to blue pencil the covenants to
bring them within a reasonable scope contravened “decades of Delaware law” and
this State’s commitment to freedom of contract.2 We disagree. The court’s decision
was entirely consistent with the factual record, Delaware precedent, and settled
principles of contract law. We also affirm the trial court’s conclusion—challenged
1 Sunder Energy, LLC v. Jackson, 305 A.3d 723, 732 (Del. Ch. 2023). 2 Appellant’s Opening Br. at 4. on appeal—that Utah law governed the employer’s tortious interference claim
against its former employee’s new employers.
We reverse the Court of Chancery’s opinion in one narrow respect. During
the proceedings, the employee argued that the employer could not demonstrate a
reasonable probability of success on the merits of its claim because the restrictive
covenants resulted from breaches of fiduciary duty and therefore were
unenforceable. Although the trial court’s factual findings supported its decision to
deny the preliminary injunction on that basis, the court’s opinion can be read as
holding that the employer’s operating agreement was unenforceable as a matter of
law because of those fiduciary breaches. That holding exceeded the scope of the
issues before the court at the preliminary injunction stage of the proceedings. Any
such holding, to the extent it is necessary, must await a complete factual record and
participation of all the indispensable parties. We therefore reverse the trial court’s
opinion only to the extent that it can be read as holding that the appellant’s operating
agreement was unenforceable as a matter of law.
2 I. RELEVANT FACTUAL AND PROCEDURAL BACKGROUND3
A. Sunder’s Formation
Sunder Energy, LLC (“Sunder”) is a solar sales dealer organized as a
Delaware limited liability company, headquartered in Utah, and currently operating
in at least forty-seven states.4 Sunder’s business model involves securing
agreements to install solar power systems in residential homes using teams of door-
to-door sales representatives.5 Until September 2023, Sunder acted as an exclusive
dealer for Freedom Forever, LLC (“Freedom”), a leading solar installation firm.
Under the terms of Sunder and Freedom’s arrangement, when a Sunder
representative secured an agreement with a homeowner, the Sunder representative
would enter the sale into Freedom’s sales portal, and Freedom would then install the
system, collect payment from the customer, and pay a commission to Sunder.6 That
commission was shared between Sunder and the representative who made the sale.7
Sunder was founded in August 2019 by Eric Nielsen, Max Britton, Tyler
Jackson, Steven Cohen, Michael Gutschmidt, Jed Sewell, and Max Ganley (together,
3 Unless otherwise noted, the recited facts are taken from the Court of Chancery’s November 22, 2023 Opinion Denying a Preliminary Injunction. See Sunder Energy, LLC v. Jackson, 305 A.3d 723 (Del. Ch. 2023). 4 Sunder Energy, 305 A.3d at 732. 5 Id. at 733. 6 Id. 7 Id.
3 the “Co-Founders”).8 The Co-Founders formed Sunder after they left a different
solar sales dealer called LGCY Power, LLC (“LGCY”).9 Nielsen served as LGCY’s
Chief Revenue Officer; Britton was the Vice President; and Jackson, Cohen,
Gutschmidt, Sewell, and Ganley were Regional Sales Managers.10
LGCY commenced a lawsuit (unrelated to this case) against the Co-Founders
on September 23, 2019.11 The Co-Founders and Sunder engaged Snell & Wilmer to
represent them jointly in that action.12 In relevant part, LGCY argued that Britton
had received grants of restricted stock units as a part of his compensation that were
subject to a two-year non-compete covenant, and Britton violated that covenant
when he left to form Sunder.13 In response, Britton argued:
TWO years is a LONG time not to compete in the very industry I have bet my family’s future on. This is what I have been doing for close to a decade. This is my career. . . . This seems very heavy handed. A two year non compete is nuts.14
8 Id. 9 Id. 10 The Court of Chancery noted that Nielsen’s position as LGCY’s Chief Revenue Officer effectively made him the head of sales, drawing a parallel to Appellee Tyler Jackson’s role at Sunder. Id. 11 Id. 12 Id. 13 Id. at 734. 14 Id. (omission in original).
4 Notwithstanding the LGCY lawsuit, Sunder’s business grew rapidly.15 By
December 2019, Sunder had generated hundreds of thousands of dollars in
commissions.16
B. The 2019 LLC Agreement
When they formed Sunder in August 2019, the Co-Founders agreed on an
equity split under which Jackson, Cohen, Gutschmidt, Sewell, and Ganley (the
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IN THE SUPREME COURT OF THE STATE OF DELAWARE
§ SUNDER ENERGY, LLC, § § Plaintiff Below, § No. 455, 2023 Appellant, § § Court Below: v. § Court of Chancery of the § State of Delaware TYLER JACKSON, FREEDOM § FOREVER, LLC, BRETT BOUCHY, § CHAD TOWNER, FREEDOM SOLAR § C.A. No. 2023-0988 PROS, LLC, and SOLAR PROS LLC, § § Defendants Below, § Appellees. §
Submitted: September 18, 2024 Decided: December 10, 2024
Before SEITZ, Chief Justice; VALIHURA, TRAYNOR, LEGROW, and GRIFFITHS, Justices, constituting the Court en Banc.
Upon appeal from the Court of Chancery and the Superior Court of the State of Delaware. AFFIRMED in part, REVERSED in part.
Raymond J. DiCamillo, Esquire, Chad M. Shandler, Esquire, Steven J. Fineman, Esquire, Kelly E. Farnan, Esquire, Kevin M. Gallagher, Esquire, Christine D. Haynes, Esquire, Alexander M. Krischik, Esquire, Sara M. Metzler, Esquire, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware, Joshua Berman, Esquire (argued), Jackson Herndon, Esquire, Paul C. Gross, Esquire, Ben Nicholson, Esquire, Michael H. Rover, Esquire, PAUL HASTINGS LLP, New York, New York, for Appellant Sunder Energy, LLC.
Timothy R. Dudderar, Esquire, Aaron R. Sims, Esquire, Eric J. Nascone, Esquire, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware, Maureen M. Stewart, Esquire (argued), FOLEY & LARDNER LLP, Tampa, Florida, Jordan C. Bledsoe, Esquire, Tyler Dever, Esquire, Bryce W. Talbot, Esquire, FOLEY & LARDNER LLP, Salt Lake City, Utah, for Appellee Tyler Jackson.
Paul J. Lockwood, Esquire (argued), Jenness E. Parker, Esquire, Jessica R. Kunz, Esquire, Matthew R. Conrad, Esquire, Eric M. Holleran, Esquire, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Wilmington, Delaware, Karen Hoffman Lent, Esquire, Evan R. Kreiner, Esquire, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, New York, New York, for Appellees Freedom Forever LLC, Brett Bouchy, Chad Towner and Freedom Solar Pros, LLC.
LEGROW, Justice: This interlocutory appeal arose from the Court of Chancery’s decision
denying an employer’s motion for a preliminary injunction that sought to enforce
restrictive covenants against its former employee and minority member. The Court
of Chancery refused to issue the requested injunction because it found that the
restrictive covenants at issue were unenforceable for two independent reasons: first,
because they were part of an agreement that “originate[d] in an egregious breach of
fiduciary duty”; and second, because the covenants were “facially unreasonable.”1
In light of those conclusions and its factual findings, the court declined the
employer’s invitation to “blue pencil” the restrictive covenants to make them
reasonable.
On appeal, the employer does not challenge the Court of Chancery’s factual
findings or its conclusion that the restrictive covenants were facially unreasonable.
Instead, the employer argues that the court’s refusal to blue pencil the covenants to
bring them within a reasonable scope contravened “decades of Delaware law” and
this State’s commitment to freedom of contract.2 We disagree. The court’s decision
was entirely consistent with the factual record, Delaware precedent, and settled
principles of contract law. We also affirm the trial court’s conclusion—challenged
1 Sunder Energy, LLC v. Jackson, 305 A.3d 723, 732 (Del. Ch. 2023). 2 Appellant’s Opening Br. at 4. on appeal—that Utah law governed the employer’s tortious interference claim
against its former employee’s new employers.
We reverse the Court of Chancery’s opinion in one narrow respect. During
the proceedings, the employee argued that the employer could not demonstrate a
reasonable probability of success on the merits of its claim because the restrictive
covenants resulted from breaches of fiduciary duty and therefore were
unenforceable. Although the trial court’s factual findings supported its decision to
deny the preliminary injunction on that basis, the court’s opinion can be read as
holding that the employer’s operating agreement was unenforceable as a matter of
law because of those fiduciary breaches. That holding exceeded the scope of the
issues before the court at the preliminary injunction stage of the proceedings. Any
such holding, to the extent it is necessary, must await a complete factual record and
participation of all the indispensable parties. We therefore reverse the trial court’s
opinion only to the extent that it can be read as holding that the appellant’s operating
agreement was unenforceable as a matter of law.
2 I. RELEVANT FACTUAL AND PROCEDURAL BACKGROUND3
A. Sunder’s Formation
Sunder Energy, LLC (“Sunder”) is a solar sales dealer organized as a
Delaware limited liability company, headquartered in Utah, and currently operating
in at least forty-seven states.4 Sunder’s business model involves securing
agreements to install solar power systems in residential homes using teams of door-
to-door sales representatives.5 Until September 2023, Sunder acted as an exclusive
dealer for Freedom Forever, LLC (“Freedom”), a leading solar installation firm.
Under the terms of Sunder and Freedom’s arrangement, when a Sunder
representative secured an agreement with a homeowner, the Sunder representative
would enter the sale into Freedom’s sales portal, and Freedom would then install the
system, collect payment from the customer, and pay a commission to Sunder.6 That
commission was shared between Sunder and the representative who made the sale.7
Sunder was founded in August 2019 by Eric Nielsen, Max Britton, Tyler
Jackson, Steven Cohen, Michael Gutschmidt, Jed Sewell, and Max Ganley (together,
3 Unless otherwise noted, the recited facts are taken from the Court of Chancery’s November 22, 2023 Opinion Denying a Preliminary Injunction. See Sunder Energy, LLC v. Jackson, 305 A.3d 723 (Del. Ch. 2023). 4 Sunder Energy, 305 A.3d at 732. 5 Id. at 733. 6 Id. 7 Id.
3 the “Co-Founders”).8 The Co-Founders formed Sunder after they left a different
solar sales dealer called LGCY Power, LLC (“LGCY”).9 Nielsen served as LGCY’s
Chief Revenue Officer; Britton was the Vice President; and Jackson, Cohen,
Gutschmidt, Sewell, and Ganley were Regional Sales Managers.10
LGCY commenced a lawsuit (unrelated to this case) against the Co-Founders
on September 23, 2019.11 The Co-Founders and Sunder engaged Snell & Wilmer to
represent them jointly in that action.12 In relevant part, LGCY argued that Britton
had received grants of restricted stock units as a part of his compensation that were
subject to a two-year non-compete covenant, and Britton violated that covenant
when he left to form Sunder.13 In response, Britton argued:
TWO years is a LONG time not to compete in the very industry I have bet my family’s future on. This is what I have been doing for close to a decade. This is my career. . . . This seems very heavy handed. A two year non compete is nuts.14
8 Id. 9 Id. 10 The Court of Chancery noted that Nielsen’s position as LGCY’s Chief Revenue Officer effectively made him the head of sales, drawing a parallel to Appellee Tyler Jackson’s role at Sunder. Id. 11 Id. 12 Id. 13 Id. at 734. 14 Id. (omission in original).
4 Notwithstanding the LGCY lawsuit, Sunder’s business grew rapidly.15 By
December 2019, Sunder had generated hundreds of thousands of dollars in
commissions.16
B. The 2019 LLC Agreement
When they formed Sunder in August 2019, the Co-Founders agreed on an
equity split under which Jackson, Cohen, Gutschmidt, Sewell, and Ganley (the
“Minority Members”) would each receive 8% of the company’s equity for a total
stake of 40%, while Nielsen and Britton would own the remaining 60% of the
equity.17 Despite this, the Co-Founders thought of and referred to themselves as
partners.18 Although all the Co-Founders expected Nielsen and Britton to manage
Sunder as majority owners, there were no discussions of separate types of equity or
different rights and obligations between the Minority Members, Nielsen, and
Britton.19
When the Co-Founders filed a certificate of formation with the Delaware
Secretary of State on August 16, 2019, Sunder had not yet executed an operating
agreement.20 Rather, the newly founded company operated under the default
15 See id. 16 Id. 17 Id. at 733. 18 Id. 19 Id. 20 Id.
5 provisions of the Delaware Limited Liability Company Act (the “LLC Act”), subject
to any specific unwritten understandings between the Co-Founders.21
In fall 2019, Nielsen and Britton engaged Snell & Wilmer22 to draft an
operating agreement (the “2019 LLC Agreement” or the “Agreement”).23 When the
draft was complete, Nielsen and Britton met with Snell & Wilmer attorneys at the
firm’s office to review the Agreement’s terms.24 The other Co-Founders were not
invited to this meeting, and the terms of the Agreement were never explained to
them.25 Nielsen testified that he could not have understood the 2019 LLC
Agreement without the attorneys explaining it to him, and he invoked privilege in
response to questions about the 2019 LLC Agreement on the grounds that his
understanding came entirely from counsel.26 Jackson and the other Minority
Members were all high school graduates, had spent all or most of their careers in the
door-to-door sales industry, and were not sophisticated in legal matters.27
21 Id. 22 At this point, Snell & Wilmer were also jointly representing Sunder and the Co-Founders in the LGCY suit. All the Co-Founders regarded the firm as their counsel. Id. 23 Id. at 734. 24 Id. 25 Id. 26 Id. 27 Id. at 736.
6 Several aspects of the 2019 LLC Agreement differed from the default
provisions of the LLC Act and the members’ unwritten understanding that had
governed the Co-Founders’ relationship since Sunder’s formation. For example, the
Agreement expressly disavowed general fiduciary duties among the Co-Founders
and created two classes of member units—Common Units for Nielsen and Britton
and Incentive Units for the Minority Members.28 These two classes of equity had
drastically different rights.29 Incentive Unit holders lacked voting, consent, pre-
emptive, and informational rights, as well as broad indemnification and
advancement rights, all of which were awarded only to Nielsen and Britton as the
sole owners of Common Units.30 Additionally, Incentive Unit holders were bound
by a contractual confidentiality obligation, which did not apply to Common Unit
holders.31 In reality, Incentive Units were structured to be nothing more than a form
of incentive compensation with numerous limitations.32 The Agreement provided
for automatic forfeiture of any unvested Incentive Units if any holder left Sunder,
imposed transfer restrictions, and gave Sunder a call option to repurchase vested
28 Id. at 734. 29 Id. at 736. 30 Id. at 734–35. 31 Id. at 735. 32 Id.
7 units for zero dollars if any holder was terminated for cause or left Sunder without
“Good Reason.”33
The Agreement’s most significant component for purposes of this case was a
set of broad restrictive covenants binding the Minority Members and their
“affiliates” while they held Incentive Units and for a period of two years after they
ceased owning equity in Sunder.34 The Agreement imposed a Competition
Restriction and Personnel Restriction (collectively, the “Covenants”).35 The
Competition Restriction prohibited Incentive Unit holders and their “affiliates” from
engaging in any door-to-door sales business in the markets where Sunder operated
or reasonably anticipated operating.36 The Personnel Restriction prohibited
Incentive Unit holders and their affiliates from recruiting or “encourag[ing] to leave”
any individual whom Sunder employed, received services from, or had a business
relationship with.37
33 Id. 34 Id. at 729. 35 The 2019 LLC Agreement further prohibited Incentive Unit holders from soliciting, selling to, accepting any business from, or engaging in any business relationship with any of Sunder's customers (the “Customer Restriction”); and prohibited Incentive Unit holders from inducing, influencing, causing, advising, or encouraging any Sunder stakeholder to terminate its relationship with Sunder (the “Stakeholder Restriction”). Id. These covenants are not at issue in this interlocutory appeal. 36 Id. at 755. 37 Id. at 758–59.
8 On December 31, 2019—New Year’s Eve—Nielsen sent the Minority
Members an email (the “New Year’s Eve Email”) that attached a .pdf of the 2019
LLC Agreement.38 Addressing the Minority Members as “Partners,” he wrote:
Max [Britton] and I have executed our portion of the Sunder Operating Agreement today and a copy for your review is attached. I will be sending each of you a couple of documents via docusign momentarily. The first one contains your grant of shares and the second one is a joinder agreement that will formally add each of you to the Operating Agreement. If you are married, your spouse will also be sent a spousal consent form. Please let Max or me know if you have any questions.
Lastly, the attorney’s [sic] highly recommend completing these documents by the end of tonight, but we don’t expect any of you to sign something if you are uncomfortable with it or if you need more clarification from the attorney’s [sic] on something.39 Please let me know if you have any questions.
Happy New Year!40
Nielsen circulated the signature pages via DocuSign, which meant that the
Minority Members did not have to scroll through the 2019 LLC Agreement to reach
the end and sign it—they only had to look at a one-page joinder agreement.41
38 Id. at 736. 39 The 2019 LLC Agreement itself recited that each party had the opportunity to review the Agreement with independent legal counsel and that Snell & Wilmer only represented Sunder in connection with the document’s preparation. Id. at 735. 40 Id. at 736. 41 Id.
9 Appellee Tyler Jackson signed the Agreement barely an hour after receiving the New
Year’s Eve Email.42
That pattern continued when the partners amended Sunder’s operating
agreement in 2021 (the “2021 LLC Agreement”). No copy of the amended
agreement was sent to the Minority Members; rather, Nielsen and Britton only
circulated a signature page. Nielsen and Britton sent out an email stating that the
2019 LLC Agreement was being amended to add another member and that there
were no substantive changes.43 This representation, however, was not true. The
2021 LLC Agreement expanded the Covenants’ geographic scope.44
Testimony given by Jackson and other Minority Members in the LGCY action
in 2022 demonstrated that they believed that the 2019 and 2021 LLC Agreements
granted them equity with the same rights as Nielsen and Britton.45 While represented
by a Snell & Wilmer attorney at his deposition in that action, Jackson testified to his
understanding that the Agreement did not restrict his ability to compete with Sunder
42 Id. at 737. 43 Id. 44 Id. 45 Id.
10 or solicit its customers or employees.46 It does not appear from the record that
Jackson’s attorney ever advised him of this misimpression.47
C. The Sunder-Freedom Relationship
Upon Sunder’s formation in August 2019, Sunder and Freedom entered into
a five-year Dealer Agreement under which Sunder exclusively marketed and sold
Freedom’s solar installation services in certain regions.48 From 2019 to 2023,
Sunder grew into one of Freedom’s “super-dealers,” generating over 25% of its
sales.49 Freedom supported Sunder’s business with marketing and administrative
services, including payroll and commission calculations.50
Jackson’s responsibilities at Sunder grew with the company as his sales group
excelled.51 Jackson was given direct authority over many of Sunder’s key markets.52
By 2022, Jackson held the title of Vice President, and nearly half of Sunder’s sales
force reported to him directly or indirectly.53 He became Sunder’s highest-paid sales
leader, earning $4.8 million in compensation over four years.54 Over the same
46 Id. 47 Id. 48 Id. at 738. 49 Id. at 737. 50 Id. 51 Id. 52 Id. 53 Id. 54 Id.
11 period, he received $1.2 million in profit distributions from his Incentive Units.55
Jackson’s title of “Vice President,” however, was simply that—a title—and did not
actually grant him executive rights or responsibilities.56 He remained an
independent contractor with Sunder.57
In 2021 and 2022, Nielsen and Britton made a series of business decisions that
negatively affected Sunder’s relationship with Freedom and with Sunder’s own sales
force.58 First, Nielsen and Britton rejected an equity swap with Freedom, hoping
instead to secure a private equity investment.59 In an effort to appear more attractive
to private equity investors, Nielsen and Britton took steps to increase Sunder’s
profits.60 One proposed strategy involved using a finance company outside of
Freedom’s network, but Freedom vetoed that proposal because it would have caused
Freedom to violate its exclusivity agreements with its financing partners.61 But
Nielsen and Britton successfully deployed another strategy that involved Sunder
inflating solar installation costs received from Freedom, which artificially raised the
deal price and effectively took money from Sunder’s sales force by lowering
55 Id. 56 Id. 57 Id. 58 Id. at 738. 59 Id. 60 Id. 61 Id.
12 commissions.62 Finally, when asked whether Sunder would continue working with
Freedom after the initial five-year Dealer Agreement ended in 2024, Nielsen and
Britton responded that, although they prioritized working with Freedom, they would
not rule out the possibility that Sunder would go in a different direction.63
D. Jackson Joins Solar Pros
By early 2023, the combination of the artificial price floor and uncertainty
about whether Sunder would continue with Freedom caused Sunder’s sales force,
particularly its sales leadership, to begin questioning whether they should move to
another Freedom dealer.64 Solar Pros LLC (“Solar Pros”), a rapidly growing dealer
majority owned by Brett Bouchy (one of Freedom’s principles), posed an attractive
option to Sunder’s sales force because it offered significantly better commissions.65
In Spring 2023, sixty-three Sunder sales professionals moved to Solar Pros.66
Appellee Tyler Jackson was among the Sunder sales leaders exploring
employment opportunities with Solar Pros.67 After meeting with Freedom’s
principals in May 2023, Jackson asked Sunder’s CFO for copies of the agreements
that he had signed with Sunder, at which point he learned that he was bound by the
62 Id. 63 Id. 64 Id. at 738–39. 65 Id. at 739. 66 Id. 67 Id.
13 restrictive covenants.68 Thereafter, on September 14, 2023, Freedom and Sunder’s
principals met at Freedom’s headquarters in Las Vegas.69 During this meeting,
Freedom attempted to negotiate a price to release Jackson from the restrictive
covenants, facilitate a transfer of Jackson’s “group” to Solar Pros, and obtain a global
release of all previous claims that Sunder had made against Freedom.70 The parties
did not come to an agreement at that meeting, but they did not seem particularly far
apart either.71
After learning that the meeting went well, Jackson circulated a list of Sunder
sales representatives to three of his direct reports to identify who would join him at
Solar Pros.72 Jackson’s direct reports and their teams began to join Solar Pros within
days of the Las Vegas meeting, and Jackson continued to recruit more members of
his team to make the transition.73
Over a nine-day period in September 2023, nine of the twelve Senior Regional
Managers, Regional Managers, and Co-Regional Managers who reported to Jackson
68 Id. 69 Id. at 741. 70 Id. 71 Id. 72 Id. at 742. 73 Id.
14 joined Solar Pros.74 Over three hundred Sunder sales personnel followed them.75
None of the managers or sales personnel had any restrictions on their ability to work
for a competitor or solicit Sunder personnel.76
Ultimately, Sunder and Freedom did not reach a deal.77 Nevertheless, on
September 22, 2023, Jackson signed an independent consulting agreement with
Freedom Solar Pros LLC (“Freedom Solar Pros), an affiliate of Freedom and Solar
Pros, and resigned from Sunder four hours later.78 In this consulting agreement,
Freedom Solar Pros agreed to indemnify Jackson and hold him harmless against
claims brought by Sunder, including claims for any violations of the Covenants.79
On September 25, 2023, Solar Pros announced Jackson as its new President.80
Jackson continued to recruit Sunder sales representatives to Solar Pros following his
resignation from Sunder and before Sunder filed this action.81
74 Id. at 729. 75 Id. 76 Id. 77 Id. at 742. 78 Id. at 743. 79 Id. 80 Id. at 729, 743. 81 Id. at 743.
15 E. Procedural History
Within a week of Jackson’s announcement as Solar Pro’s President, Sunder
filed this action against Jackson for breach of contract and against Freedom,
Freedom’s principals, Freedom Solar Pros, and Solar Pros (together, the “Freedom
Defendants”) for tortiously interfering with Sunder’s rights under the operating
agreement.82 Based on Sunder’s allegations that Jackson was continuing to recruit
Sunder personnel to Solar Pros, the Court of Chancery issued an ex parte temporary
restraining order that enjoined Jackson from working with any of Sunder’s business
competitors or recruiting any Sunder employee to leave the company.83 According
to the Court of Chancery, that order was intended to preserve the status quo pending
a hearing on whether to renew or lift the order.84 The parties briefed whether the
court should renew the temporary restraining order or allow it to expire, and the
defendants also moved to dismiss the case in favor of arbitration.85 The Court of
Chancery renewed the temporary restraining order and denied the motion to
dismiss.86
82 App. to Appellee’s Answering Br. at B3, B33. 83 App. to Appellant’s Opening Br. at A493–95. 84 Id. at A495. 85 See id. at A80–84. 86 Id. at A496–98; see id. at A78.
16 Following expedited discovery, briefing, and a hearing, however, the court
denied Sunder’s motion for a preliminary injunction (the “Opinion”).87 In the
Opinion, the Court of Chancery found that Sunder had not met the first element of
the preliminary injunction standard, and because there was not a reasonable
probability of Sunder succeeding on the merits of its claims, there was no reason for
the court to balance the equities or consider irreparable harm.88 The Court of
Chancery found that (i) Sunder could not enforce the Covenants because they were
invalid under the Delaware Limited Liability Company Act (the “LLC Act”) and the
common law governing fiduciary duties;89 (ii) alternatively, Sunder could not
enforce the Covenants because they were unreasonably broad as a matter of law;90
and (iii) Sunder could not prevail against the Freedom Defendants for tortious
interference because Utah law governed that claim and the Freedom Defendants had
not engaged in tortious interference as defined by Utah law.91 Sunder asked the
Court of Chancery to certify an interlocutory appeal under Supreme Court Rule 42,
87 See Sunder Energy, LLC v. Jackson, 305 A.3d 723 (Del. Ch. 2023). 88 Id. at 745. 89 Id. at 748. 90 Id. at 752–53. 91 Id. at 760.
17 and the Court of Chancery granted that application on December 22, 2023.92 This
Court accepted the interlocutory appeal on January 25, 2024.93
II. STANDARD OF REVIEW
We review the Court of Chancery’s exercise of its equitable powers,94 its
decision to permit parties to amend pleadings or to consider an affirmative defense,95
and the grant or denial of a preliminary injunction for abuse of discretion. 96 We
review questions of law, including the Court of Chancery’s “formulation and
application of legal principles,”97 and “the trial court’s decision on the choice of law
to apply to tort claims, including issues of liability, damages, and remedies,” de
novo.98 The parties disagree as to the standard of review with respect to the court’s
92 App. to Appellant’s Opening Br. at A2448. 93 Order Accepting Interlocutory Appeal at 1, 7. Dkt. 7. Jackson argued that some of Appellant’s arguments on appeal exceeded the scope of the issues that we accepted for interlocutory consideration. Jackson’s Reply Br. at 36. Our Order Accepting Interlocutory Appeal, however, was not limited to any particular issues, and the parties had a full opportunity to brief and argue the issues raised on appeal. As such, we have considered the merits of all Appellant’s arguments. 94 In re Peierls Charitable Lead Unitrust, 77 A.3d 232, 235 (Del. 2013); Reserves Dev. LLC v. Severn Sav. Bank, FSB, 961 A.2d 521, 523 (Del. 2008); In re Unfunded Ins. Trust Agreement of Capaldi, 870 A.2d 493, 497 (Del. 2005). 95 See Realty Enterprises, LLC v. Patterson-Woods, 11 A.3d 228, 2010 WL 5093906, at *4 (Del. 2010) (TABLE); Abdi v. NVR, Inc., 945 A.2d 1167, 2008 WL 78564, at *2 (Del. 2008) (TABLE); H & H Poultry Co. v. Whaley, 408 A.2d 289, 291 (Del. 1979). 96 Lawson v. Meconi, 897 A.2d 740, 743 (Del. 2006); SI Mgmt. L.P. v. Wininger, 707 A.2d 37, 40 (Del. 1998); Kaiser Aluminum Corp. v. Matheson, 681 A.2d 392, 394 (Del. 1996). 97 Reddy v. MBKS Co., 945 A.2d 1080, 1085 (Del. 2008); Lawson, 897 A.2d at 743; SI Mgmt., 707 A.2d at 40 (citing Kaiser, 681 A.2d at 394); see also Unitrin, Inc. v. American Gen. Corp., 651 A.2d 1361, 1385 (Del. 1995) (citing Merrill v. Crothall–American, Inc., 606 A.2d 96, 99 (Del. 1992)). 98 Bell Helicopter Textron, Inc. v. Arteaga, 113 A.3d 1045, 1052 (Del. 2015) (footnotes omitted).
18 decision on blue penciling. We address that standard of review in detail in the
section analyzing that argument.
III. ANALYSIS
Appellant raises three arguments on appeal. First, Appellant contends that the
Court of Chancery erred in declining to blue pencil the Covenants given the flagrant
nature of Jackson’s competitive conduct, which would have breached even a much
narrower set of covenants.99 Second, Appellant argues that the Court of Chancery
erred in considering Jackson’s fiduciary duty defense and in ruling at the preliminary
injunction stage that Nielsen and Britton’s breaches of fiduciary duty made the LLC
Agreements unenforceable as a matter of law.100 And finally, Appellant maintains
that the Court of Chancery erred in ruling that Utah law governs Sunder’s tortious
interference claims against the Freedom Defendants, which effectively dismissed
those claims because Sunder cannot meet the elements of that cause of action under
Utah law.101
Appellees respond that the Court of Chancery appropriately exercised its
discretion by refusing to blue pencil the covenants; Jackson timely raised his
fiduciary duty defense and the record supported the court’s ruling on that issue; and
99 Appellant’s Opening Br. at 21. 100 Id. at 28. 101 Id. at 40.
19 the Court of Chancery correctly determined that Utah law applies to Sunder’s
tortious interference claims.102 We address each issue in turn.
A. The Court of Chancery did not abuse its discretion by refusing to blue pencil the restrictive covenants.
The parties have suggested different standards of review that this Court should
apply in its review of the Court of Chancery’s decision to refuse Appellant’s request
to blue pencil the restrictive covenants. Appellant acknowledges that we usually
review decisions granting or denying a preliminary injunction for abuse of
discretion, but argues that the availability of blue penciling involves legal
conclusions and public-policy considerations that typically are reviewed de novo.103
Appellees contend that “[w]hether to blue pencil overbroad restrictive covenants is
a matter within the trial court’s discretion. . . . This court reviews a trial court’s
discretionary ruling under an abuse of discretion scope of review.”104
Appellees have the stronger position under our precedent. In C&J Energy
Services, this Court emphasized that blue penciling a merger agreement to excise a
Appellee Tyler Jackson’s Answering Br. at 3–4 (hereinafter “Jackson’s Answering Br. at __.”); 102
Appellees Freedom Forever LLC, Brett Bouchy, Chad Towner and Freedom Solar Pros, LLC’s Answering Br. at 3–4 (hereinafter “Freedom Defendants’ Answering Br. at __.”). Appellant’s Opening Br. at 21 (citing SI Mgmt., 707 A.2d at 40; Kaiser, 681 A.2d at 394; 103
Lawson, 897 A.2d at 743; Cantor Fitzgerald, L.P. v. Ainslie, 312 A.3d 674, 685 (Del. 2024)). 104 Jackson’s Answering Br. at 41 (citing Kodiak Bldg. Partners v. Adams, 2022 WL 5240507, at *4 n.49 (Del. Ch. Oct. 6, 2022); Firestone Tire & Rubber v. Adams, 541 A.2d 567, 570 (Del. 1988)).
20 prohibition against soliciting other bids was not an appropriate exercise of equitable
authority in a preliminary injunction order, reasoning:
Even after a trial, a judicial decision holding a party to its contractual obligations while stripping it of bargained-for benefits should only be undertaken on the basis that the party ordered to perform was fairly required to do so, because it had, for example, aided and abetted a breach of fiduciary duty.105
This Court reversed the Court of Chancery’s decision because it did not make the
necessary findings to justify such an injunction.106
Our opinion in C&J Energy Services did not discuss the standard of review
for blue penciling restrictive covenants in the employment context specifically, but
it described judicial blue penciling as an “exercise of equitable authority” in the
context of an injunctive order.107 And although public-policy considerations may
buttress a court’s discretionary decision to exercise its blue-penciling power, the
question presented in this appeal does not require us to consider public policy.
Rather, we are asked to decide whether the Court of Chancery erred in declining to
exercise its equitable authority based on the record before it. Furthermore, Appellant
fails to identify any questions of law. Therefore, as a threshold matter, this Court
105 C & J Energy Servs., Inc. v. City of Miami Gen. Employees’, 107 A.3d 1049, 1072 (Del. 2014). 106 Id. (“To blue-pencil an agreement to excise a provision beneficial to a third party . . . on the basis of a provisional record and then declare that the third party could not regard the excision as a basis for relieving it of its own contractual duties involves an exercise of judicial power inconsistent with the standards that govern the award of mandatory injunctions under Delaware law.”). 107 Id.
21 will review for abuse of discretion the Court of Chancery’s decision to deny
Appellant’s request for blue penciling.
Delaware courts review non-compete and non-solicit agreements “subject to
Delaware law to ensure that they are that they are (i) reasonable in geographic scope
and temporal duration, (ii) advance legitimate economic interests of the party
seeking enforcement, and (iii) survive a balancing of the equities.”108 After
considering the Covenants’ language and the record, the Court of Chancery
concluded that the Competition Restriction and the Personnel Restriction,
individually and together, were unreasonable and overbroad as to whom they
covered, when they applied, and where they operated geographically.109 The court
found that the Competition Restriction, in particular, was “both oppressive and far
more restrictive than any legitimate interest that Sunder could have.”110 Appellant
has not appealed the Court of Chancery’s conclusion that the Covenants are
unreasonably broad as a matter of law, but instead challenges the court’s decision to
forgo blue penciling under the facts as the court found them.111
108 Ainslie, 312 A.3d at 684 n.65 (citing FP UC Holdings, LLC v. Hamilton, 2020 WL 1492783, at *6 (Del. Ch. Mar. 27, 2020)). 109 Sunder Energy, 305 A.3d at 759. 110 Id. at 758. 111 Appellant’s Opening Br. at 22; Appellant’s Reply Br. at 4–5.
22 But Appellant’s decision not to challenge the trial court’s factual findings or
its conclusions about the Covenants’ manifest overbreadth leaves Appellant with a
difficult climb to reversal. Neither side disputes that Delaware courts have the
discretionary power to blue pencil overbroad restrictive covenants to align a
company’s legitimate interests and an individual’s right to be free from unreasonable
restrictions on their livelihood. On several occasions, the Court of Chancery has
utilized blue penciling to narrow the geographic scope and temporal duration of
restrictive covenants to make them reasonable and enforceable.112 Delaware courts
have exercised their discretion to blue pencil restrictive covenants under
circumstances that indicate an equality of bargaining power between the parties,
such as where the language of the covenants was specifically negotiated, valuable
consideration was exchanged for the restriction, or in the context of the sale of a
business.113
112 See, e.g., Del. Exp. Shuttle, Inc. v. Older, 2002 WL 31458243, at *11–14 (Del. Ch. Oct. 23, 2002) (adding geographical limit to restrictive covenant that lacked one and revising temporal restriction in covenant); RHIS, Inc. v. Boyce, 2001 WL 1192203, at *1 (Del. Ch. Sept. 26, 2001) (concluding two-year restriction was unreasonable in the particular field but issuing injunction precluding solicitation for a period of one year from termination); Norton Petroleum Corp. v. Cameron, 1998 WL 118198, at *3 (Del. Ch. Mar. 5, 1998) (blue penciling geographic scope from 100-mile radius to 20-mile radius); Knowles-Zeswitz Music, Inc. v. Cara, 260 A.2d 171, 175 (Del. Ch. 1969) (blue penciling overbroad geographic scope in restrictive covenants to make the covenants reasonable to enforce). 113 See Del. Exp. Shuttle, 2002 WL 31458243, at *11 n.53 (blue penciling covenants where the employee received three months’ severance as consideration and the parties negotiated the precise language of the restrictions); DGWL Investment Corp. v. Giannini, C.A. No. 8647-VCP, at 20, 28 (Del. Ch. Sept. 19, 2013) (TRANSCRIPT) (blue penciling covenants imposed in connection with
23 This case did not carry any of those hallmarks, and the Court of Chancery
therefore declined to blue pencil the agreement. In doing so, the court at times
employed sweeping language regarding the policy implications of blue penciling.
The court expressed the view that “[t]he differences in bargaining power between
repeat-player businesses and individuals suggests that ‘when a restrictive covenant
is unreasonable, the court should strike the provision in its entirety.’”114 The court
reasoned that “the law should not create a ‘no-lose’ scenario in which employers
receive the benefits of an overbroad covenant and, on those occasions when
enforceability is challenged, gain the benefit of a lawful restriction through blue-
penciling.”115 The Court of Chancery acknowledged the precedents on which
Sunder relied to urge the court to rewrite the agreements but concluded that the
court’s equitable powers allowed it to hold an employer to the consequences of
crafting a wholly unreasonable and overbroad covenant.116
Appellant contends that the court’s reasoning was flawed for three reasons:
(1) blue penciling overbroad restrictive covenants to bring them into reasonable line
was historically “commonplace” under Delaware law; (2) the “egregious” facts of
a change-of-control transaction through which the company’s sole founder and longtime CEO received $10 million). 114 Sunder Energy, 305 A.3d at 753 (quoting Del. Elevator, Inc. v. Williams, 2011 WL 1005181, at *10 (Del. Ch. Mar. 16, 2011)). 115 Id. at 754 n.68 (noting the same proposition above the line). 116 Id. at 754 (citing FP UC Holdings, 2020 WL 1492783, at *8).
24 this case warrant blue penciling; and (3) the Court of Chancery should have deferred
to the “blue penciling” provision in the 2019 LLC Agreement.117 Appellees respond
that the decision to blue pencil is a matter of discretion and should be exercised only
where the equities require, which they do not in this case.118 Appellees also contend
that the “blue penciling” provision in the 2019 LLC Agreement is permissive and
non-binding on the Court. 119
We are compelled to begin our analysis by level-setting the issue before us.
The parties have approached this appeal to some extent as though it is a referendum
on the future of blue penciling in Delaware. They have invited us to craft a bright-
line rule on when—if at all—it is appropriate for the Court of Chancery to blue pencil
a restrictive covenant that the court concludes is unreasonable or overbroad. We do
not view this case as the appropriate vehicle to create such a rule.
We acknowledge that restrictive covenant cases are time-consuming and
expensive for the parties to litigate and that they impose substantially on judicial
resources. We also appreciate the Court of Chancery’s concern that businesses
seeking to enforce restrictive covenants are increasingly selecting Delaware as a
forum while other jurisdictions rebuff these types of actions. The Court of Chancery
117 Appellant’s Opening Br. at 22, 24, 26. 118 Freedom Defendants’ Answering Br. at 23–24, 31. 119 Id. at 34.
25 is rightly concerned about this use of judicial resources and the principles of comity
raised when a Delaware court is asked to blue pencil unambiguous contract
provisions crafted between parties with no ongoing dealings in Delaware. And we
have recognized the restraints on trade that are imposed by restrictive covenants that
prevent employees from engaging in their chosen livelihood, which can lead to
personal hardship and financial risk.120 As we recently explained in Cantor
Fitzgerald, L.P. v. Ainslie, these concerns “give rise to the strong policy interest that
justifies the review of unambiguous contract provisions for reasonableness and a
balancing of the equities, two exercises typically foreign to judicial review in
contract actions.”121
Given those concerns, there is an understandable temptation to seek bright-
line rules of general applicability. But, on the other hand, Delaware is a contractarian
state that holds parties’ freedom of contract in high regard.122 Balancing those
contractarian principles against the restraints on trade that restrictive covenants
impose requires a nuanced approach that does not lend itself well to judicial standard
making. Some states have addressed this question by statute.123 At this time,
120 See Ainslie, 312 A.3d at 691. 121 See id. 122 Id. at 676. 123 As the Court of Chancery noted, blue penciling is statutorily required under Texas law. See Sunder Energy, 305 A.3d at 747–48 (quoting Tex. Bus. & Com. Code § 15.51(c) (“[T]he court
26 Delaware has not chosen this path. We are hesitant to establish policy-based rules
that have not been considered by the General Assembly.
As previously mentioned, there are a number of cases in which Delaware
courts have blue penciled restrictive covenants to narrow a provision’s geographic
or temporal scope to salvage an overbroad restriction while not placing an
unreasonable restraint on trade.124 As the Court of Chancery recently explained in
Labyrinth, Inc. v. Urich—delivered while this appeal was pending—“[w]here the
restricted party holds the cards, Delaware has applied the ‘rule of partial
enforcement,’ ‘restricting [the overbroad covenant] to its proper sphere and
enforcing it only to that extent.’”125
shall reform the covenant to the extent necessary to cause the limitations contained in the covenant as to time, geographical area, and scope of activity to be restrained to be reasonable . . . .”)). Other states have statutes expressly prohibiting or limiting the practice of blue-penciling. See, e.g., Wis. Stat. § 103.465 (“Any covenant . . . imposing an unreasonable restraint is illegal, void and unenforceable even as to any part of the covenant or performance that would be a reasonable restraint.”); Ga. Code Ann. § 13-8-53(d) (“Any restrictive covenant not in compliance with the provisions of this article is unlawful and is void and unenforceable; provided, however, that a court may modify a covenant . . . so long as the modification does not render the covenant more restrictive with regard to the employee . . . .”). 124 See, e.g., Del. Exp. Shuttle, 2002 WL 31458243, at *11–14; RHIS, 2001 WL 1192203, at *1; Norton, 1998 WL 118198, at *3; Knowles-Zeswitz Music, 260 A.2d at 175. 125 Labyrinth, Inc. v. Urich, 2024 WL 295996, at *24 (Del. Ch. Jan. 26, 2024) (citing and quoting John Roane, Inc. v. Tweed, 33 Del. Ch. 4, 18 (Del. 1952) (finding that defendant was not of inferior bargaining power, that defendant was offered choices and chose the type of restrictive covenant at issue, accepting its benefits but later seeking to repudiate its burdens, and holding that the rule of partial enforcement for an overbroad restrictive covenant should apply); Leo E. Strine, Categorical Confusion: Deal Protection Measures In Stock-For-Stock Merger Agreements, 56 Bus. Law. 919, 941 n.71 (2001) (“[T]o the extent possible the court should not strip a merger partner of all of its contractual deal protections because those protections are unenforceable to their fullest written extent. Instead, the court should endeavor to pare away only the forbidden excess, leaving the
27 On the other hand, Delaware courts have declined to blue pencil when the
circumstances and equities do not support that relief. In Intertek Testing Services
NA, Inc. v. Eastman, the court refused to blue pencil a non-compete clause in a sale-
of-business agreement after finding that doing so would inequitably rescue a
sophisticated party from its own unenforceable contract.126 Similarly, in Kodiak
Building Partners, LLC v. Adams, the Court of Chancery declined to blue pencil
overbroad restrictive covenants despite the presence of a judicial reformation clause
within the agreement, reasoning that “[t]he inequities inherent in blue-penciling a
noncompete also counsel against enforcing only those portions.”127
Given the factual record in this case—which is undisputed on appeal—the
Court of Chancery was well within its discretion to apply that precedent and refuse
to blue pencil the Covenants. First, it was clear from the record that Jackson was
not involved in any negotiations or discussions concerning the Covenants or their
merger partner with the benefits of those protections that fall within recognized standards of acceptability.”). 126 Intertek Testing Servs. NA, Inc. v. Eastman, 2023 WL 2544236, at *5 (Del. Ch. Mar. 16, 2023) (“In my view, revising the non-compete to save Intertek—a sophisticated party—from its overreach would be inequitable.”); Del. Elevator, 2011 WL 1005181, at *10 (“[A] court should not save a facially invalid provision by rewriting it and enforcing only what the court deems reasonable.”). But see Labyrinth, 2024 WL 295996, at *24–25 (refusing to dismiss enforcement of an overbroad restrictive covenant and finding that blue penciling may be appropriate). The court in Labyrinth noted that the plaintiff there “adequately pled facts indicating the context of the[] restrictive covenants may conceivably present a rare instance where equity and public policy might require blue penciling.” Id. at *25. 127 Kodiak Bldg. Partners, 2022 WL 5240507, at *4 n.49, *13 n.108 (citations omitted).
28 scope.128 He was not present for (or even invited to) the 2019 meeting at Snell &
Wilmer’s offices during which the firm’s attorneys explained the Agreement’s terms
to Nielsen and Britton, and the terms were not explained to Jackson thereafter.
Nielsen testified that he could not have understood the 2019 LLC Agreement without
the attorneys explaining it to him, and he went so far as to invoke privilege in
response to questions about the Agreement on the grounds that his understanding
came entirely from counsel.129 Those facts allowed the Court of Chancery to
conclude that the parties did not negotiate the Covenants in any substantive way.
Second, the circumstances surrounding Jackson’s signing of the 2019 LLC
Agreement also reveal important information about the parties’ relative bargaining
power. On New Year’s Eve, in an email that addressed the recipients as “Partners,”
Nielsen and Britton sent a .pdf of the 2019 LLC Agreement along with a separate
DocuSign signature page, stating that “the attorney’s [sic] highly recommend” that
the Minority Members sign before midnight.130 Nielsen and Britton did not inform
any of the Minority Members of the changes to their rights under the agreement, and
the separate signature page meant that the Minority Members did not even have to
128 App. to Appellant’s Opening Br. at A1080–81 (Tyler Jackson Dep. at 336:13–338:12). 129 Sunder Energy, 305 A.3d at 734. App. to Appellant’s Opening Br. at A98. It was not made clear to Jackson that Snell & Wilmer 130
were not representing his interests in the creation of the 2019 LLC Agreement, even though they were simultaneously representing him in the LGCY suit.
29 open the Agreement in order to sign it. As instructed, Jackson signed the Agreement
barely an hour after receiving the New Year’s Eve Email—he never negotiated its
terms. Similarly, in 2021, Nielsen and Britton obtained consent to the updated LLC
Agreement by circulating only a signature page to the Minority Members. In fact,
the record suggests that Jackson did not learn of the Covenants’ terms until 2023 in
a discussion with Solar Pros.
Additionally, Jackson received minimal-to-no separate compensation in
exchange for his agreement to be bound by the Covenants. Rather, he was given
“Incentive Units” under the Agreement that could not be freely transferred and were
later repurchased by Sunder for $0.131 In that respect, this case resembles FP UC
Holdings, LLC v. Hamilton, in which the Court of Chancery found the company had
imposed “draconian non-competes on company employees in exchange for minimal
consideration” in the form of LLC membership units to which the company declined
to assign value.132 Although the decision in FP UC Holdings did not address the
issue of blue penciling, the court concluded that it had “serious doubts that the Court
would be inclined to rewrite the clause to make it more reasonable as a matter of
equity.”133
131 Freedom Defendants’ Answering Br. at 32. 132 FP UC Holdings, 2020 WL 1492783, at *11 n.88. 133 Id. at *8. 30 Finally, the terms of the Covenants are exceptionally broad, and no apparent
effort was made to tailor the provisions to Sunder’s legitimate interests. The
Competition Restriction would prevent Jackson and his “affiliates” from being
employed in any sales job in at least forty-six states without regard to whether the
employer competed with Sunder or sold similar products. As the Court of Chancery
noted, these restrictions not only applied to Jackson but “the Competition Restriction
requires that Jackson prevent his Affiliates from engaging in any sales of products
to consumers in their homes. As written, Jackson’s daughter cannot go door to door
selling Girl Scout cookies.”134 Moreover, the Covenants’ duration is potentially
indefinite, lasting for a period of two years after a person ceases to own Incentive
Units. Because Sunder’s call option allowed it to choose when (and if) to purchase
vested Incentive Units and the holder could not freely transfer the units, this two-
year period would only begin when Nielsen and Britton decided to trigger it. Until
then, Jackson remained bound by the Covenants.135
Combined with the Agreement’s customer restriction, the Competition
Restriction prevents Jackson from participating in any business that sells to any
134 Sunder Energy, 305 A.3d at 756. 135 As the Court of Chancery acknowledged, Jackson would be entitled to incentive compensation while he held the units. But that compensation depended on Sunder’s profits, which could be diverted or distributed in various ways to minimize Jackson’s take. Id. at 756–57. Additionally, since the Covenants restrict both Jackson and his affiliates, including his family members, the risk of financial hardship remained real, and it is possible that Nielsen and Britton would elect to hold Jackson to the Covenants for an extended period by not repurchasing his vested units.
31 homeowner in the states where Sunder did business before his departure. The
Personnel Restriction is similarly overbroad, preventing Jackson and his “affiliates”
from directly or indirectly communicating regarding employment with any person
who has ever been employed by Sunder for any period of time.
Despite this record, Appellant argues that the Court of Chancery should have
blue penciled the Covenants because—in effect—Jackson’s actions were so
blatantly competitive that they would have constituted a breach of even the most
narrowly circumscribed restrictive covenant. This argument, however, turns the
analysis on its head and creates perverse incentives for employers drafting restrictive
covenants. If employers know that even the most unreasonable covenants will be
enforced if an employee’s conduct is sufficiently flagrant, employers will be less
incentivized to craft reasonable restrictions from the outset. Whether a court should
blue pencil a covenant cannot turn on the egregiousness of the employee’s conduct.
Rather, the court’s decision to exercise that equitable power should be based on the
covenants themselves and the circumstances surrounding their adoption, as the Court
of Chancery did here.
This is not to say that Delaware courts should never blue pencil an agreement
that is overbroad in some respects. But the relief Appellant sought was a wholesale
reformation of the parties’ agreement. It would require the court to craft an entirely
new covenant to which neither side agreed. That is, the Court of Chancery could not
32 simply constrain the Covenants’ temporal or geographic scope. The court also
would have had to rewrite the persons to whom the Covenants applied and the type
of conduct they restricted, which would extend well beyond what Delaware
precedent has historically allowed. That is the opposite of the freedom of contract
principles that are esteemed by Delaware’s legal system and that Appellant has urged
us to uphold. The Court of Chancery’s decision to refuse to employ this
discretionary power therefore fell well within the bounds of reason.
B. The Court of Chancery did not err in considering Jackson’s defense to the Covenants’ enforceability, but its legal conclusion exceeded the scope of the issues before the court.
We review the Court of Chancery’s decision to grant or deny a preliminary
injunction for abuse of discretion.136 We review questions of law, including the
Court of Chancery’s “formulation and application of legal principles,”137 and
whether the court “correctly formulated the legal standard for determining if
[Nielsen or Britton] owed a fiduciary duty to [Jackson],”138 de novo.139
Before holding that the Covenants were facially overbroad, the Court of
Chancery first found that Sunder could not obtain a preliminary injunction because
136 Lawson, 897 A.2d at 743; SI Mgmt., 707 A.2d at 40; Kaiser, 681 A.2d at 394. 137 Reddy, 945 A.2d at 1085; Lawson, 897 A.2d at 743; SI Mgmt., 707 A.2d at 40 (citing Kaiser, 681 A.2d at 394); see also Unitrin, 651 A.2d at 1385 (citing Merrill, 606 A.2d at 99). 138 In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 48 (Del. 2006). 139 Bell Helicopter, 113 A.3d at 1052.
33 the Covenants were the unenforceable product of Nielsen and Britton’s breach of
fiduciary duty.140 In particular, the court held that “[t]he record establishes that
Nielsen and Britton breached their fiduciary duty of disclosure when seeking
member approval for the 2019 LLC Agreement and the 2021 LLC Agreement.”141
The court therefore concluded that the terms of those agreements were “never validly
approved.”142 The court went on to hold that:
Even at this preliminary stage, it is clear as a matter of law that Nielsen and Britton breached their fiduciary duty of disclosure in connection with the 2019 LLC Agreement and 2021 LLC Agreement. Nielsen and Britton therefore cannot enforce the terms of the 2021 LLC Agreement against Jackson.143
Although the Court of Chancery stated that this conclusion did not foreclose
all possibilities of Sunder’s success at trial, it held that “Sunder cannot enforce the
Covenants as a matter of law . . . [or] rely on those provisions to secure a remedy
from Jackson.”144
Appellant’s appeal from this holding presents a two-pronged question: first,
did the Court of Chancery abuse its discretion in considering Jackson’s fiduciary
140 Sunder Energy, 305 A.3d at 748. 141 Id. 142 Id. 143 Id. at 751 (emphasis added). 144 Id. at 762.
34 duty defense; and second, did the Court of Chancery err by ruling as a matter of law
on the merits of the fiduciary duty defense.
1. The Court of Chancery did not abuse its discretion by considering the fiduciary duty defense.
Appellant first argues that the Court of Chancery erred in considering
Jackson’s fiduciary duty defense.145 This argument is a procedural one: Appellant
contends that Jackson did not properly plead or provide notice of this defense and
he therefore waived it.
The Court of Chancery allowed Jackson to pursue this defense because he
“raised an unclean hands defense in his answer, and unclean hands can be a vehicle
for asserting a defense based on breach of fiduciary duty or fraud.”146 The court then
went on to explain that:
The fact that Jackson had not formally spelled out a defense based on breach of fiduciary duty thus did not prevent him from arguing that Nielsen and Britton’s breach of duty rendered the [Covenants] unenforceable such that Sunder was not entitled to a preliminary injunction. Jackson had identified unclean hands as a defense in his answer, and he diligently pursued that defense by seeking discovery and moving to compel the production of documents related to that defense. Jackson fairly presented the defense for purposes of the injunction application.147
145 Appellant’s Opening Br. at 29. 146 Sunder Energy, LLC v. Jackson, 2023 WL 8868407, at *6 (Del. Ch. Dec. 22, 2023) (Memorandum Opinion Certifying Interlocutory Appeal). 147 Id.
35 Appellant argues that the record does not support the conclusion that
Jackson’s unclean hands defense properly raised a breach of fiduciary duty defense
to the breach of contract claim.148 Appellant contends that fiduciary duty was too
attenuated from unclean hands and that “Sunder was not and could not have been on
notice of Jackson’s fiduciary duty defense based on the vague unclean hands
defense” or Jackson’s positions during discovery.149
Jackson responds that “to the extent [he] was required to raise an affirmative
defense to present an argument regarding the lack of enforceability of the LLC
Agreement based on Nielsen and Britton’s fraud and fiduciary breaches, [he] did
so.”150 Specifically, Jackson argues that by raising the “unclean hands” defense in
his Answer, he satisfied Court of Chancery Rule 8 and put Sunder on notice.151
Further, Jackson argues that he “diligently pursued” the fiduciary duty defense in a
detailed motion to compel, an amended pleading, and briefing.152
We review for abuse of discretion the Court of Chancery’s decision to permit
amendment to the pleadings or to consider an affirmative defense.153 Appellant
148 Appellant’s Opening Br. at 32. 149 Id. at 33. 150 Jackson’s Answering Br. at 37. Appellees the Freedom Defendants join Jackson in his response to this appellate claim. Freedom Defendants’ Answering Br. at 3. 151 Id. 152 Id. at 38. 153 See Realty Enters., LLC v. Patterson-Woods, 11 A.3d 228, 2010 WL 5093906, at *4 (Del. 2010) (TABLE); Abdi, 2008 WL 787564, at *2; H & H Poultry, 408 A.2d at 291.
36 blends its discussion of notice and waiver in its briefing. We see these as two
separate issues—neither of which supports reversal—and address them as such.
The record shows that Appellant had adequate notice of this defense and an
opportunity to respond to it. Jackson pleaded unclean hands as an affirmative
defense in his Answer.154 Further, he pursued a fiduciary duty defense in a Motion
to Compel filed October 30, 2023,155 a Motion for Leave to File a Third Party
Complaint filed November 13, 2023,156 and briefing filed November 14, 2023.157 As
the Court of Chancery correctly pointed out, “[i]n expedited litigation, parties often
raise arguments during injunction briefing that have not been fully spelled out in the
pleadings.”158
For similar reasons, we can discern no waiver through Jackson’s conduct in
the litigation. Waiver is a discretionary tool used by the court to prevent unfair
surprise.159 Appellant was aware of the unclean hands affirmative defense and had
the opportunity to respond to Jackson’s fiduciary duty arguments in its reply brief in
154 App. to Appellant’s Opening Br. at A566; Del. Ct. Ch. R. 8(c). 155 Court of Chancery Docket I.D. No. 71235337 (Motion to Compel). 156 App. to Appellant’s Opening Br. at A2088. 157 Id. at A2098. 158 Sunder Energy, 2023 WL 8868407, at *5. 159 See, e.g., Ratcliffe v. Fletcher, 690 A.2d 466, 1996 WL 773003, at *2 (Del. 1996) (TABLE) (citing Mullen v. Alarmguard of Delmarva, Inc., 625 A.2d 258, 262–63 (Del. 1993)) (“We noted that leave to amend under Superior Court Civil Rule 15 is granted liberally and that a ruling permitting amendment of a pleading is a highly discretionary one.”).
37 the injunction proceedings.160 Under those circumstances, we struggle to identify
any unfair surprise or prejudice that Appellant suffered. The cases that Appellant
cites in support of its argument161 all address un-pleaded affirmative defenses raised
at the pre-trial stage and not a preliminary injunction stage.162
Additionally, Appellant’s argument presumes that Jackson was required to
plead an affirmative defense to challenge the enforceability of the LLC Agreement
based on Nielsen and Britton’s conduct.163 But Appellant had the burden of
establishing an enforceable contract as an element of its claim in order to obtain a
preliminary injunction.164 The Court of Chancery therefore did not abuse its
discretion in considering the merits of Jackson’s defense.
160 App. to Appellant’s Opening Br. at A2183–86. 161 Appellant’s Opening Br. at 31. 162 See Alexander v. Cahill, 829 A.2d 117, 128 (Del. 2003) (“While this defense may also have merit, the defense never gave notice before trial that it would raise the defense at trial.”) (emphasis added); Realty Enterprises, 2010 WL 5093906, at *4 (“[Realty] did not raise any claims against the Bariglio brothers in the pretrial stipulation.”) (emphasis added); Kaufman v. DNARx LLC., 2023 WL 9060288, at *4 (Del. Ch. Dec. 29, 2023) (finding defense waived when defendant failed to plead the defense) (emphasis added). 163 See Appellant’s Opening Br. at 29. 164 See Sunder Energy, 305 A.3d at 746 (“Sunder's claim for breach of the Covenants is a claim for breach of contract. The elements of a claim for breach of contract are ‘(i) a contractual obligation, (ii) a breach of that obligation by the defendant, and (iii) a causally related injury that warrants a remedy, such as damages or in an appropriate case, specific performance.’”); see also Braga Inv. & Advisory, LLC v. Yenni Income Opportunities Fund I, L.P.,, 2020 WL 3042236, at *8 (Del. Ch. June 2020) (“To establish a claim for breach of contract under Delaware law, a plaintiff must prove: (i) the existence of a valid and enforceable contract . . . .”).
38 2. The Court of Chancery’s ruling that the entire operating agreement was unenforceable as a matter of law exceeded the scope of the preliminary injunction motion.
Sunder also argues that, even if the Court of Chancery properly considered
Jackson’s fiduciary duty defense, the court exceeded its authority in a preliminary
injunction proceeding by ruling that Nielsen and Britton breached their fiduciary
duties as a matter of law. In this portion of its opinion, the court held that:
The record demonstrates that the Minority Members had no idea what Nielsen and Britton had accomplished. When questioned about their rights under the 2021 LLC Agreement and then confronted with its actual terms, the Minority Members consistently evidenced shock and surprise about what the agreement said. And that testimony came from Minority Members aligned with Nielsen and Britton.
Even at this preliminary stage, it is clear as a matter of law that Nielsen and Britton breached their fiduciary duty of disclosure in connection with the 2019 LLC Agreement and 2021 LLC Agreement. Nielsen and Britton therefore cannot enforce the terms of the 2021 LLC Agreement against Jackson.165
The court later wrote “[t]hat does not mean that Sunder is destined to lose at trial[,]”
but “Sunder cannot enforce the Covenants as a matter of law . . . [or] rely on those
provisions to secure a remedy from Jackson.”166
165 Sunder Energy, 305 A.3d at 751 (emphasis added). 166 Id. at 762.
39 Appellant argues that this holding exceeded the issues raised by the parties in
the preliminary injunction proceeding. This Court has described the issues raised by
a motion for a preliminary injunction as follows:
When seeking a preliminary injunction, a plaintiff must demonstrate a reasonable probability of success on the merits and that some irreparable harm will occur in the absence of the injunction. Furthermore, in evaluating the need for a preliminary injunction, the Court must balance the [moving party’s] need for protection against any harm that can reasonably be expected to befall the [non-moving party] if the injunction is granted.167
More succinctly, the standard requires proof of three elements: “(i) a reasonable
probability of success on the merits; (ii) irreparable harm absent interim relief; and
(iii) that the balance of the equities favors the relief requested.”168 Those were the
questions before the trial court in this case.
Motions for preliminary relief often require a trial court to consider legal
issues. But the court generally is resolving those issues under the “reasonable
probability of success” standard. That was the case here, and the record amply
supported the trial court’s conclusion that Sunder could not demonstrate a reasonable
probability of success on the merits because the circumstances surrounding the LLC
Agreements’ adoption raised serious questions as to whether the Covenants were
167 Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1278 (Del. 1989) (citing Gimbel v. Signal Companies, Inc., 316 A.2d 599, 603 (Del. Ch. 1974), aff’d, 316 A.2d 619 (Del. 1974); Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 179 (Del. 1986)). 168 In re New Maurice J. Moyer Acad., Inc., 108 A.3d 294, 311 (Del. Ch. 2015) (citing Revlon, 506 A.2d at 179).
40 enforceable. The court ruled that “[w]hen Nielsen and Britton solicited the Minority
Members’ approval for the 2019 LLC Agreement, they owed a fiduciary duty to
disclose fully and fairly all material information, as well as a duty not to make
misleading partial disclosures.”169 The court described the 2019 LLC Agreement as
“an astoundingly one-sided document, stacked with provisions drafted in Nielsen
and Britton’s favor.”170 The document contained eighteen changes to the parties’
original understanding171 all of which “should have been called out for the Minority
169 Sunder Energy, 305 A.3d at 750. 170 Id. 171 The Vice Chancellor highlighted the following changes to the 2019 LLC Agreement: “[(1)]Eliminated all fiduciary duties, turning Sunder into a purely contractarian entity; [(2)] Created a manager-managed entity in which Sunder was managed by a Board of Managers consisting only of Nielsen and Britton or their appointees; [(3)] Authorized the Board of Managers to approve compensation agreements with selected members “in its sole discretion”; [(4)] Created two classes of member units–Common Units for Nielsen and Britton and Incentive Units for the other Co-Founders; [(5)] Eliminated voting rights for the Incentive Units, ensuring that Nielsen and Britton exercised 100% of the voting power; [(6)] Ensured that the Incentive Units have no consent rights; [(7)] Reiterated yet again that the Incentive Units have no voting or consent rights; [(8)] Turned each Minority Member’s grant of 8,000 Incentive Units into a combination of 1,600 vested units, with another 1,600 units to vest on each anniversary after that; [(9)] Provided for the automatic forfeiture of any unvested Incentive Units if any holder left Sunder; [(10)] Gave Sunder a call option on the Incentive Units for zero dollars per unit if any holder left Sunder without ‘Good Reason’ or was terminated for cause; [(11)] Eliminated informational rights for holders of Incentive Units; [(12)] Imposed transfer restrictions on the Incentive Units so that they could not be transferred to any third party without Sunder's consent and any transfer would be subject to a right of first refusal in favor of Nielsen and Britton—but not any other Co-Founder; [(13)] Authorized Nielsen and Britton to drag all of the holders of Incentive Units into a third-party transaction; [(14)] Granted pre-emptive rights to Nielsen and Britton, but not any other Co- Founder; [(15)] Provided Nielsen and Britton—but not any other Co-Founder—with broad indemnification and advancement rights; [(16)] Recited that all of the signatories made various representations in connection with entering into the 2019 LLC Agreement; [(17)] Recited that each party had the opportunity to review the 2019 LLC Agreement with independent legal counsel and that Snell & Wilmer only represented Sunder in connection with the preparation of the document; [and] [(18)] [m]ost significantly for this case, Article XIII of the 2019 LLC Agreement added the
41 Members.”172 The court therefore concluded that Sunder had not met the first prong
of the preliminary injunction standard.
The inquiry, however, did not need to go further, and to the extent that the
trial court’s opinion can be read as determining as a matter of law that the operating
agreement was unenforceable with respect to all signatories, the court strayed
beyond the legal and factual questions presented at the preliminary injunction stage
of the proceeding. If we were to affirm that holding in the sweeping way that it
could be read, it would result in unfair surprise and potential unintended
consequences for all signatories, including those who were not parties to the
litigation, as well as possible consequences for Sunder’s creditors and business
partners.
A motion for a preliminary injunction is presented on a limited discovery
record, with a truncated schedule, and in an abbreviated proceeding before the trial
court. The standard therefore requires the court to weigh probabilities and equities,
rather than make final conclusions regarding the merits of the parties’ legal
positions. Accordingly, upon remand, whether the operating agreement is
enforceable against Jackson remains an open question. If the parties engage in
Covenants. Article XIII also imposed a contractual confidentiality obligation on the holders of Incentive Units—and only the holders of Incentive Units.” Id. at 734–35. 172 Id. at 750.
42 further proceedings before the trial court, it may become necessary for the Court of
Chancery to make a final determination regarding enforceability as a matter of law,
but the parties will be able to present a complete record to the court before asking it
to make that ruling.
C. The Court of Chancery correctly held that Utah law applied to Appellant’s tortious interference claim.
Finally, Appellant argues that the Court of Chancery erred in ruling that Utah
law governs Appellant’s tortious interference claim against the Freedom Defendants,
which had the effect of dismissing that claim.173 Both parties agree that Delaware
courts use the principles from the Restatement (Second) of Conflicts of Law and
apply the laws of the jurisdiction with the most significant relationship to the
dispute.174 Appellant does not take issue with the court’s application of any of those
principles but instead argues that, although “[t]he facts of this case implicate many
states’ interests[,] . . . [t]he only common ground these parties share . . . is Delaware,
where they all do business and deliberately chose to organize their LLCs.”175 Rather
than challenge the court’s analysis under the Restatement, Appellant argues that the
Restatement is “flexible” and “Delaware law has the most significant interest in this
173 Appellant’s Opening Br. at 40. 174 Id.; Freedom Defendants’ Answering Br. at 35. 175 Appellant’s Opening Br. at 41.
43 claim and should thus govern its adjudication.”176 Appellees argue that the court
“correctly applied the routine choice-of-law analysis employed by Delaware courts
to determine which law should apply to specific legal claims.”177
The Court of Chancery identified and thoroughly analyzed the Restatement
factors to determine which jurisdiction has the most significant relationship to this
controversy.178 For a tortious interference claim, a court considers four factors:
1) the place where the injury occurred; 2) the place where the conduct causing the injury occurred; 3) the domicile, residence, nationality, place of incorporation and place of business of the parties; and 4) the place where the relationship, if any, between the parties is centered.179
For the first factor, the Court of Chancery reasoned that “[w]hen an injury consists
of the loss of customers or business, ‘[t]he effect of the loss, which is pecuniary in
its nature, will normally be felt most severely at the plaintiff’s headquarters or
principal place of business.’”180 The court went on to find that Sunder is
headquartered in Utah, its injury therefore occurred in that state, and accordingly the
first Restatement factor favored applying Utah law.181 Appellant does not address
this finding on appeal.
176 Id. at 42. 177 Freedom Defendants’ Answering Br. at 35. 178 Sunder Energy, 305 A.3d at 760 (citing Restatement (Second) of Conflict of Laws § 145(1) (1971)). 179 Id. 180 Id. (citing and quoting Restatement (Second) of Conflict of Laws § 145(1) cmt. f. (1971)). 181 Id. at 760.
44 The court found that the second factor was “immaterial” in this case because
the conduct did not take place in either Utah or Delaware.182
As to the third factor, the court considered Appellant’s argument that “the
court should apply Delaware law when determining whether two Delaware LLCs
and their executives tortiously interfered with the LLC agreement of another
Delaware LLC,” but concluded that “the Restatement says otherwise.”183 The court
therefore held that “[b]ecause Sunder’s principal place of business is in Utah, this
factor favors the application of Utah law.”184
Finally, regarding the fourth factor, neither party contended that their
relationship was centered in Delaware. The court stated that:
[t]o the extent the relationship between Sunder and Jackson is what matters (on the theory that that relationship was the subject of the tortious interference), then the relevant jurisdictions are Utah and Texas. To the extent the relationship between Sunder and Freedom is what matters, the relevant jurisdictions are Utah and California. To the extent the relationship between Sunder and Solar Pros is what matters, the relevant jurisdictions are Utah and Nevada. As between Utah and Delaware, this factor favors Utah.185
Once again, Appellant does not specifically challenge this finding on appeal.
182 Id. at 761. 183 Id. 184 Id. 185 Id.
45 The Court of Chancery applied the correct significant-relationship test to the
choice-of-law question, and we can discern no error in the court’s application of the
facts to that test. We therefore affirm the court’s conclusion that Utah law applied
to Appellant’s tortious interference claim.
IV. CONCLUSION
For the foregoing reasons, we affirm the Court of Chancery’s decision
denying Sunder’s preliminary injunction motion. We reverse only the portion of the
court’s ruling that determined as a matter of law that the LLC Agreement was not
enforceable.
Related
Cite This Page — Counsel Stack
Sunder Energy, LLC v. Tyler Jackson, Counsel Stack Legal Research, https://law.counselstack.com/opinion/sunder-energy-llc-v-tyler-jackson-del-2024.