CLEVELAND INTEGRITY SERVICES, LLC, a Delaware Limited Liability Company, v. RANDY BYERS; CLEVELAND INTEGRITY SERVICES, LLC, a Delaware Limited Liability Company, v. MICHAEL FRYE
C.A. No. 2024-0371-MTZ; C.A. No. 2024-0372-MTZ
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
February 28, 2025
ZURN, Vice Chancellor.
Date Submitted: December 4, 2024
Andrew L. Cole, Nathaniel J. Klepser, Austin R. Niggebrugge, COLE SCHOTZ P.C., Wilmington, Delaware, Attorneys for Defendants Randy Byers and Michael Frye.
MEMORANDUM OPINION
ZURN, Vice Chancellor.
In early 2024, one of the founders resigned to start a competing business and recruited the other founder, and other plaintiff employees, to join his venture. Their business poached at least one customer from the plaintiff. Soon after, the plaintiff sued the founders for breach of the restrictive covenants and sought a preliminary injunction.
Two restrictive covenants are at issue: a noncompetition provision and a nonsolicitation provision. This opinion concludes the noncompetition provision is overbroad and unenforceable. But the nonsolicitation provision is enforceable, and the plaintiff is entitled to a preliminary injunction enforcing it.
Plaintiff Cleveland Integrity Services, LLC (“Plaintiff“) provides pipeline inspection services in the United States.2 In 2023, it serviced customers in thirty-six states.3 Plaintiff‘s customers have operations in the U.S., Canada, and Mexico,4 but Plaintiff itself has only had one limited subcontracting agreement that sent its inspectors outside the U.S,5 and it does not currently provide services outside the U.S.6 Defendants Randy Byers and Michael Frye (together, “Defendants“)
In 2013, Nautic Partners (“Buyer 1“) purchased CIS Inc. via a stock purchase
A. The Restrictive Covenants
Defendants agreed to two restrictive covenants as part of the 2013 SPA: a noncompetition provision (the “Noncompete“) and a nonsolicitation provision (the “Nonsolicit” and together with the Noncompete, the “Restrictive Covenants“). The Restrictive Covenants operate during a “Restricted Period” defined as the “later of (A) five (5) years from [closing] and (B) if applicable, two (2) years from the date of termination of employment with [CIS Inc.]”12
The Noncompete provides that, during the Restricted Period, Defendants
shall not directly or indirectly (including through an Affiliate) own, have an interest in, operate, join, control or participate in, or be connected with as an officer, employee, director, proprietor, member, manager, partner, investor, creditor, adviser, sales representative, agent, consultant or otherwise, any business similar to or competitive with the Business . . . anywhere in [North America].13
the business of [CIS Inc.] and its Subsidiaries, including without limitation the ownership and operation of the business of (i) providing inspection, integrity assessment, design and engineering, and maintenance and services to the oil and gas pipeline industry and the utility industry, and (ii) any other line of business in which, during the Restricted Period, [CIS Inc.] or any of its Subsidiaries is engaged or has plans to be engaged.14
The Nonsolicit provides that, during the Restricted Period, Defendants
shall not, directly or indirectly (including through an Affiliate):
(i) (A) hire, offer to hire, solicit for hire, or attempt to do any of the foregoing, any Person who is or was at any time during the Restricted Period an officer, manager or employee of [CIS Inc.] or any Subsidiary of Parent [Holdco] or an agent or consultant to [CIS Inc.] or a Subsidiary of Parent [Holdco], or (B) divert, entice away, or in any other manner persuade or encourage any person who is or was at any time during the Restricted Period an officer, manager or employee of [CIS Inc.] or any Subsidiary of Parent [Holdco] to terminate such person‘s employment with [CIS Inc.] or such Subsidiary of Parent [Holdco], accept employment with a third party, or engage in any of the activities prohibited under Section 7.5(a) above, or subparagraph (ii) below; or
(ii) solicit, divert, entice away, or in any other manner persuade or encourage, or attempt to solicit, divert, entice away, persuade or encourage, any customer, partner, joint venturer, referral source, payor, supplier, vendor, licensee, licensor, developer, consultant or other business relation of [CIS Inc.] or any Subsidiary of Parent [Holdco] during the Restricted Period, to cease doing or materially reduce its business with [CIS Inc.] or such Subsidiary of Parent [Holdco], or in any way interfere with the relationship between any such third party, on the one hand, and [CIS Inc.] or any Subsidiaries of Parent [Holdco],
on the other hand.15
The 2013 SPA defines “Affiliate” to include the specified individual‘s family members as well as any entity “directly or indirectly controlling, controlled by or under direct or indirect common control with” such individual.16
B. Defendants’ Cleveland Roles
Byers has held several roles in the Cleveland corporate structure. Before he sold CIS Inc., he was the company‘s president.17 He was suited for the role, having worked in pipeline inspection from the age of thirteen and having built an industry reputation through prior leadership positions in pipeline inspection at four companies.18
Byers served an important customer relations function at Cleveland.22 Over the course of his career, Byers had built extensive relationships in the oil and gas industry that were valuable to Cleveland.23 His experience and relationships allowed him to network with clients and potential clients while at Cleveland, and to mentor other Cleveland employees in dealing effectively with customers.24 As a Cleveland employee, Byers attended industry events alongside other employees, clients, and prospective clients to generate new business and maintain relationships with current
In 2015, Byers became chairman and CEO of CIS Inc.‘s parent company, Applied-Cleveland Holdings, Inc. (“Parent“).28 At the time of the 2013 SPA, Parent owned CIS Inc. and two other subsidiaries: Applied Consultants, Inc. and Central NDT, Inc.29 Applied Consultants is a pipeline inspection company that provides services nationwide.30 During Byers‘s tenure as Parent CEO, Applied Consultants formed a Mexican subsidiary that provides inspection services in Mexico.31 Applied Consultants has tried to expand into the Caribbean and Canada as well.32 Central NDT provides nondestructive testing services to oil and gas companies nationwide.33
In 2018, Parent acquired two more subsidiaries: Perennial Environmental I, LLC (“Perennial“) and Encompass Services, LLC (“Encompass“).34 Perennial
Byers remained Parent‘s chairman and CEO, where he had ultimate responsibility not only for CIS Inc., but for the other Parent subsidiaries—Applied Consultants, Central NDT, Perennial, and Encompass (collectively, the
In his role at Parent, Byers had access to the Subsidiaries’ confidential information, including financials, pricing information, customer lists, and an employee database containing information regarding performance, roles and responsibilities, and clients serviced.44 He also had access to the organization‘s Salesforce platform, a customer-relationship-management tool that Parent and the Subsidiaries used to share confidential customer information, but he did not regularly use that platform.45 Byers possessed some confidential information related to Parent‘s business in hard copy form.46
In 2023, after Cleveland faced financial distress and was acquired by another
Despite the change in title, Byers remained on Cleveland‘s payroll.52 Neither Byers nor Cleveland terminated his employment agreement, and Cleveland “continue[d] to pay [Byers‘s] salary and benefits.”53
On January 15, 2021, Frye submitted “formal notice of [his] resignation from the position of Chief Accounting Officer . . . effective April 2, 2021.”56 The notice stated, “If there is a desire, I am open to remaining engaged in some capacity after April 2nd but we would need to discuss the terms and conditions of such an arrangement.”57 But Frye did not follow through with his resignation.58 Frye “had expressed concern when he had given that notice of resignation that he felt overworked and lacked appropriate resources,” but “the company committed to hire more people to help him, and he ended up staying with the company.”59 Frye experienced no break in service or reduction in salary after giving notice, and he
C. Cleveland Is Acquired Twice.
After Defendants agreed to the Restrictive Covenants in 2013, those promises were buffeted by two subsequent transactions. Three years after Buyer 1 purchased CIS Inc. and secured the Restrictive Covenants in the 2013 SPA, it sold CIS Inc. to another private equity firm, First Reserve (“Buyer 2“), via another stock purchase agreement (the “2016 SPA“).61 Owl Rock Capital Corp. (“Lender“) financed that acquisition.62 Section 7.13 of the 2016 SPA contained a covenant to terminate a broadly defined set of contracts and obligations—excluding contracts listed in a corresponding schedule—and to deliver evidence of such termination to Buyer 2.63
In 2023, CIS Inc. went through bankruptcy. The previous year, Lender had declared a default and negotiated an agreement to purchase CIS Inc.‘s assets through a prepackaged Chapter 11 bankruptcy.64 CIS Inc. transferred “[a]ll rights under non-disclosure or confidentiality, non-compete or non-solicitation agreements with employees” to Plaintiff under an asset purchase agreement (the “APA“).65 When I
D. Formation Of Byers & Partners And Resignations From Plaintiff
Around December 2023—while Defendants were still employed at Cleveland—Byers and his spouse, Cheryl Byers,67 began discussing plans to form a new pipeline inspection company that would compete with Cleveland.68 At that time, they did not intend for Byers to have any initial role in the company; Byers intended to take at least three months off after leaving Cleveland.69
But by early January, Byers had communicated plans to form his company to Frye and two other Cleveland employees: Bradley Harmon (a Cleveland executive vice president involved in business development)70 and David Travis (Cleveland‘s manager of field services).71 Harmon was the “face” of Cleveland by that point, and Travis brought in “a great deal” of Cleveland‘s business.72 Byers
Byers did not think these discussions with current Plaintiff employees were inappropriate because he “didn‘t think any of [them] had restrictions.”76 Byers was “pretty confident” his own restrictions “didn‘t hold up in Oklahoma but wasn‘t considering Delaware.”77 Byers knew Harmon had also agreed to restrictive covenants, but recalled Harmon telling him the covenants were unenforceable.78
The Byerses worked with counsel to form Byers & Partners, LLC as the new company‘s operating entity, and Our Gang Energy, Inc. (“Our Gang“) as its sole
Once Byers & Partners and Our Gang were formed, the Byerses invested $1.2 million in marital assets under Cheryl‘s name.83 Frye, Harmon, Travis, and their spouses also invested in Our Gang.84 Byers was “very involved” in soliciting investors.85 In addition to recruiting Frye, Harmon, and Travis, he emailed other prospective investors, made phone calls, and hosted a meeting to recruit investors at the Byerses’ lodge.86 In total, the Byerses recruited twenty investors for Our Gang.87 These investors include individuals with connections to current Plaintiff customers and several individuals employed by Plaintiff when this action began.88
Byers, Frye, and Travis then visited a representative of Plaintiff customer Duke Piedmont to try to secure its business.95 Harmon reached out to a third Plaintiff customer about attending a golf tournament, again hoping to secure the customer‘s business.96 Harmon and Byers collectively solicited at least five Plaintiff customers,
E. Procedural History
On April 9, 2024, Plaintiff filed its complaint, a motion to expedite, and a motion for a temporary restraining order against Defendants.98 After briefing and oral argument, I granted the TROs on June 4.99 But Byers continued attending industry events to promote Byers & Partners, prompting Plaintiff to file a motion for contempt.100 On August 29, I denied the motion for contempt, but modified the TRO to enjoin Defendants from attending industry events, socializing with industry participants, socializing with people who represent customers, and wearing Byers & Partners branded swag.101
On September 12, Plaintiff filed a motion for preliminary injunction, initially seeking to enforce both Restrictive Covenants against both Defendants.102 Plaintiff modified its requested relief when it submitted its opening brief, and it now seeks to enforce the Noncompete against both Defendants, and the Nonsolicit against
II. ANALYSIS
“This Court has broad discretion to grant or deny a preliminary injunction.”107 To obtain a preliminary injunction, the movant must demonstrate: (i) a reasonable probability of success on the merits; (ii) a threat of irreparable injury if an injunction is not granted; and (iii) that the balance of the equities favors the issuance of an injunction.108 A party showing a reasonable probability of success must demonstrate
Plaintiff seeks a preliminary injunction enforcing restrictive covenants. “[A]greements not to compete must be closely scrutinized as restrictive of trade.”111 “Because the specific enforcement of such covenants involve important interests of commercial enterprises and of individuals seeking to support themselves and their families financially, and because, in that setting, the court is asked to exercise its distinctively equitable powers, each such case requires a careful evaluation of the specific facts and circumstances presented.”112 Restrictive covenants are enforceable when they (i) are valid under general principles of law, (ii) are reasonable in their scope and effect, (iii) bear a reasonable relationship to the advancement of legitimate interests, and (iv) survive a balancing of the equities.113
Delaware courts evaluate restrictive covenants “holistically and in context.”116 “A court must not tick through individual features of a restriction in isolation, because features work together synergistically.”117 Courts generally assess the validity of a restrictive covenant at the time of contracting; then, “[a]ssuming that there is a valid covenant, the request for specific performance raises other issues that do not focus upon the time of contracting, but upon the time of enforcement.”118 But where a restrictive covenant advances an employer‘s interest in expanding into new
In considering whether a covenant advances a legitimate interest, this Court has considered whether the plaintiff has demonstrated an interest in protecting not only the plaintiff, but also the plaintiff‘s affiliates.120 “Including affiliates in a restrictive covenant greatly expands the covenant‘s breadth, and therefore requires a broader legitimate economic interest.”121 Access to the affiliates’ confidential information is generally necessary to justify a restrictive covenant that includes affiliates.122
A. The Restrictive Covenants Are Valid Contractual Promises.
Defendants do not dispute that the 2013 SPA was a valid contract when it was executed. Instead, Defendants argue the 2013 SPA and its Restrictive Covenants did not survive the 2016 SPA or APA. The Restrictive Covenants survived both
B. Plaintiff Has Not Shown A Reasonable Likelihood Of Success On The Merits As To The Noncompete: It Is Unenforceable.
Plaintiff seeks to enforce the Noncompete against both Defendants. This opinion gives the Restrictive Covenants, entered into when CIS Inc. was sold to Buyer 1, the additional latitude afforded in the context of a sale of a business.129 The Noncompete has two temporal components. It lasts until the later of five years from the 2013 SPA and two years from termination of employment with Cleveland.130 The five-year component expired in 2018, so Defendants do not challenge its reasonableness.
Starting with the two-year component: viewed in isolation, particularly for key employees in the context of a sale of a business, that period might be
But when that two-year period is combined with a geographic scope prohibiting competition anywhere in North America, the Noncompete is facially broader than necessary to protect Plaintiff‘s U.S. business interests.132 While Plaintiff may have customers with operations or assets in Canada and Mexico, Plaintiff only services such customers within the U.S.133 Plaintiff‘s oil and gas pipeline inspection business is geographically rooted: its employees must physically
Plaintiff argues, based on reasoning in Research & Trading Corp. v. Pfuhl,136 that it may protect its “goodwill where its customers are located.”137 But Pfuhl‘s reasoning relates to restrictions on soliciting those customers. Pfuhl held that if an employer‘s customer base extends “internationally, and the employee would gain from the employment some advantage in any part of that market, then it is
Plaintiff also cites Kan-Di-Ki v. Suer for the proposition that the restricted area does not need to “map perfectly onto the geographical area of the plaintiff‘s business” because it is the “employer‘s goodwill in a particular market that is entitled to protection.”140 In Kan-Di-Ki, the noncompete covered “the twenty-three states west of the Mississippi River” even though the employer only operated in eight states at the time of contracting.141 The scope was still reasonable because “during the period of the Non-Competition Provisions’ effectiveness, [the] business expanded to include” most of the remaining covered states.142 Plaintiff is correct that a noncompete‘s geographic scope need not perfectly match the employer‘s
Here, at the time of contracting in 2013, the Noncompete‘s North American scope may have been reasonable as a means to protect its interest in expanding its services beyond the U.S. free from Defendants’ interference. But Plaintiff‘s business has not expanded beyond the U.S., and Plaintiff has offered no evidence that it plans to do so.143 At the time of enforcement, in 2025, Plaintiff bears the burden of showing the covenant‘s scope advances a legitimate economic interest.144 Time has shown that any 2013 interest in expansion has gone unfulfilled. The Noncompete is geographically overbroad.145 Coupled with a two-year duration, it is unenforceable.146
Given this conclusion, Plaintiff contends “blue penciling would be appropriate” because any overreaches are only “in the margins.”147 While this Court has, in some instances, used its discretion to blue pencil overly broad restrictive covenants, doing so creates confusion, encourages employers to overreach, and encourages litigation “by building a degree of uncertainty into every employment agreement.”148 To be sure, the geographic overreach from Plaintiff‘s United States interests could be worse. But the point remains that Plaintiff has no legitimate business interest in countries outside of the United States, much less one that could support a two-year noncompete: enforcing an overbroad noncompete carries systemic costs. I decline, in my discretion, to blue-pencil the parties’ negotiated agreement.149
Plaintiff seeks to enforce the Nonsolicit against Byers, but not Frye. For the reasons below, I conclude the Nonsolicit is enforceable and that Byers breached it.
1. The Nonsolicit Is Enforceable.
Plaintiff has demonstrated a reasonable probability of success on the merits as to the Nonsolicit. As explained, the Restrictive Covenants survived the 2016 SPA and bankruptcy APA, so the Nonsolicit is valid under contract law.
It is also enforceable under the law governing restrictive covenants. The Nonsolicit does not have a geographic scope, as it is tied to business relationships rather than locations.150 Byers does not challenge the Nonsolicit‘s undefined geographic scope. He argues more generally that “the geographic scope of the non-compete restriction renders the post-employment restrictive covenants unenforceable.”151 While courts may consider the interaction between multiple restrictive covenants to assess reasonableness,152 nothing about the Noncompete‘s geographic scope bears on the Nonsolicit‘s reasonableness.
The Nonsolicit advances legitimate business interests as it applies to Plaintiff. It lasts for two years. Like the Noncompete, the Nonsolicit‘s two-year duration does
Byers played an integral role in Cleveland‘s customer relations. He attended events and dinners to attract and maintain customers.155 He mentored other Cleveland employees on how to deal with customers.156 And when he was demoted from his executive position, Parent placed him in a customer-facing role to leverage his reputation and client relationships.157 Indeed, Byers & Partners bears Byers‘s
The Nonsolicit applies not just to Plaintiff, but also to Parent‘s Subsidiaries.162 This also advances Plaintiff‘s legitimate business interests. While including affiliates expands the Nonsolicit‘s scope, that broader scope is justified here by a broader economic interest. Parent collected subsidiaries in related industries under one corporate umbrella to create synergies by enabling cross-selling and information sharing.163 Plaintiff benefits from that insofar as it can successfully cross-sell to customers of the Subsidiaries. By the same token, Plaintiff is harmed when an affiliate customer reduces its business with that affiliate: if the customer has a weaker relationship with the affiliate, cross-selling to that customer is more difficult. If the customer ceases doing business with the affiliate, cross-selling to that customer becomes impossible.164
Plaintiff has also shown it is harmed when a Subsidiary employee leaves for a competitor. For Plaintiff, employee stability nurtures better collaboration among Subsidiaries, increasing cross-selling potential.165 Employee stability also promotes deeper customer relationships, again improving cross-selling potential.166 The same logic applies to maintaining stable relationships with suppliers and other business relations that can support a web of cross-selling customer relationships. While Plaintiff does not have an interest in preventing Byers from engaging with such parties altogether, it does have an interest in preventing Byers from interfering in its relationships with such parties.
Plaintiff has demonstrated it is likely to prove by a preponderance of the evidence that Byers had access to the Subsidiaries’ confidential information, providing a potential advantage in soliciting employees, customers, and other business relations.167 As Parent‘s CEO, he had access to the Subsidiaries’ financials, pricing information, customer lists, and a proprietary database containing various
Plaintiff has also shown it will likely prove its interest in protecting Parent‘s business model against Byers‘s interference at the time of the 2013 SPA, even though Parent had only acquired two of the four Subsidiaries and had yet to change its name to reflect the company‘s broader range of services. Byers testified that before he became Parent‘s CEO in 2015, the organization was not where company
Byers makes several counterarguments in response. First, he argues the restriction is overbroad because it “prohibits various activities” not only with respect to customers, but also to any “partner, joint venturer, referral source, payor, supplier, vendor, licensee, licensor, developer, consultant or other business relation.” But the provision is narrower than Byers implies. Unlike its restriction with respect to employees, the Nonsolicit does not provide for a blanket ban on soliciting business relations. Byers may still engage with Plaintiff‘s customers, suppliers, and other business relations as long as he does not interfere with Plaintiff‘s relationships with such parties. Rather than overbroad, the Nonsolicit appears tailored to protect Plaintiff‘s legitimate interests as it applies to Plaintiff‘s business.
Next, he contends Plaintiff has offered only “lip service” justifying the Nonsolicit‘s extension to the Subsidiaries that does not evince a sufficiently strong
Byers next argues the Nonsolicit is overbroad because it prohibits Byers from soliciting Subsidiary customers “to cease doing or materially reduce [their] business, regardless of whether Byers ever had any contact with such persons or even knows who they are.”176 Byers is correct that restrictive covenants including affiliates risk being overbroad.177 Recent cases—in particular Fortiline, Inc. v. McCall,178 Hub
Where a plaintiff fails to show any legitimate business interest served by shielding all its unspecified affiliates from the restrained party‘s competition, and fails to show the restrained party had access to any kind of information that would warrant that restriction, the plaintiff has failed to justify the restrictive covenant as drafted.185
The Nonsolicit here does not present the same problems. There are a limited number of known affiliates.187 The Subsidiaries cross-sell. Byers had access to their confidential information and was responsible for their business development.188 The Nonsolicit is considerably narrower than the covenants in Hub Group and Ainslie.189 And while complying with the provision may require Byers to identify whether a customer or employee is a Subsidiary customer or employee, that is not an
Byers next argues the Nonsolicit is unenforceable because Cleveland breached his employment agreement when it demoted him to the business development role at Parent.191 Indeed, Byers‘s employment agreement named him as Cleveland‘s president and CEO.192 But Byers does not explain why that demotion excuses his obligations under the Nonsolicit in the 2013 SPA, which is not tied to his employment as an executive, but rather to his employment at Cleveland.193 Byers remained on Cleveland‘s payroll.194 His demotion to a business development role in 2023 does not affect the enforceability of the Nonsolicit.
2. Byers Breached The Nonsolicit.
Byers breached the Nonsolicit by soliciting Frye, Harmon, and Travis to join Byers & Partners.199 Plaintiff has also shown Byers likely interfered with its relationship with Southern Star in breach of the Nonsolicit by meeting with Southern
D. Irreparable Harm
Delaware law recognizes that a breached restrictive covenant causes irreparable harm.202 Measuring the effects of such breaches “involves a costly
E. Balance Of The Equities
Byers received more than $12 million in the 2013 SPA when he agreed to the Nonsolicit.204 He was a sophisticated seller represented by counsel.205 The fact that he agreed to the Nonsolicit twelve years ago does not make it inequitable to enforce. Byers agreed to contractual language that started the clock on the two-year component of the Nonsolicit when his employment at Plaintiff ended, regardless of how long after the 2013 SPA that occurred. There is no inequity in holding Byers to the bargain he struck. This is particularly so when this decision allows Byers to work in his chosen field, and prohibits him only from unfair competition via solicitations from Plaintiff that interfere with Plaintiff‘s employee base and customer relationships.
Plaintiff has “ask[ed] the Court to find that Byers, Frye, and their spouses must divest their interest in Our Gang, and that Cheryl Byers, who has been acting in concert with Byers & Partners, must also be enjoined from owning, operating, or having any involvement in Our Gang and Byers & Partners.”206 Investing in Our Gang might be prohibited under the Noncompete‘s restriction on investing in a competitive business.207 And Cheryl‘s involvement in Our Gang and Byers & Partners might be prohibited under the Noncompete as Byers‘s indirect involvement in a competitive business.208 But because the Noncompete is unenforceable, Defendants will not be ordered to comply with it. And that conduct, standing alone, is not barred by the Nonsolicit, as it does not solicit Plaintiff‘s employees for hire, solicit Plaintiff‘s business relations to cease or materially reduce their business with Plaintiff, or interfere with Plaintiff‘s relationships with its business relations.209
Byers shall comply with the Nonsolicit. He may not, directly or indirectly, solicit or attempt to solicit employees of Plaintiff or any Subsidiary; solicit or attempt to solicit any customer, partner, joint venturer, referral source, payor, supplier, vendor, licensee, licensor, developer, consultant or other business relation
So long as Byers complies with the Nonsolicit, he may attend industry events and promote the company by wearing Byers & Partners swag: Plaintiff‘s request that he be enjoined from doing so is denied. Plaintiff has not demonstrated such conduct necessarily interferes with its business relationships or constitutes an attempt to solicit its customers or other business relations to cease or materially reduce their business with Plaintiff.211
III. CONCLUSION
Plaintiff is entitled to a preliminary injunction enforcing the Nonsolicit against Byers. Plaintiff and Byers should submit a proposed form of order implementing the rulings contained herein. In addition, within ten days of the date of this opinion,