Delaware courts are increasingly scrutinizing noncompete agreements, particularly in the context of equity and profit incentive plans. Recent rulings have shifted the landscape, challenging the enforceability of restrictive covenants linked to forfeiture upon competition. These developments follow a growing trend where courts are questioning the validity of such agreements, traditionally viewed as employer-friendly.
The Delaware Chancery Court has ruled on multiple cases involving noncompete agreements, reinforcing the notion that forfeiture of equity can render restrictive covenants unenforceable. This follows the Delaware Supreme Court’s endorsement of the employee choice doctrine, which holds that if an employee voluntarily leaves a company, they may forfeit their equity while the employer may lose the ability to enforce noncompete clauses.
In the case of Payscale Inc. v. Norman, 2025-0118-BWD, the court addressed multiple incentive agreements that included restrictive covenants alongside nontransferable profit interest units. The agreement stipulated that if the employee breached the covenants, their profit interest units would be automatically cancelled without compensation. After the employee resigned to pursue opportunities with competing firms, the court found that while the profit interests had some value, it was insufficient to justify the broad noncompete clause, leading to its unenforceability.
Similarly, in The Imagine Group v. Biscanti, No. CV 25-1137-RGA, the United States District Court for the District of Delaware denied a request for a temporary restraining order to enforce a noncompete against a former Chief Revenue Officer. The court ruled that due to the forfeiture of incentive units upon voluntary resignation, there was no consideration supporting the noncompete, thus rendering it unenforceable. The court dismissed arguments that other forms of compensation provided sufficient consideration, as they were governed by the employee’s employment agreement rather than the incentive agreement.
Implications for Employers and Employees
These recent rulings underscore a significant shift in how Delaware courts view restrictive covenants tied to incentive plans. The decisions suggest that while employers may impose forfeiture provisions, they risk rendering their noncompete agreements unenforceable. This concept was further clarified in the 2024 ruling of LKQ Corp v. Rutledge, which upheld employee forfeiture-upon-competition provisions but did not guarantee the enforceability of accompanying noncompetes.
As two of the recent cases are currently under appeal, employers may need to reconsider their approach to drafting equity and profit incentive agreements. They might explore changing the choice of law or revising the language in existing contracts. Key considerations include the nature of the consideration offered in exchange for restrictive covenants, the potential inadequacy of consideration if forfeiture occurs, and whether restrictive covenants should be included in employment agreements instead.
Employees, as well as their new employers, should also assess the terms of their agreements carefully. They may find that forfeiture clauses could strengthen their arguments against the enforceability of restrictive covenants, thus informing their departure strategies.
As the legal landscape surrounding noncompete agreements continues to evolve, stakeholders should remain vigilant. The outcomes of the appeals will likely shape the future of noncompete enforcement in Delaware, making it a critical area to watch. With oral arguments for the appeals recently heard, further developments are anticipated in the near future, potentially redefining how restrictive covenants are approached in incentive plans.
