Delaware courts are increasingly challenging the enforcement of noncompete agreements, particularly those linked to equity or profit incentive plans. This shift marks a significant change in a state once regarded as employer-friendly. Recent rulings from the Delaware Chancery Court and federal courts have focused on the implications of forfeiture-upon-competition provisions, which may render these agreements unenforceable.
In recent cases, Delaware courts have scrutinized forfeiture clauses within equity incentive agreements that include affirmative restrictive covenants. Following the Delaware Supreme Court’s affirmation of the employee choice doctrine, three trial courts ruled that the forfeiture of equity results in a failure of consideration, leading to the unenforceability of affirmative restrictive covenants. As a consequence, companies face a critical decision: either impose forfeiture or maintain affirmative restrictions when drafting employee equity contracts.
Key Cases Illustrate the Shift in Legal Interpretation
The evolving landscape of noncompete enforcement in Delaware is illustrated by two noteworthy cases: *Payscale Inc. v. Norman* and *The Imagine Group v. Biscanti*.
In *Payscale Inc. v. Norman* (2025-0118-BWD, 2025 WL 1622341), the court examined multiple incentive agreements that included restrictive covenants. The agreements granted nontransferable profit interest units, with 25% granted on a specific date and the remaining 75% contingent upon the sale of the business. Upon resigning to join two competitors, the former employee faced a lawsuit aimed at enforcing these covenants. However, the Delaware Court of Chancery ruled that even if the profit interests had some value at the time of the agreement, the consideration was deemed “vanishingly small.” Consequently, the court held that the broad, 18-month nationwide noncompete sought by the plaintiff was unenforceable.
In a similar vein, *The Imagine Group v. Biscanti* (No. CV 25-1137-RGA, 2025 WL 2936785) involved a temporary restraining order sought by the plaintiff against its former Chief Revenue Officer. The equity incentive agreement stipulated that all incentive units would be forfeited upon voluntary resignation. The United States District Court for the District of Delaware ruled that the forfeiture of all incentive units negated any enforceable contract concerning the noncompete. The court dismissed claims that other forms of consideration, such as employment and monetary compensation, could support the restrictions, as those were governed by a separate employment agreement.
Implications for Employers and Employees
These rulings follow the Delaware Supreme Court’s decision in *LKQ Corp v. Rutledge* (2024), which upheld the enforceability of forfeiture-upon-competition provisions. If the recent rulings are upheld, they may reinforce the notion that while companies can impose forfeiture, it may eliminate their ability to enforce noncompete clauses.
As the legal landscape develops, employers considering restrictive covenants may need to reassess their equity or profit incentive agreements. They might explore changing the choice of law or revising contractual language to avoid potential pitfalls highlighted in recent cases. This includes carefully evaluating the consideration offered in exchange for restrictive covenants, determining whether forfeiture should be automatic or discretionary, and possibly relocating affirmative covenants to employment agreements where applicable.
Employees, alongside their new employers, should also scrutinize the terms of their agreements. They should assess whether forfeiture provisions impact the enforceability of noncompete clauses and plan any transitions accordingly.
Currently, two of these pivotal cases have been appealed to the Delaware Supreme Court, with oral arguments having taken place recently. The outcomes will undoubtedly shape how Delaware courts approach restrictive covenants tied to incentive units in the future. As this area of law evolves, stakeholders must remain vigilant to adapt to the shifting legal landscape surrounding noncompete agreements.
