In a recent en banc decision, Delaware’s Supreme Court upheld a key tool available to employers to enforce forfeiture-for-competition provisions against former employees. Delaware’s Chancery Court has shown an increasing reluctance to enter injunctions enforcing noncompetes. However, in Cantor Fitzgerald, L.P. v. Ainslie, 312 A.3d 674 (Del. 2024), issued in January 2024, the Supreme Court upheld a limited partnership agreement provision under which employees who received limited partnership equity forfeited future distributions if they joined a competitor. Relying on freedom of contract principles, the Court held such arrangements are not subject to a “reasonableness” review.
Ainslie left open whether the principle is restricted to limited partnership agreements. In LKQ Corp. v. Rutledge (Dec. 18, 2024), a middle-level manager (Rutledge) employed by a Delaware corporation (LKQ), received grants of restricted stock units (RSUs) under an RSU Agreement providing for a forfeiture (including a return of previously-granted units) if the employee joined a competitor within nine months of his last day of employment. LKQ brought an enforcement action in an Illinois federal court, which was dismissed on summary judgment. On appeal, the Seventh Circuit Court of Appeals certified to the Delaware Supreme Court the question of “[w]hether Cantor Fitzgerald precludes reviewing forfeiture-for-competition provisions for reasonableness in circumstances outside the limited partnership context?” The Supreme Court held the freedom of contract principle endorsed in Cantor Fitzgerald “was not … limited to the partnership act.”
LKQ reflects a balance of the employee’s right to earn a living and the doctrine favoring freedom of contract. The Court explained that “[l]ike the anticompetition condition in Cantor Fitzgerald’s limited partnership agreement, a restricted stock unit agreement stands on different footing than underlies non-competition covenants because it does not restrict competition or a former [employee’s] ability to work.” In other words, unlike provisions purporting to bar work for a competitor, the forfeiture structure preserves the employee’s freedom to choose, albeit at the cost of losing the economic benefits accruing from the contract that contained the noncompete.
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