Delaware courts are increasingly scrutinizing noncompete agreements, particularly those linked to equity or profit incentive plans. Recently, two significant rulings have emerged, emphasizing that forfeiture-upon-competition provisions may render these agreements unenforceable. This shift marks a notable departure from Delaware’s previous reputation as a “pro-employer” jurisdiction.
In a pair of recent cases, the Delaware courts have focused on the implications of restrictive covenants within incentive agreements. Following the Delaware Supreme Court’s affirmation of the employee choice doctrine, three trial courts have ruled that the forfeiture of equity can undermine the legal basis for enforcing noncompete clauses. This development forces companies to reassess how they structure their incentive contracts with employees.
Case Summaries Highlighting Court Opinions
The first notable case, Payscale Inc. v. Norman, 2025-0118-BWD, 2025 WL 1622341 (Del. Ch. April 4, 2025), involved an employee who had multiple incentive agreements that included restrictive covenants. These agreements stipulated that if the employee breached the covenants, their profit interest units would be canceled without compensation. After resigning to work for competitors, the employer sought to enforce the noncompete. However, the Delaware Court of Chancery deemed the noncompete provisions unenforceable, ruling that while the profit interests had some value at the time of the agreements, the consideration was insufficient to support the broad scope of the noncompete sought by the employer.
Another pivotal case, The Imagine Group v. Biscanti, No. CV 25-1137-RGA, 2025 WL 2936785 (D. Del. October 15, 2025), involved a former Chief Revenue Officer whose equity incentive agreement included a provision for forfeiture of all incentive units upon voluntary resignation. The United States District Court for the District of Delaware ruled that the forfeiture eliminated any enforceable contract, thereby invalidating the noncompete. The court dismissed claims that other forms of consideration, such as employment and compensation, could support the restrictive covenants, as these were governed by a separate employment agreement.
Implications for Employers and Employees
These recent decisions build on the foundation laid by the Delaware Supreme Court in LKQ Corp v. Rutledge, which upheld forfeiture provisions when employees voluntarily leave a company. If the latest rulings are upheld, they may reinforce the notion that while companies can impose forfeiture, they risk losing enforceable noncompete agreements in the process.
As this legal landscape evolves, employers crafting equity or profit incentive agreements may need to reconsider the choice of law and language used in these contracts. It is essential for employers to evaluate what consideration is provided in exchange for restrictive covenants, especially regarding potential forfeiture. They should determine whether such forfeiture should be automatic or discretionary and consider relocating affirmative restrictive covenants to employment agreements where appropriate.
Employees, along with their new employers, must carefully review the terms of any restrictive covenants. Evaluating the impact of forfeiture on enforceability could strengthen their position in challenging such agreements.
Both Payscale and the related case are currently under appeal, with oral arguments recently heard in the Delaware Supreme Court. As developments unfold, the interpretation of restrictive covenants, especially those involving forfeiture clauses, remains a rapidly evolving area of law. Observers anticipate further clarifications from the courts that could significantly influence the drafting and enforcement of noncompete agreements tied to incentive units.
