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Delaware Courts Continue to Scrutinize Noncompete Agreements
As previously reported (here, here and here), courts in Delaware, the once favored "employer-friendly" jurisdiction, have increasingly scrutinized and refused to enforce noncompete agreements. In recent cases, Delaware courts have continued this trend, this time focusing on forfeiture-upon-competition provisions in equity or profit incentive agreements that also include affirmative restrictive covenants. Two of these cases are Delaware Chancery Court noncompete cases. Following on the heels of the Delaware Supreme Court's affirmation of the employee choice doctrine, three trial courts have held that forfeiture of equity results in a failure of consideration such that the affirmative restrictive covenants are unenforceable. The practical effect of these cases is to force companies to choose between forfeiture or affirmative restrictions when crafting their equity contracts with employees. We can expect further developments in Delaware noncompete law and its implications for drafting incentive units and noncompete agreements under Delaware law, as two of the three cases are now on appeal. Recent cases are discussed below.
Case Summaries and Court Reasoning
Payscale v. Norman
In Payscale Inc. v. Norman, 2025-0118-BWD, 2025 WL 1622341 (Del. Ch. Apr. 4, 2025), the parties entered into multiple incentive agreements that included restrictive covenants and granted nontransferable profit interest units — 25% on a date certain, with the other 75% upon the sale of the business. The agreement also provided that if the employee breached the restrictive covenants, the profit interest units would "automatically be cancelled without payment of any consideration." After the plaintiff resigned and went to work for not one but two competitors, his former employer sued to enforce the affirmative restrictive covenants. Despite the forfeiture of the profit interest units, the Delaware Court of Chancery declined to "go so far as to conclude that [defendant] received no consideration in exchange for the Noncompete." Instead, the court held that the noncompete provisions were unenforceable because, even assuming the profit interests had "some value when the parties executed" the agreements, the consideration was "vanishingly small" and could not support the broad, 18-month nationwide noncompete the plaintiff sought to enforce.
The Imagine Group v. Biscanti
In The Imagine Group v. Biscanti, No. CV 25-1137-RGA, 2025 WL 2936785 (D. Del. October 15, 2025), the plaintiff sought a temporary restraining order in federal court to enforce a noncompete against its former Chief Revenue Officer. The noncompete was set forth in the parties' equity incentive agreement, which included a provision imposing forfeiture of all incentive units upon a voluntary resignation by the executive. The United States District Court for the District of Delaware held that due to the forfeiture of all incentive units, there was no consideration, and, thus, no enforceable contract, and refused to enforce the noncompete. In so holding, the court rejected arguments that the executive received other consideration that could support the affirmative restrictions — his employment, monetary compensation, and other benefits — because those forms of consideration were governed by the executive's employment agreement, not the incentive agreement.
Key Takeaways From the Latest Delaware Cases
These decisions follow the Delaware Supreme Court's 2024 decision in LKQ Corp v. Rutledge, that upheld employee forfeiture-upon-competition provisions where the employee chooses to leave the company, regardless of whether the restrictive covenants are reasonable in scope and duration. If affirmed, these most recent decisions would serve as an extension of LKQ, holding that while the company may impose a forfeiture against the employee, the consequence of doing so likely means that the company will be left without a noncompete to enforce.
It remains unclear to what extent other states and/or courts will follow or extend the reasoning in these decisions. Employers who seek to implement and enforce restrictive covenants may consider changing the choice of law for their equity or profit incentive agreements, or otherwise revising the language of such agreements while waiting on the outcomes of the cases up for appeal. Either way, employers should carefully consider what consideration will be provided in exchange for restrictive covenants, whether the consideration may be found insufficient to support a noncompete if some or all of it is forfeited, whether forfeiture should be automatic or discretionary, and whether affirmative restrictive covenants should be removed from equity awards and instead included in employment agreements (where permitted by applicable law and appropriate under the circumstances). And, employees (and their new employers) who seek to challenge restrictive covenants should carefully evaluate the terms of the agreement, consider whether a forfeiture may aid arguments that the restrictive covenants are no longer enforceable, and plan any departure accordingly.
Payscale and another similar case have been appealed to the Delaware Supreme Court, with oral argument heard recently. Stay tuned: how Delaware courts view restrictive covenants with forfeiture clauses and what Delaware courts say about noncompetes tied to incentive units is a fast-changing area of law, with more to follow.
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