Delaware Supreme Court Weighs Enforceability of Noncompete Agreements After Forfeiture of Equity Shares

Quick Hits

• The Delaware Supreme Court is reviewing a case on whether noncompete and nonsolicitation agreements remain enforceable after the forfeiture of equity units due to violations of the noncompete agreement by a former executive.
• The Delaware Court of Chancery ruled that because the executive’s equity units were automatically forfeited under the agreement when he was terminated for cause, the restrictive covenants lacked the necessary consideration at the time the employer sought to enforce them.
• The outcome of the case could clarify the standard for enforceability of restrictive covenants under Delaware law, especially regarding the necessity of retained consideration after contract formation.

On November 5, 2025, the Delaware Supreme Court heard oral arguments in North American Fire Ultimate Holdings LP v. Doorly, in which a fire and life safety systems company., NAF, seeks to enforce restrictive covenants against a former executive, Alan Doorly, to stop him from competing with his former company.

Alan Doorly, who had worked for twenty years for a company acquired by North American Fire Ultimate Holdings (NAF) in 2021, agreed in February 2022 to sign an “Incentive Unit Grant Agreement” that granted him 300,000 equity units in the company. NAF alleges that Doorly began surreptitiously competing with NAF shortly after his equity units vested. NAF further alleges that upon discovering Doorly’s violations, it terminated his employment for cause, which caused Doorly’s equity units to automatically forfeit in accordance with the noncompete agreement.

The Delaware Court of Chancery ruled that the restrictive covenants are not enforceable because the equity units were the sole consideration for Doorly’s promise not to compete, and consideration is lacking after the forced forfeiture of the equity shares.

At oral argument before the Delaware Supreme Court, counsel for NAF said Delaware contract law does not provide that contracts become unenforceable in the event one of the parties forfeits their consideration pursuant to the terms of the contract, and that the Court of Chancery effectively rewrote Doorly’s agreement with NAF to say that the restrictive covenants expire not one year after separation, but immediately upon the forfeiture of the equity units.

“It’s black letter law that the existence of consideration, whether something of value has been exchanged is determined at the time of contract formation,” counsel for NAF said at oral arguments. The Court of Chancery’s decision “departed from this first principle of contract law.”

Doorly has argued that while a contract may not fail because the consideration has “reduced or diminished in value,” this case is different in that the consideration “was taken from him” by the company. The Incentive Agreement “established a quid pro quo: Units in exchange for restrictive covenant,” and when the company “clawed back all the Units,” it left him with nothing, depriving him “of consideration for the restrictive covenants just as surely as if NAF had never issued the Units to him,” Doorly alleged in his brief.

When pressed by the Delaware high court at oral argument, Doorly’s counsel agreed that the adequacy of consideration is typically assessed at the time of contract formation, but argued that restrictive covenants are treated differently. Delaware law “does adopt the proposition that to enforce restrictive covenants the employee needs to retain some consideration,” Doorly’s counsel argued.

Regardless, Doorly’s counsel argued that the company cannot raise arguments about consideration since that issue had not been raised. If it had, it would have weighed against the reasonableness of the restrictive covenants as a whole.

Next Steps

The Delaware Supreme Court’s decision could provide clarity on the adequacy of consideration when enforcing restrictive covenants under Delaware law, particularly those that impose restrictions on a former employee after separation from the company. While contract law typically holds that whether a contract is lacking consideration looks at whether there was sufficient consideration at the time of the formation of the contract, the Court of Chancery’s decision suggests that Delaware law requires the employee to retain some consideration to make the restrictive covenants enforceable after separation, even if that consideration has diminished in value.

It is not clear when the Delaware Supreme Court will issue its decision. In the meantime, employers may want to note that restrictive covenants need to be supported by consideration to be enforceable, as with all contracts. Employers may also want to ensure that all employment contracts, especially those involving restrictive covenants, clearly outline all forms of consideration beyond equity units.

Ogletree Deakins’ Unfair Competition and Trade Secrets Practice Group will continue to monitor developments and will provide updates on the Delaware and Unfair Competition and Trade Secrets blogs as additional information becomes available.

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