Delaware Supreme Court Says Employer Can Enforce Restrictive Covenants After Revoking Ex-Employee’s Equity

Quick Hits

• The Supreme Court of the State of Delaware revived an employer’s lawsuit to enforce restrictive covenants, including a noncompete agreement, against a former executive after the executive’s misconduct led to his forfeiture of the equity offered as consideration at the time of the agreement.
• The Delaware supreme court ruled that a lower court had erred in ruling that the restrictive covenant agreement lacked consideration because the executive no longer possessed the shares at the time the company sought to enforce the covenants.
• The decision clarifies the enforceability of restrictive covenants under Delaware law regarding the necessity of retained consideration after contract formation.

In North American Fire Ultimate Holdings LP v. Doorly, the Delaware supreme court rejected a lower court ruling that found North American Fire Ultimate Holdings (NAF), a fire and life safety systems company, could not enforce restrictive covenants against a former executive for lack of consideration.

“Because consideration is measured at the time of contracting and not at the time of enforcement, we reverse and remand for further proceedings,” the Delaware supreme court stated in the unanimous decision.

Restrictive Covenants

In February 2022, then-NAF executive Alan Doorly had signed an “Incentive Unit Grant Agreement” with his employer that granted him 300,000 equity units in the company and required him to be bound by restrictive covenants, including restrictions on the use of confidential information, nonsolicitation of employees, and noncompetition. But NAF alleged that shortly after his equity units vested, Doorly began planning to start a competing company. NAF terminated Doorly’s employment for cause, an action that triggered the automatic forfeiture of his equity units.

NAF then filed a complaint against Doorly, alleging breach of contract and breach of the implied covenant of good faith and fair dealing, and seeking a declaratory judgment tolling the timeframe for enforcing the restrictive covenants.

Doorly argued that NAF could not enforce the restrictive covenants since he was forced to forfeit the equity units. In March 2025, the Delaware Court of Chancery sided with Doorly, ruling that the restrictive covenants were unenforceable because the equity units were the sole consideration and their forced forfeiture meant consideration was lacking.

Evaluating Consideration

However, the Delaware supreme court reversed, finding that the Court of Chancery had “erred in evaluating whether the Agreement was enforceable by determining whether there was consideration at the time of enforcement.”

The court cited a prior case in which the Court of Chancery ruled that incentive equity units offered as consideration for a restrictive covenant were sufficient consideration and not illusory, even though those units were contingent on certain factors and a vesting period.

Doorly had argued that his case was different since the employee in that case had received dividends, whereas in his case, NAF’s “clawback” of the shares deprived him of “all” of the consideration he had received as part of the agreement. Further, during oral arguments, Doorly’s counsel had argued that for restrictive covenants to remain enforceable, “the employee needs to retain some consideration.”

The Delaware high court did not agree. The court said the cases were the same in that the equity units were “somewhat contingent” and consideration was thus “not illusory at the time of formation.”

Next Steps

The Delaware supreme court’s decision provides some clarity over the enforceability of restrictive covenants in situations where the initial consideration offered to secure the agreement has lost its value or been forfeited. The Court of Chancery’s decision initially raised questions about whether employees must retain some value in the consideration for the covenant to remain enforceable. But the supreme court’s holding answers those questions in finding that consideration must be evaluated only at the time of contract formation, meaning employers may seek to enforce covenants even if they revoke incentives due to the employee’s conduct.

Employers may want to take note of this ruling, while keeping in mind that restrictive covenants, like all contracts, must be supported by consideration to be enforceable. Employers may further want to ensure that all employment contracts, especially those involving restrictive covenants, clearly outline the forms of consideration.

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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