Delaware High Court Affirms That an Employer Cannot Recover Damages for Unenforceable Restrictive Covenants

Quick Hits

• The Delaware supreme court affirmed that an employer cannot recover damages for violation of restrictive covenants that are unreasonable.
• The ruling clarified that a claim seeking damages for breach of restrictive covenants is subject to reasonableness review, distinguishing it from forfeiture-for-competition agreements, which are not generally subject to such a review.

In a brief one-paragraph order, the Delaware supreme court unanimously affirmed the Court of Chancery of Delaware ruling in Fortiline, Inc. v. Hayne McCall that granted summary judgment in favor of the employer’s founder, who allegedly left to set up a competing business and poached half its workforce. The high court order comes less than two weeks after it heard the appeal on January 28, 2026.

The case involved a unique posture in which Fortiline, a waterworks industry company that was acquired by Patriot Supply Holdings, Inc. (PSH), sought to recover damages, instead of injunctive relief, against the founder and former employees for the alleged breaches of restrictive covenants, including noncompetition and nonsolicitation covenants, that they had agreed to in exchange for equity units in PSH. The Court of Chancery had previously found those restrictive covenants to be unreasonably broad and unenforceable when the employer sought a preliminary injunction.

“[A]fter consideration of the parties’ briefs, the argument of counsel, and the record on appeal, it appears to the Court that the judgment of the Court of Chancery should be affirmed on the basis of and for the reasons stated in its memorandum opinion,” the Delaware supreme court stated.

Distinguished From Forfeiture-for-Competition Agreements

The employer had argued that seeking only damages for the alleged breaches would not trigger the court’s analysis of whether the agreements themselves are reasonable. The employer pointed to decisions where courts had upheld forfeiture-for-competition provisions, in which an employee forfeits a supplemental benefit if the employee competes with the employer, that are not subject to reasonableness review.

But the Court of Chancery found that enforcing forfeiture-for-competition agreements is not akin to recovering damages for a breach, since forfeiture-for-competition contracts called for the set return of a supplemental benefit when an employee competes. Damages, on the other hand, seek to restore the aggrieved party to the position it would have been in if the breach had not occurred.

“A damages award for breach of a restrictive covenant and an order enforcing a forfeiture-for-competition provision both move money around because of employee competition, but those similarities are superficial and, at bottom, irrelevant,” the Court of Chancery stated. “The law treats the promises differently because they call for different performance.”

Since the restrictive covenants serve to restrain employees from competing, they implicate public policy interests and require review for reasonableness, the trial court found. The court had already found them unreasonable and unenforceable. The trial court concluded that the employer was not “entitled to any damages based on breaches of unreasonable restrictive covenants.”

Next Steps

The ruling underscores that Delaware courts will examine the reasonableness and scope of restrictive covenants when they prohibit an employee from competing, whether the employer seeks injunctive relief or damages.

At the same time, the Court of Chancery’s underlying ruling and the affirmance by the Delaware supreme court make clear that employers will still be able to enforce properly crafted forfeiture-for-competition provisions that require an employee to forfeit a supplemental benefit if the employee competes with the company.

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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