In LKQ v. Rutledge, 2024 WL 5152746 (Del. Supr. 2024), the Delaware Supreme Court recently responded to questions certified by the United States Court of Appeals for the Seventh Circuit by confirming that the Supreme Court’s ruling in Cantor Fitzgerald, L.P. v. Ainslie, 312 A.3d 674 (Del. 2024)—that forfeiture-for-competition provisions are not reviewed for reasonableness—was not limited to provisions in limited partnership agreements. 2024 WL 5152746, at *6. While the Court’s decision itself may not be surprising, it is notable for two reasons.

First, the Supreme Court held that “[i]t may be the case that forfeiture-for-competition provision which required a claw back is so extreme in duration and financial hardship that it precludes employee choice by an unsophisticated party and should be reviewed for reasonableness,” thus leaving open the possibility that Ainslie may not apply to every forfeiture-for-competition provision. Id. at *6. The Supreme Court did not expand on its holding, citing Court rules that limit responses to certified questions to addressing “issues of law based on stipulated facts.” Id. at *6.

Second, the LKQ decision provided a helpful and concise summary of the current state of forfeiture-for-compensation provisions, including

• Delaware embraces the employee choice doctrine under which “courts do not review forfeiture-for-competition provisions for reasonableness so long as the employee voluntarily terminated her employment.” Id. at *5.
• “A restricted stock unit agreement stands on different footing than underlies non-competition covenants because it does not restrict competition of a former employee’s ability to work.” Id. at *4.
• Forfeiture-for-competition provisions are conditions precedent to paying future distributions and not liquidated damages. Id. at *5.
• Unlike restrictive covenants, forfeiture-for-competition provisions are not enforceable through injunctive relief and do not deprive the public of the employee’s services. Id. at *5
• “[R]estraint of trade policy implications are diminished—if it does not vanish—for forfeiture-for-competition provisions.” Id.

While the Supreme Court’s decision in LKQ suggested—but did not hold—that there may be circumstances in which a forfeiture-for-competition provision is reviewed for reasonableness, until the Court makes that express ruling Ainslie remains good law and the LKQ opinion offers helpful guidance on how to apply it.

Sean Brennecke, a partner in the Delaware office of Lewis Brisbois, prepared this article.