By: David S. Levine
For decades, companies have chosen Delaware law to govern their contracts and, at times, Delaware courts to adjudicate disputes—even if, in practice, the company had little or no connection to the state. This favored status has stemmed from, among other things, Delaware’s extensive body of corporate law, expert judges, and perceived pro-business environment.
Recently, however, Delaware courts have issued several important decisions regarding restrictive covenants—and the decisions have not always aligned with Delaware’s pro-business reputation. In the article that follows, we summarize these developments and discuss how they might bear on a company’s legal strategies going forward.
The Issues
The recent decisions have addressed three issues in particular: (1) when a court should “blue pencil” a restrictive covenant, i.e., by narrowing an otherwise overly broad restrictive covenant and enforcing the covenant as narrowed; (2) the related (and often antecedent) issue of when a restrictive covenant is sufficiently narrowly tailored to protect an employer’s legitimate interests; and (3) how “forfeiture-for-competition” clauses—which link post-employment compensation to non-competition—should be analyzed. We address each issue below.
Blue Penciling. As noted, “blue penciling” occurs when a court narrows an otherwise overly broad restrictive covenant and enforces the restrictive covenant as narrowed. In any given case, whether a court chooses to do so may depend on, among other things, the governing law, the propriety of the restraint as originally written, the sophistication of the parties, and whether the contract at issue includes (as many contracts do) a provision expressly empowering a future court to blue pencil.
In a December 2024 decision, however, the Delaware Supreme Court upheld the lower court’s refusal to blue pencil a restrictive covenant despite the parties’ contract expressly authorizing the blue penciling. As the Delaware Supreme Court explained last December in Sunder Energy, LLC v. Jackson, 332 A.3d 472 (Del. 2024), the potential for “perverse incentives” for employers largely motivated the decision. “If employers know that even the most unreasonable covenants will be enforced” following a court’s blue penciling, the Delaware Supreme Court reasoned, “employers will be less incentivized to craft reasonable restrictions from the outset.” In addition, the Delaware Supreme Court cited the parties’ unequal bargaining power, the breadth of the restrictive covenant, and other factors in finding blue penciling unwarranted.
The Sunder decision may lead future courts to similarly reject blue penciling. Indeed, this has already started to occur, as lower courts in Delaware have cited Sunder in declining to blue pencil overbroad contractual restrictions and have therefore found them unenforceable. See, e.g., Weil Holdings II, LLC v. Alexander, No. 2024-0388-BWD (Del. Ch. Mar. 4, 2025); Cleveland Integrity Servs., LLC v. Byers, No. 2024-0371-MTZ (Del. Ch. Feb. 28, 2025); Newark Shopping Ctr. Owner, L.L.C. v. Saudades Grp., LLC, No. N23C-02-091 JRJ (Del. Super. Ct. Feb. 26, 2025).
Reasonableness. With blue penciling losing favor under Delaware law, it is now especially important that restrictive covenants be enforceable as written. On that front, the Delaware Supreme Court has also offered guidance.
In the Sunder decision noted above, the Delaware Supreme Court found that the restrictions at issue were not reasonably tailored to the employer’s legitimate interests. As to duration, for example, the restriction applied for two years after the employee sold his equity in the business—a fairly typical provision for certain closely held businesses. Because the equity stake was illiquid, however, the court noted that the restriction’s duration was “potentially indefinite” and thus unreasonable. The court also found that the non-compete provision was otherwise overbroad, because it prevented the employee and his “affiliates” from working in any sales job in “at least forty-six states” without regard to whether the new employer sold similar products. “As written,” the court noted, the employee’s “daughter cannot go door to door selling Girl Scout cookies” under the restrictive covenant.
In part due to the breadth of the restrictions, and as noted above, the Delaware Supreme Court upheld the lower court’s refusal to blue pencil the agreement. Given this refusal to blue pencil, and despite the alleged “flagrant nature” of the employee’s post-employment competition, the employer’s restrictive covenant was thus deemed wholly unenforceable under Delaware law.
The Sunder decision is not the only indication that Delaware courts are scrutinizing non-competition and non-solicitation provisions. Rather, Sunder appears to be part of a broader trend. For example, in Kodiak Building Partners, LLC v. Adams, No. 2022-0311-MTZ, 2022 WL 5240507(Del. Ch. Oct. 6, 2022), the Court of Chancery of Delaware refused to enforce a non-compete agreement, even though the restriction involved the sale of a business where such covenants are ordinarily subject to less scrutiny. In particular, the court held that the covenant exceeded the buyer’s legitimate interest in protecting the goodwill it purchased, because an “acquirer’s valid concerns about monetizing its purchase do not support restricting the target’s employees from competing in other industries in which the acquirer also happened to invest.” Kodiak was followed by other decisions finding restrictive covenants overbroad and therefore unenforceable under Delaware law. See, e.g., Centurion Serv. Grp. v. Wilensky, No. CV 2023-0422-MTZ, 2023 WL 5624156 (Del. Ch. Aug. 31, 2023) (declining to enforce non-compete against former employee because the agreement “cast[] a limitless net over [employee] in both scope of geography and scope of conduct”); Hub Group v. Knoll, No. 337, 2024, 2024 WL 4343006 (Del. Ch. July 18, 2024) (finding non-compete overbroad and unenforceable because it prohibited former vice president from working in any entity that competes with any of the employer’s 25 entities located in at least four countries and in 42,000 zip codes within the U.S.); Fortiline, Inc. v. McCall, No. 2024-0211-MTZ, 2024 WL 4088629 (Del. Ch. Sept. 5, 2024) (refusing to enforce post-employment non-compete on overbreadth grounds because the restraint extended to the former employer’s “affiliates” in different sectors and different countries which rendered the covenant “not essential to the protection of [the employer’s] legitimate business functions.”).
Forfeiture for Competition. Although the prior two developments have largely favored employees, a third development under Delaware law has favored employers. As described below, this development concerns what are known as “forfeiture-for-competition” clauses, which provide that if a former employee competes, he or she forfeits a contingent benefit such as deferred compensation.
Across the country, jurisdictions are split on how to analyze these clauses. Some jurisdictions treat the clauses like any other restrictive covenant and review them for reasonableness. Under the Illinois Freedom to Work Act (IFWA), for example, a “covenant not to compete” is defined to include most forfeiture-for-competition clauses. Accordingly, under the IFWA, forfeiture-for-competition clauses are ordinarily analyzed like any other non-compete and thus are scrutinized for reasonableness.
Yet other jurisdictions, such as New York, apply what is known as the “employee choice” doctrine. Under that doctrine, forfeiture-for-competition provisions may be analyzed under traditional contract principles without inquiry into the clause’s reasonableness. The reasoning is that an employee subject to a forfeiture-for-competition clause has a choice—refrain from competing with the former employer or engage in competition but forfeit certain compensation—and the employee should be held to that choice. Given this underlying logic, however, the “employee choice” doctrine typically applies only when the employee voluntarily terminates his or her employment.
In two recent decisions—LKQ Corp. v. Rutledge, No. 110, 2024, 2024 WL 5152746 (Del. Dec. 18, 2024) and Cantor Fitzgerald, L.P. v. Ainslie, 312 A.3d 674 (Del. Jan. 29, 2024)—the Delaware Supreme Court applied the “employee choice” doctrine and held that the lower courts in those cases did not need to “review forfeiture-for-competition provisions for reasonableness so long as the employee voluntarily terminated her employment.” As the Delaware Supreme Court noted, a forfeiture-for-competition clause “does not prohibit the employee from engaging in competitive work but merely denies her the right to some financial benefit if she chooses to engage in competitive activity.” The Delaware Supreme Court thus held that, depending on the circumstances of the case, forfeiture-for-competition clauses may be subject to less scrutiny than ordinary restrictive covenants.
Employer Takeaways
In light of these developments, employers should consider a few items in drafting their employment and similar agreements.
- Evaluate Choice-of-Law Clauses: As noted above, many companies choose Delaware law to govern their corporate and/or employment agreements, even if they have no operations in the state. This decision is a multifaceted one and should not normally be made solely on the basis of developments regarding restrictive covenants. These developments, however, should inform the analysis. In our experience, Delaware is rightly regarded as a jurisdiction with an extensive body of corporate law and expert judges, but these recent developments demonstrate that Delaware is not necessarily a “safe bet” to enforce post-employment restrictive covenants. Companies should consider these tradeoffs in drafting their choice-of-law and venue provisions.
- Tailor Restrictive Covenants: For standard restrictive covenants—i.e., not forfeiture-for-competition clauses—it is now particularly important that they be enforceable as drafted, because courts applying Delaware law will be less likely to blue pencil them. What a court will enforce will depend on the particular facts, so companies should consult with legal counsel and not rely on off-the-shelf provisions that are not tailored to the specific employment situation. As a general rule, however, companies may consider erring on the side of narrower restrictions given the unlikelihood of blue penciling under Delaware law.
- Consider Forfeiture-for-Competition Clauses: If an employment or related agreement will be subject to Delaware law, then companies should consider supplementing (or replacing) restrictive covenants with forfeiture-for-competition clauses. As discussed above, these clauses will often be subject to less scrutiny than typical restrictive covenants and may be particularly straightforward to add to agreements that already contemplate post-employment deferred compensation.
Fox Swibel will continue to follow these developments closely and can be reached at any time. Please contact Steve Brenneman, Kelly Smith Haley, David Levine, or the Fox Swibel attorney with whom you regularly work to address these issues.
David S. Levine
David Levine is a partner in the Firm’s Employment Law and Litigation Groups. David’s practice focuses on representing clients in a wide range of labor and employment matters, as well as other business disputes. As part of his litigation practice, David regularly defends employers in class, collective, and individual actions involving claims under the FLSA, Title VII, ADA, and other federal and state statutes. David also often litigates individual and class actions involving data privacy issues, in particular cases under the Illinois Biometric Information Privacy Act (BIPA). He practices in state and federal courts and before administrative agencies such as the EEOC, DOL, and DOJ.
This article contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Under applicable rules of professional conduct, this content may be regarded as attorney advertising.