Delaware Court Confronts Issue of First Impression: When a Company Attempts to Enforce a Noncompete Seeking Only Damages, Does the Same Reasonableness Analysis Apply?
In Fortiline, Inc. v. McCall, the plaintiffs sought to enforce a noncompetition agreement against its former employees through a preliminary injunction. The court denied the injunction, holding the noncompetition agreements unenforceable “because their breadth was unsupported by the plaintiffs’ legitimate business interests.” The plaintiffs then amended their complaint to seek damages only. In so doing, plaintiffs’ amended complaint presented an issue of first impression: Where a noncompetition claim seeks only damages, and no injunctive relief, is the restrictive covenant subject to review for reasonableness? The court answered yes.
Antecedentes
Fortiline, Inc. (“Fortiline”) and its parent company, Patriot Supply Holdings (“PSH”), brought suit when a former founder allegedly left the company, formed a competing business, and enticed several other of plaintiffs’ employees to follow suit. The departing founder and employees were subject to restrictive covenants, including noncompetition covenants.
At the preliminary injunction stage, the defendants argued that the noncompetition provision was overbroad and therefore unenforceable because it prohibited employees from competing with any business that fell under the PSH umbrella, including those in different sectors than their employer. The court agreed.
When the plaintiffs amended their complaint by removing any prayer for injunctive relief, they likened their damages-only noncompetition claim to forfeiture-for-competition. “Forfeiture-for-competition” is a type of restrictive covenant where an employee agrees to forfeit certain benefits (like deferred compensation or equity interests) if they compete with their employer during a certain period of time after their employment ends.
Plaintiffs argued that, under Delaware law, forfeiture-for-competition provisions are not subject to the same reasonability standards that noncompetition agreement are subject to because forfeiture-for-competition covenants do not prevent an employee from earning a livelihood and instead merely claw back contingent, post-employment benefits.
The defendants moved for summary judgment. They argued against the plaintiffs’ forfeiture-for-competition comparison as well as argued that the court’s ruling at the preliminary injunction stage that the noncompetition agreements were unreasonable and therefore unenforceable rendered the restrictive covenants unenforceable no matter the remedy sought.
The Court’s Ruling
The court disagreed with the plaintiffs’ forfeiture-for-competition analogy. It explained that “Delaware courts should respect the fundamental different between a restrictive covenant and a forfeiture-for-competition provision: the latter does not restrict competition.” It further noted that, while a restrictive covenant can be enforced through injunctive relief, damages, or both, the difference between a restrictive covenant and a forfeiture-for-competition provision is “based on what the provisions demand of the employee, not what remedy the company seeks.” If a contract “restrains the employee from work, then the reasonableness review kicks in. If it does not—if instead, for example, it allows the employer to retain a benefit the employee would otherwise receive—then the court must enforce the term as written.”
By granting summary judgment in the defendants’ favor, the court rejected the argument that the “reasonability” test for noncompetition agreements applies only when an employer seeks injunctive relief. Instead, the court confirmed that Delaware courts must apply the same reasonableness standard to noncompetition agreements regardless of what remedy is sought in the complaint.
In the court’s opinion, the court also reiterated a point it made in its Order Denying Preliminary Injunction — that it would not blue-pencil the overbroad agreement. Delaware courts are becoming more and more reluctant to blue pencil noncompetition agreements, a trend we discussed here.
Principais conclusões
- No matter the remedy, reasonableness is a threshold matter for an employer attempting to enforce a noncompetition agreement under Delaware law.
- Noncompetition agreements that purport to restrict an employee from competing with any business under a large parent organization, especially when those businesses vary across sectors, may be considered unreasonable under Delaware law.
- Delaware courts are increasingly hesitant to blue pencil unenforceable restrictive covenants.
This article was prepared with the assistance of 2025 summer associate JJ Gramlich.
