Search results for: Delaware

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On February 3, 2026, the Delaware Supreme Court issued a short but highly anticipated order in North American Fire Ultimate Holdings, LP v. Doorly, reversing the Chancery Court’s dismissal of contract claims seeking to enforce restrictive covenants against a former senior executive. The decision clarifies that the existence of consideration supporting restrictive covenants must be evaluated at the time the parties enter into their agreement—not at the time of an alleged breach or at the time the employer seeks enforcement.

Background

As part of a 2021 acquisition, the plaintiff North American Fire granted common equity units to Alan Doorly, a co‑founder of the acquired company. Doorly later exchanged those units for incentive units subject to time‑ and performance‑based vesting under an Incentive Unit Grant Agreement, which contained various restrictive covenants, including confidentiality, non‑solicitation, and non‑competition provisions.

By 2023, Doorly had formed a new competing entity in violation of his non-compete. Upon discovering these activities, North American Fire terminated Doorly for cause, triggering a contractual forfeiture of both his vested and unvested incentive units under his agreement. North American Fire sued Doorly, seeking among other things to enforce his restrictive covenants. The Chancery Court dismissed the contract claims, holding that the covenants lacked consideration because the incentive units—framed by the court as the sole consideration for Doorly’s agreement to abide by the covenants—had been forfeited by the time enforcement was sought.

The Supreme Court’s Decision

The Supreme Court reversed, holding that the Chancery Court applied the wrong legal framework. The Supreme Court reaffirmed a “general principle of contract law” that consideration is assessed at the time the parties form their contract, not at the time of breach or enforcement. In other words, the forfeiture of Doorly’s incentive units after formation did not retroactively eliminate the consideration that existed when he entered into the agreement.

The Supreme Court found that the Chancery Court’s reliance on the forfeiture of Doorly’s vested and unvested units “at the time of enforcement” was improper and emphasized that the units, though contingent, had “actual value” at the time of contract formation. In doing so, the Supreme Court analogized to earlier Chancery Court precedent involving restricted stock units, where contingent equity awards were held to constitute valid consideration despite time or performance conditions to vest.

The Supreme Court remanded the case for further proceedings on the contract claims. The Court did not address North American Fire’s claim that the restrictive covenants were supported by consideration other than the incentive units, apparently finding it unnecessary to address that issue in light of its determination that the question of consideration should be measured at the time of contract formation, notwithstanding the later forfeiture.

Context: Delaware’s Evolving Approach to Restrictive Covenants

Although narrow in scope, the decision arrives as Delaware continues to refine its approach to restrictive covenants in both the employment and M&A contexts. Recent decisions and commentary have signaled an increased willingness by the Chancery Court to closely scrutinize post‑employment restrictions. However, Doorly follows other decisions from the Delaware Supreme Court that have reaffirmed Delaware’s stated policy of freedom of contract that has been in tension with certain rulings by the Chancery Court (see some of our prior discussions here and here).

Against this backdrop, Doorly fits into a larger trend: Delaware courts continue to enforce restrictive covenants when they reflect bargained‑for exchange and reasonable scope, but the Chancery Court has shown an increased readiness to challenge enforceability of such covenants.

Takeaways

While the law continues to evolve, Doorly and its predecessors offer some guidance to businesses that continue to use Delaware law to govern restrictive covenants agreements (whether in the employment context or in the sale of a business):

  • Under Delaware law, the forfeiture of equity after contracting does not retroactively invalidate the consideration that existed when the agreement was executed.
  • Contingent equity awards can be valid consideration for restrictive covenants. Delaware continues to view such equity awards as non‑illusory, even if they are tied to performance or time vesting.
  • Drafting matters. Businesses relying on restrictive covenants should carefully structure grant agreements to reinforce that the award itself—regardless of future vesting or forfeiture—constitutes consideration.
  • Restrictive covenants are being subjected to much greater scrutiny for reasonableness in scope, time and geography than ever before.
  • The broader landscape remains in flux. Delaware courts continue to scrutinize restrictive covenants in both employment and M&A settings, and alternative mechanisms such as forfeiture‑for‑competition clauses may ultimately prove to be a more attractive option for businesses to enforce restrictive covenants in the “First State.”
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cin ., Unsplash

The Delaware Supreme Court recently clarified that forfeiture-for-competition clauses under the Employee Choice Doctrine may be enforceable against a broader range of employees, including middle managers, not just senior-level executives or more highly compensated employees. These clauses require employees to forfeit certain benefits—such as stock options or severance pay—if they leave their employer and subsequently work for a competitor. Unlike traditional non-competes, these provisions allow employees to choose to compete, albeit with financial consequences.

Background: LKQ Corporation v. Rutledge

Previously, the scope of employees against whom these clauses could be enforced  in Delaware had been unclear. In early 2024, the Delaware Supreme Court reaffirmed the validity of such provisions but in a case involving partners bound by high-level partnership agreements. Cantor Fitzgerald, L.P. v. Ainslie, 312 A.3d 674 (Del. 2024). However, in a landmark decision issued in late December 2024, the Delaware Supreme Court provided significant clarity, holding that forfeiture-for-competition clauses could also be enforced with middle managers and other less senior employees. LKQ Corp. v. Rutledge, No. 110, 2024, — A.3d —, 2024 WL 5152746 (Del. Dec. 18, 2024).

In LKQ, Plaintiff-employer LKQ was a national supplier of recycled and salvaged automobile parts. Defendant Robert Rutledge was a plant manager there, considered a “key” employee entitled to stock awards, which were issued pursuant to agreements governed by Delaware law. The awards were optional, but Rutledge chose to accept them, agreeing in return to restrictive covenants that required forfeiture of the awards if he competed with LKQ within nine (9) months of leaving the company.

Rutledge voluntarily resigned from LKQ in April 2021 and joined a direct competitor. LKQ then sued Rutledge in Illinois federal court. The company sought, among other relief, to clawback nearly a decade of stock award proceeds Rutledge had received pursuant to the agreements. The district court, applying Delaware law, held the agreements were restraints on trade and applied a more stringent reasonableness review, as it would for standard noncompetes, thereby finding the forfeiture provision unenforceable. LKQ appealed.

The Seventh Circuit was unable to predict Delaware’s approach to the issue, largely because previous decisions, such as Cantor Fitzgerald, had only affirmed forfeiture provisions for higher-level employees than Rutledge. It therefore certified two questions to the Delaware Supreme Court to resolve the issue:

  1. Whether Cantor Fitzgerald precludes reviewing forfeiture-for-competition provisions for reasonableness in circumstances outside the limited partnership context?
  2. If Cantor Fitzgerald does not apply in all other circumstances, what factors inform its application? For example, does it matter what type of agreement the forfeiture provision appears in, how sophisticated the parties are, whether the parties retained counsel to review the provision, whether the forfeiture involves a contingent payment or clawback, how far backward a clawback reaches, whether the employee quit or was involuntarily terminated, or whether the provision also entitled the company to injunctive relief?

The Delaware Supreme Court’s LKQ Decision

The Delaware Supreme Court answered the first question and deferred on the second in determining that forfeiture-for-competition clauses should be broadly applied and enforced. The Court emphasized Delaware’s strong preference for freedom of contract, stating that such provisions should be evaluated consistently, whether they apply to a partner, executive, or middle manager or other lower level employee. The Court upheld the clawback of Rutledge’s stock award proceeds (covering eight years), reasoning that invalidating the provision could discourage employers from offering additional benefits and compensation to employees.

The Court did caution, however, that a clawback provision could be “so extreme” that an employer seeking to enforce it against a lower-level employee would need to survive a reasonableness analysis. In Delaware, a forfeiture-for-competition provision that requires clawing back benefits is not analyzed any differently than one involving forfeiture of future benefits. Importantly, that may not be the case in other jurisdictions, as some states draw distinctions between forfeiture and clawbacks in terms of enforcing remedial measures contained in contracts.

The LKQ Court also emphasized that a forfeiture provision does not invite an identical array of employer options in the event of breach as would a standard noncompete.  Because the former would only provide an employer with monetary damages, it cannot, on its own, be enforced through an application for an injunction.

On January 22, 2025, the Seventh Circuit Court of Appeals reversed the federal district court’s ruling that the forfeiture provision was unenforceable against Rutledge. Citing the Delaware Supreme Court’s “broad” interpretation of Cantor Fitzgerald, it emphasized that exceptions to the Employee Choice Doctrine are “limited” and apply only in “extraordinary circumstances.” Although the provision would allow LKQ to clawback stock awards worth hundreds of thousands of dollars from Rutledge—whose salary was lower than defendants in prior cases—the court did not view this as an “extraordinary hardship.” Instead, it reiterated the Delaware Supreme Court’s reasoning that “Delaware ‘enforce[s] as a matter of fundamental public policy the voluntary agreements of sophisticated parties.”

Nonetheless, as we have reported, non-competes have faced significant legal scrutiny and pushback in recent years at both the state and federal level. To mitigate risk, employers should consider all available tools to safeguard confidential information and key relationships. The LKQ decision indicates forfeiture-for-competition clauses may provide a useful alternative, if appropriate in scope. Employers should carefully assess the scope and terms of such provisions to ensure enforceability and alignment with business objectives and differing (and shifting) legal standards. Stay tuned for a more fulsome treatment of this important topic in the near term.

Delaware has long been favored by businesses for many reasons, including its courts’ deference to parties’ ability to contract. Recently, however, the Delaware Chancery Court was seemingly less deferential to restrictive covenant agreements in circumstances outside of the traditional employment agreement context. In Cantor Fitzgerald, L.P. v. Ainslie, the Court, in a well-reasoned decision which arguably included a survey of this area of law, analyzed restrictive covenants in a partnership agreement that, if breached, resulted in the forfeiture of economic rights by former partners. Cantor Fitzgerald argued that such provisions were conditions precedent to payment and were not subject to a review for reasonableness as a restrictive covenant. The Court disagreed, analyzed the restrictive covenants for reasonableness, and found the provisions unenforceable because the covenants were broader than necessary to protect the partnership or what is commonly referred to as a protectable business interest.

On January 29, 2024, however, the Supreme Court of Delaware, in another well-reasoned and expansive analysis reversed and remanded the Chancery Court’s order. See Cantor Fitzgerald, L.P. v. Ainslie, Case No. 162, 2023, 2024 WL 315193 (Del. Jan. 29, 2024). Similar to the Chancery Court, the Supreme Court weighed the policy interests of the freedom of competition against the freedom of contract embodied in the Delaware Revised Uniform Limited Partnership Act. But, unlike the lower court, the Supreme Court held that the policy interests of contractual flexibility outweighed the state’s interest in protecting competition and determined that the Chancery Court erred by “imposing its notion of reasonableness on the very provisions that, when enforced against other departing partners, redounded to the plaintiffs’ benefit during their tenure as partners.” Id. at *1.

While Cantor Fitzgerald involved a forfeiture-for-competition clause in a partnership agreement, the reasoning underlying the opinion – deference to parties’ freedom to contract – may have broader implications and may be argued that it also applies to shareholder agreements, long-term incentive plans, and similar agreements. Hence, businesses should consider this latest foray into non-compete law when strategizing legitimate ways to protect their business interests.   

We intend to closely follow how courts apply this most recent ruling and businesses are advised to consult with their counsel regarding how this opinion may affect their existing and prospective agreements.

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M&A attorneys representing buyers, and their private equity and strategic clients, have long felt comfortable that the courts would uphold restrictive covenants in an acquisition. Even if the restrictive covenant at hand was perhaps somewhat broader than necessary, buyers and their counsel believed that the courts would judiciously apply their “blue pencil” to reform an overbroad covenant to make it enforceable. They also believed that by picking Delaware law and Delaware courts to hear any dispute, their restrictive covenants would be upheld by a court that has a well-deserved reputation for enforcing contracts.

Continue Reading A Delaware Surprise: Busting the Limits of Enforceability of Non-Competes in an M&A Transaction under Delaware Law

Consistent with many jurisdictions which have adopted the Uniform Trade Secrets Act, Delaware’s version expressly preempts common law claims based on the misappropriation of trade secrets. See 6 Del. C. § 2007. In a recent opinion, Vice Chancellor Slights of the Court of Chancery dismissed a claim for unjust enrichment based on defendant’s alleged misappropriation and use of plaintiff’s confidential and proprietary data because Delaware’s trade secret statute “occupies the filed” and preempts claims for common law unjust enrichment. Continue Reading Spam Trap Evading Plaintiff Falls into Statutory Preemption Trap under Delaware Trade Secret Act

shutterstock_6242524By Justin K. Beyer and Matthew I. Hafter

Delaware has long been one of the jurisdictions most friendly to the interests of corporations and is the state of incorporation for a significant majority of corporations. While that trend does not seem likely to change, a new Delaware Chancery Court decision should give pause to choice of law decisions of Delaware corporations with multi-jurisdictional work forces and operations in states other than Delaware.

Recent Ascension Case

In Ascension Ins. Holdings, LLC v. Underwood, C.A. No. 9897-VCG, 2015 Del. Ch. LEXIS 19 (Del Ch. Jan. 28, 2015) (unpublished), the Delaware Court of Chancery recently ruled that, despite a Delaware choice-of-law and venue provision contained in a non-compete agreement, California law applied to the agreement and under California law the agreement was void as a matter of law. In this case, the plaintiff (Ascension) sought an injunction against a former employee (Underwood) for violating a non-compete provision in an employment agreement entered into around the same time Ascension purchased Underwood’s business under an asset purchase agreement.

When Underwood terminated his employment relationship with Ascension, the five-year non-competition period under the asset purchase agreement lapsed. However, the separate non-compete provision of Underwood’s employment agreement provided a two-year tail at the end of the employment, which Ascension argued was specifically contemplated during the negotiations when acquiring Underwood’s business.

Ascension was incorporated in Delaware, but headquartered in California which is also where Underwood worked. In the employment agreement, parties selected Delaware law to govern. Delaware law generally enforces employee non-competition agreements if reasonable in scope and duration and if they advance a legitimate economic interest of the employer. California, in contrast, has a specific statute that renders a covenant not to compete unenforceable against an employee unless made in connection with his or her sale of substantially all of the assets and goodwill of a business non-competition agreements (Cal. Bus. & Prof. Code Sections 16600, 16601).

Choice of Law Analysis

The Chancery Court conducted a choice-of-law analysis to determine whether Delaware or California law would apply. The court found that the parties’ relationship was centered in California, the various contracts were negotiated and entered into there, and the territory in which the defendant employee would be restricted was located there. The court acknowledged that “[u]pholding freedom of contract is a fundamental policy of [Delaware]” but rejected the plaintiff employer’s argument that Delaware’s interest in that policy trumped California’s interest in not burdening its citizens with non-competition covenants. The Delaware court acknowledged that under the applicable California statute the non-compete in the asset purchase agreement would be enforceable to protect the acquired goodwill, but reasoned that the covenant in the employment agreement was directed to a different employer interest; concluding that the restriction in the employment agreement would be prohibited under California law. It held that “allowing parties to circumvent state policy-based contractual prohibitions through the promiscuous use of [choice-of-law] provisions would eliminate the right of the default state to have control over enforceability of contracts concerning its citizens.” On this basis, the Chancery Court denied the employer’s motion for preliminary injunction.

Practical Considerations

For Delaware corporations with employees in many states, this case presents a conundrum:

  • While there is clearly a value to having a single state law govern its relationship with employees in many states, and Delaware law is comparatively employer-friendly with respect to restrictive covenants, there is a risk that the law of each employee’s home state will control unless the corporation has a meaningful connection to Delaware.
  • Similarly, a Delaware corporation headquartered in a state with laws on restrictive covenants that are in the middle of the spectrum (enforceable but narrowly construed or with high proof thresholds) might opt for Delaware law because it is more favorable. But in that situation the employer should evaluate the risk that in reaching for the more friendly laws of Delaware it may lose the benefit of even the modestly friendly provisions of its home state and become subject to laws of each employee’s state which may render non-competition restrictions completely unenforceable or in other respects may be less favorable that those of the employer’s home state.
  • In mergers and acquisitions and similar transactions involving the sale of a business, acquirers commonly require restrictive covenants in both the sale agreement and in separate employment agreements. Acquirers should balance the risk that a court in any particular state may reject the choice-of-law provision that selects Delaware compared with the law of the state in which the acquirer has meaningful contacts.

By Robert Milligan and Grace Chuchla

Using a forum selection clause to transfer a case out of California federal court may have become easier thanks to a recent order from Judge Koh of the United States District Court for the Northern District of California.  In her order, Judge Koh granted defendants’ motion to transfer plaintiff’s complaint to Delaware federal court, finding that the forum selection clauses contained in two agreements were both broadly applicable to tort and statutory claims and enforceable despite allegations that enforcing them would violate California public policy, e.g. the inclusion of an alleged unenforceable jury trial waiver. AJZN, Inc. v. Donald Yu, et al., Case No. 5:12-cv-03348-LHK, (N.D. Cal.)

The agreements and forum selection clauses in question came to be when plaintiff sold all of its assets to one of the defendants in exchange for a warrant giving plaintiff the option to purchase a stake in one of the defendants and that defendant’s assumption of plaintiff’s debt.  This transaction was accomplished via an Asset Purchase Agreement and a Warrant Agreement, both of which contained jury trial waivers and forum selection clauses stating that suits arising under the agreements must be filed in Delaware.    

Following the transaction, the relationship between the parties took a turn for the worse, and on July 3, 2012, the plaintiff filed suit alleging eight causes of action under both federal and California law related to misrepresentations in the Warrant Agreement and in the defendants’ actions, including claims for breach of fiduciary duty and unfair competition.

Defendants responded with a motion to dismiss or transfer based on the forum selection clauses in both the Asset Purchase Agreement and the Warrant Agreement.  In its opposition, plaintiff argued that the claims it brought were not covered by the forum selection clauses and that the clauses were unenforceable due to their inclusion of a jury trial waiver.  Judge Koh disagreed with plaintiff and struck down each of its arguments in turn. The Court found that federal law, not California law, controlled the question of the enforceability of the forum selection clauses and that the plaintiff had the burden of establishing the lawful basis to set aside the clauses.

First and foremost, Judge Koh refuted plaintiff’s assertion of inapplicability by approving of the broad wording of the forum selection clauses.  The text of these clauses reads:

“The parties agree that all actions or proceedings relating to this Agreement (whether to enforce a right or obligation or obtain a remedy or otherwise) will be brought solely in the state or federal courts located in or for Wilmington, Delaware.” (emphasis added)

As Judge Koh saw it, these clauses “do not require that claims seek to enforce the agreements, or seek remedies under the agreements.”  Rather, they “require only that claims relate to, or are based on matter in connection with, the agreements.”  Using this broad interpretation of the forum selection clause, Judge Koh easily held that plaintiff’s claims fall within the scope of the clause.

Plaintiff’s second argument — that the forum selection clauses should be struck down because of their inclusion of a jury trial waiver — met with a similar fate.  Although Judge Koh recognized that jury trial waivers may be unenforceable in California, she did not view the forum selection clause as a contravention of California public policy.  In its briefings, plaintiff did “not presen[t] any reason why a Delaware federal court could not protect [its] interests as well as a California court could.”  Based on this lack of a concrete threat, Judge Koh was not ready to speculate about how a Delaware court would handle this case.  Perhaps it would apply California law.  Perhaps it would apply “some other law that would be equally protective of the interests of California citizens.”  The answer was unclear, and therefore plaintiff did not meet its burden of proving that enforcing the forum selection clauses would contravene California public policy.

Coming on the heels of cases such as Hartstein v. Rembrandt and Hegwer v. American Hearing and Associates — both of which also came from the Northern District and enforced forum selection clauses despite claims of violation of California public policy, i.e. Business and Professions Code section 16600 — AJZN v. Yu is yet another example of how California federal courts are generally willing to enforce forum selection clauses, absent a strong showing that enforcement would be unreasonable or unjust. Notable here is Judge Koh’s insistence that plaintiff  concretely demonstrate that transferring this case to a Delaware court would contravene California public policy.  As Judge Koh stated at the end of her analysis:

“A mere unspecified ‘risk’ that a court could, in theory, enforce the waiver…cannot carry AJZN’s heavy burden to establish that ‘enforcement of the clause would contravene a strong public policy’ of California.” (citing to Argueta v. Banco Mexicano, S.A., 87 F.3d 320, 324 (9th Cir. 1996), emphasis in original).

Although it remains to be seen how concrete of a “risk” California federal judges will demand from plaintiffs in the future,  Judge Koh has provided further authority for courts to demand that plaintiffs all but predict the future if they want to have a forum selection clause declared unenforceable because it contravenes California public policy.  Because we cannot predict the future (try as we might!), only time will tell how this dispute over the enforceability and applicability of forum selection clauses will play out in California. Expect the continued use of aggressive use of forum selection and choice of law provisions to attempt to secure a more favorable forum for future disputes.

Delaware is typically viewed as business friendly as sophisticated parties attempt to avail themselves of Delaware courts through mandatory forum selection, choice of law, and consent to jurisdiction provisions. Delaware also has a  favorable choice of law/venue statute, 6 Del. C. § 2708, which provides that parties to certain contracts over $100,000  may use Delaware choice of law provisions in their contracts and that it “shall conclusively be presumed to be a significant, material and reasonable relationship with this State and [the agreement] shall be enforced whether or not there are other relationships with this State.”

On July 11, 2012, the Delaware Court of Chancery found that former employees are not indispensable parties for purposes of dismissal pursuant to Chancery Court Rule 19 in an action against their new employer for breach of covenants not to compete, misappropriation of trade secrets, and aiding and abetting a breach of fiduciary duty, based on allegations that the new employer improperly persuaded the employees to breach agreements with their former employer.

NuVasive, Inc. v. Lanx, Inc., C.A. No. 7266-VCB (Del. Ch. July 11, 2012) involved claims that Lanx, a medical device company, induced employees of NuVasive, a competitor, to work for Lanx. Specifically, NuVasive alleged that Lanx persuaded employees of NuVasive to breach various restrictive covenants that the employees had with NuVasive and to misappropriate NuVasive’s trade secrets and other proprietary information. NuVasive further alleged that Lanx aided and abetted breaches of fiduciary duty by the former employees. Neither party asserted that the former employees are subject to personal jurisdiction in Delaware or could otherwise be joined. Lanx then moved to dismiss pursuant to Chancery Court Rule 12(b)(7), which allows a defendant to move for dismissal because of a failure to join an indispensable party under Rule 19.

Under Chancery Court Rule 19(a), the Court must determine whether an absent person is a necessary party to the litigation. If an absent party is deemed necessary and cannot be joined, the Court must then, pursuant to Rule 19(b), “determine whether in equity and good conscience the action should proceed among the parties before it, or should be dismissed, the absent person being thus regarded as indispensable.” Rule 19(b) lists four factors for the court to consider in determining if a necessary party is indispensable to the action, including the extent to which a judgment rendered in the person’s absence would be prejudicial to those already parties, and whether the plaintiff will have an adequate remedy if the action is dismissed for nonjoinder.

In NuVasive, the Court found that, while the former employees of NuVasive were necessary parties to the litigation concerning the restrictive covenant-based claims, they were not indispensable parties because the court could protect the rights of the absent parties by declining to enter injunctive relief, or by crafting a limited injunction that did not inappropriately prejudice the absent employees. 

As to the remaining allegations, the Court found that the former NuVasive employees were not necessary parties for claims based on trade secret misappropriation and aiding and abetting a breach of fiduciary duty. Specifically, the Court concluded that any ruling on the issues raised by this litigation would only affect the former employees’ employment prospects with the new employer to the extent that their employment actually did rely on the misappropriation of trade secrets. Thus, the Court found that they were not necessary parties for the trade secret misappropriation claim. Nor were they necessary parties as to the aiding and abetting breach of fiduciary duty claims, because any potential reputational harm that could be suffered by the former employees in this litigation, in their absence, would not be sufficient to render them necessary parties.

           Delaware Court of Chancery Vice Chancellor J. Travis Laster, faced with an unreasonable non-compete/non-solicitation agreement, indicated that he would have preferred to hold it invalid but said that he had no choice other than to modify its terms because its Maryland choice-of-law provision requires judicial “blue penciling.” He did enjoin the ex-employee from using his ex-employer’s customer list, a trade secret, but held that the ex-employee may call on any customer whose name is within his own knowledge.

            Delaware Elevator, Inc. (“DEI”), a national elevator installer and servicer, sued ex-employee John Williams who had 20 years of experience in the industry (six of them with DEI) at the time he left that corporation and started his own — one man — competing elevator maintenance company. He had signed an agreement with DEI (a) barring him for three years after leaving its employ from working in a competing business within 100 miles of any DEI office, and (b) prohibiting him from soliciting business from anyone who during the last six months of his employ had been either an actual DEI customer or a potential customer DEI was actively soliciting. While he claimed his signature on the agreement was a forgery, the court said that no rational fact finder could accept his claim. 

            The agreement contained a Maryland choice-of-law provision and a stipulation that a violation would inflict irreparable harm on DEI. Maryland law upholds non-competes if the restraints are reasonably necessary for the protection of the employer, do not impose an undue hardship on the employee, and are in the public interest. Even DEI recognized the unreasonableness of the territorial restriction as written (within 100 miles of any DEI office) and sought to enforce the agreement within 100 miles of just the Newark, Delaware office where Williams worked.   

            The Vice Chancellor observed that Williams has 34 years in the workforce, has personal and family ties to the area where he has been working, and could not readily re-locate or find an equivalent job in a new field. Rhetorically, the court asked DEI’s attorneys “how they would fare if forced to re-start in a far-off jurisdiction, to re-invent themselves as practitioners in a completely different subject-matter area, or to leave the law entirely and find employment in another industry.” 

            While he might have preferred to invalidate the agreement altogether, the Vice Chancellor stated that Maryland “does not authorize a policy-based refusal to enforce an unreasonable non-compete agreement. Maryland law instead calls on the court to carve back overly broad restrictive covenants by wielding the judicial ‘blue pencil.’” Accordingly, he modified the restrictive provisions to a two-year-30-miles-from-Newark-radius (since the two year period began January 17, 2010, Williams’ date of termination, it will expire less than one year after the decision was announced in March 2011). The court observed that, as modified, Williams would be able to earn a living by using his contacts and knowledge of the industry outside the non-compete zone immediately, and within the zone shortly, while at the same time DEI’s relationships with existing and prospective customers were adequately protected. 

            Williams admitted that he took a DEI customer list with him and used it. Because the list was held to constitute a trade secret, he was ordered to destroy all electronic and paper copies. However, the court said he is free to call on customers he knows, even if their names are on the list. A hearing on damages for wrongful use of the list will be scheduled.

            Employers should be cognizant of the applicable legal principles when they include a choice-of-law provision in a non-compete or non-solicitation agreement. If DEI’s agreement with Williams had provided for application of Delaware law, the agreement might have been voided altogether. By applying Maryland law, the employer salvaged at least some protection. Designation of another state’s law might have been even more favorable to the employer. Ask your Seyfarth Shaw trade secrets attorney for advice about choice-of-law provisions.

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Sasun Bughdaryan, Unsplash

As part of Seyfarth’s 2026 Trade Secrets Webinar Series, our panel presented FTC Non-Compete Ban Two Years Later: Enforcement & Workarounds, examining how the non-compete landscape continues to evolve following the FTC’s abandoned rulemaking effort and the growing influence of state law.

Jesse Coleman, Gary Friedman, and Eron Reid led a practical discussion for in-house counsel, HR professionals, executives, and business leaders navigating an increasingly complex enforcement and compliance environment.

View the Recording – CLE credit for this recording expires on May 27, 2027. Please refer to the program description for jurisdiction-specific details and deadlines.

Key Takeaways

FTC Enforcement Has Shifted to a Case-by-Case Approach

Under new leadership, the FTC has moved away from attempting to impose a categorical ban on non-competes and instead is pursuing a case-by-case enforcement strategy. This approach applies a reasonableness standard similar to those long used by many states.

While the rulemaking effort may be behind us, federal scrutiny of restrictive covenants remains active—now focused on specific fact patterns rather than broad prohibitions.

Enforcement Is Targeting Overbroad Use of Non-Competes

Early enforcement actions indicate that the FTC is focusing on clear overuse and overreach, particularly where non-competes are:

  • Applied broadly across employee populations
  • Untethered to role, seniority, or access to sensitive information
  • Used as a default rather than a tailored protection

These actions reinforce that employers should avoid “one-size-fits-all” restrictions and instead ensure covenants are narrowly aligned to legitimate business interests.

Healthcare Remains a Key Area of Focus

The health care industry continues to be a priority for enforcement, particularly where restrictive covenants are perceived to limit patient choice or access to care.

Employers in this space should expect continued scrutiny of non-competes involving physicians and other clinical professionals, especially in highly competitive or underserved markets.

“Education Through Enforcement” Will Continue

The FTC is expected to continue leveraging targeted enforcement actions as a tool to shape the law, effectively providing guidance through test cases and settlements.

This “education through enforcement” approach means employers should closely monitor developments, as each action may further define the boundaries of acceptable restrictive covenant practices.

State Law Patchwork Is Expanding

At the same time, employers face an increasingly complex patchwork of state laws governing non-competes and other restrictive covenants. These laws vary significantly and may include:

  • Wage thresholds restricting enforceability
  • Advance notice requirements
  • Industry-specific limitations or outright bans

As a result, compliance must be managed on a jurisdiction-by-jurisdiction basis, with careful attention to applicable state requirements.

Uniform Agreements Are No Longer Sustainable

Given the divergence in state laws, multi-state employers can no longer rely on uniform agreements.

Instead, employers should consider:

  • Modular agreements that adjust based on employee location
  • State-specific templates tailored to local legal requirements

This approach helps balance enforceability with administrative efficiency while reducing legal risk.

Choice-of-Law Strategy Requires Reassessment

Employers should also re-evaluate whether to default to Delaware law when drafting restrictive covenants.

Although Delaware has traditionally been a preferred jurisdiction—particularly for companies incorporated there—its jurisprudence on restrictive covenants has shifted over the past several years and remains in flux.

Companies should:

  • Assess whether Delaware has a meaningful nexus to the employment relationship
  • Consider whether another jurisdiction tied to the workforce or business operations may provide a more reliable enforcement forum
  • Avoid reflexively selecting Delaware without evaluating current legal trends

Looking Ahead

Although the FTC’s non-compete rule is no longer in effect, the broader movement to limit restrictive covenants continues to gain momentum through both federal enforcement and state legislation. Employers should take a proactive approach by tailoring agreements, strengthening alternative protections, and staying attuned to ongoing legal developments.

To ensure you don’t miss future sessions, subscribe to our Litigation – Trade Secrets & Non-Competes mailing list. For tailored programs, our attorneys are available to present customized sessions for your organization. Subscribe to our Trading Secrets blog for ongoing insights on trade secrets, employee mobility, and information governance.