A win for employers in the restrictive covenants space:
The Delaware Supreme Court recently issued a decision upholding a forfeiture-for-competition provision in a limited partnership agreement (signed by individuals who were also employees of the partnership), stating that such provisions are distinguishable from standard non-competition clauses because they do not restrict an individual’s livelihood or deprive the public of an individual’s services, but instead permit the individual to engage in competition against a former employer if they are willing to forfeit a contingent benefit.
Due to this distinction, the court found that the usual “reasonableness” review applied to standard non-competition clauses does not apply to forfeiture-for-competition provisions and held that such provisions should instead be analyzed under traditional contract law principles; that is, courts should enforce forfeiture-for-compensation provisions that are freely agreed to, unless there is evidence of unconscionability or bad faith.
It should be noted that the court explicitly limited its holding to forfeiture-for-competition provisions in partnership agreements; nevertheless, the court’s holding in this case is a useful tool for employers who wish to secure non-competition obligations from high-level employees who also have a partnership interest in the business.
You can read the full decision here.