341 A.3d 1027
Del. Ch.2025Background
- Defendants are former employees of Fortiline, Inc., which is a subsidiary of Patriot Supply Holdings, Inc. (PSH).
- Defendants signed stock option award agreements in 2016 following PSH's acquisition of Fortiline, each containing broad confidentiality, noncompete, and nonsolicitation covenants.
- Plaintiffs alleged that a company founder left, started a competing business, and recruited a significant portion of Fortiline’s workforce in violation of these covenants.
- Plaintiffs initially sought a preliminary injunction, but the court previously held the restrictive covenants were overbroad and unenforceable in that context.
- Plaintiffs amended their complaint to seek damages for breach of these covenants; defendants moved for summary judgment, arguing the covenants are unenforceable.
- The case comes on summary judgment after the dismissal of other claims, with only damage claims for breach of restrictive covenants remaining.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether restrictive covenants are subject to reasonableness review when only damages (not injunction) are sought | Seeking damages alone means reasonableness review is not triggered; draws analogy to forfeiture-for-competition provisions. | The breadth and nature of the covenants require reasonableness review regardless of remedy sought. | Reasonableness review applies based on what the provision demands, not the remedy sought; covenants are unenforceable. |
| Comparison to forfeiture-for-competition provisions | Damages for breach are like forfeiture clauses, which aren't reviewed for reasonableness. | Restrictive covenants prohibit competition and are fundamentally different from forfeiture clauses. | Court finds they are distinct; forfeiture clauses may escape reasonableness review, but covenants forbidding competition do not. |
| Effect of severing unenforceable covenants (waste argument) | Severability would make grant of options wasteful if covenants are struck, contrary to public policy. | Option grants not solely consideration for covenants; serve broader purposes like retention and performance motivation. | Severing covenants does not render agreements wasteful due to independent consideration. |
| Entitlement to damages or restitution if covenants are unenforceable | Entitled to restitution in equity even if contract is unenforceable for policy reasons. | No damages or restitution are available absent enforceable covenants. | No restitution awarded; claims fail as covenants are unenforceable. |
Key Cases Cited
- Cantor Fitzgerald, L.P. v. Ainslie, 312 A.3d 674 (Del. 2024) (distinguishes restrictive covenants from forfeiture-for-competition provisions; mandates reasonableness review of restrictive covenants)
- LKQ Corp. v. Rutledge, --- A.3d --- (Del. 2024) (reaffirms distinction and contractarian principles for evaluating restrictive covenants)