- In response to two certified questions from the 7th Circuit in LKQ Corp. v. Rutledge, the Delaware Supreme Court confirmed that its holding from Cantor Fitzgerald, L.P. v. Ainslie, which clearly endorsed the employee choice doctrine in the limited partnership context, is not limited to limited partners.
- Delaware is now confirmed as an employee choice state, which means that forfeiture-for-competition provisions will be enforced subject to contracting principles and without regard to reasonableness.
- Following the Delaware Supreme Court’s clarification, the 7th Circuit now sends the LKQ Corp. v. Rutledge dispute back to the District Court to determine the appropriate next steps.
The Delaware Supreme Court’s ruling in Cantor Fitzgerald v. Ainslie, which reversed the Court of Chancery’s 2023 finding that forfeiture-for-competition provisions should be evaluated by the same “reasonableness” standard as employee noncompetes and held instead that the provisions were subject to traditional contract principles, was a potential sign of relief for employers and entities relying on restrictive covenants governed by Delaware law. However, the court’s decision left open whether its holding applied only to limited partners or extended the “employee choice doctrine” – which presumes an employee who chooses to leave a company makes an informed decision to either refrain from competing and retain contractual benefits or compete and forfeit those benefits – to all employees. In addition, the context of Cantor Fitzgerald was unique in that it involved a dispute over millions of dollars in future profits among sophisticated players in the financial services industry, leaving the question of how the holding would be applied on more typical facts, involving the potential clawback of more-modest benefits from midlevel employees, unanswered.
Less than two months later, in LKQ Corp. v. Rutledge, the 7th Circuit needed an answer to that question. LKQ involved a plant manager – i.e., not a limited partner – earning approximately $109,000 per year who resigned from his position and went to work for an alleged competitor. The employee had signed agreements with LKQ containing forfeiture-for-competition provisions, potentially implicating the employee choice doctrine. In response to the 7th Circuit’s certified questions, the Delaware Supreme Court clarified that the Cantor Fitzgerald holding is applicable to all employees, not just limited partners. In doing so, the Court “endorsed the employee choice doctrine, meaning that the reviewing court should treat the [] provision as an enforceable term subject to ordinary breach of contract defenses.” Further, the Court held that the doctrine was applicable even when it “require[s] the return of benefits already received” by the employee. Citing its decision in Cantor Fitzgerald, it explained that “courts do not review forfeiture-for-competition provisions for reasonableness so long as the employee voluntarily terminated her employment” and contrasted forfeiture-for-competition provisions from restrictive covenants, noting their differing consequences and remedies and ultimately stating that the “restraint of trade policy implications are ‘diminished—if it does not vanish—’ for forfeiture-for-competition provisions.”
Following the decision from the Delaware Supreme Court, on Jan. 22, the 7th Circuit reversed the District Court’s decision granting summary judgment to Rutledge on LKQ’s claim that he violated his agreement, and remanded to the District Court for further proceedings.
The 7th Circuit’s decision, and the Delaware Supreme Court’s endorsement of the employee choice doctrine, provide employers and entities relying on Delaware law to govern their restrictive covenants with another tool with which to safeguard their interests.
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