Delaware Chancery Court Narrows the Path for Enforceable Non-Competes: Lessons from North American Fire and Payscale

By: Jeffrey W. Berkman, Esq., LL.M., Hon. Ruth Bogatyrow Kraft, and Vaughn C. Collopy, Esq.

Introduction

A notable trend has emerged in Delaware with respect to the enforceability of non-competes – while once considered a management-friendly jurisdiction, two recent decisions demonstrate a marked shift towards a closer scrutiny of non-competes tied to equity-incentive awards. The genesis of this trend can be traced to the 2022 landmark case, Kodiak Building Partners, LLC v. Adams,[1] where the Delaware Chancery Court declined to blue-pencil an overly broad non-compete. In Kodiak, the Court found that the nearly one million dollars the corporate executive received for his equity stake was insufficient to support a non-compete that exceeded the scope of the business actually carried on by the acquired company. Two recent cases, North American Fire Ultimate Holdings LP v. Doorly[2] and Payscale Inc. v. Norman[3]  demonstrate that Kodiak was not an outlier decision. Significantly, the Delaware courts have increasingly declined to blue pencil, or reform, non-competes deemed overbroad.

In the wake of Kodiak, the Delaware Court of Chancery has continued to send a clear signal to employers and their counsel: restrictive covenants, including non-competition agreements linked to equity awards, will be closely scrutinized and are increasingly difficult to enforce without a carefully crafted non-compete supported by meaningful consideration. In two notable 2025 cases – North American Fire and Payscale – the Chancellors invalidated non-compete provisions, highlighting the importance of both the sufficiency of consideration and the reasonableness of the imposed restrictions. These rulings underscore a growing judicial reluctance to uphold broad or inadequately supported post-employment restraints as well as offering important guidance for structuring enforceable covenants. Although limited to Delaware, the paradigm they establish should be considered in drafting restrictive covenants in any jurisdiction.

North American Fire Ultimate Holdings LP v. Doorly

On March 7, 2025, in North American Fire, the Court of Chancery invalidated restrictive covenants (including a non-compete provision) in an equity-incentive agreement because the sole consideration supporting those covenants—the equity award—automatically expired upon the employee’s discharge.  The Company discharged Doorly in December 2023 for a purported breach of the non-compete covenants, seeking injunctive relief to bar further violations. Doorly moved to dismiss the suit  arguing that upon forfeiture of his equity award, the underlying agreement lacked  consideration and was no longer enforceable.[4]

Of significant import, the Chancellors agreed with Doorly, holding that since the equity grant constituted the “adequate and sufficient” consideration required to support the restrictive covenant in the first place, its forfeiture eliminated the underlying basis for those covenants.[5] Accordingly, the non-compete provisions were declared unenforceable[6] and the complaint was dismissed.[7]

Payscale Inc. v. Norman

Barely three months after North American Fire, on June 9, 2025, in Payscale, the Chancellors once again addressed the enforceability of a non-compete provision in an equity award agreement. In Payscale Inc., the equity incentive grant was subject to forfeiture upon a breach of restrictive covenants.[8] Like in North American Fire, the defendant Norman argued that, once the equity was forfeited, the restrictive covenants lacked consideration.[9] Additionally, he contended the covenants were unenforceable because the temporal and geographic restrictions were unreasonably broad.[10]

While reflecting that nationwide non-compete agreements could be upheld under certain circumstances, the court deemed these restrictions invalid as overly restrictive, further emphasizing that covenants of such geographic breadth must be supported by substantial consideration.[11]  While recognizing that Norman had received some consideration, the Chancellors determined that the value he did receive was insufficient to warrant the scope of the restriction.[12]   

Incentive Equity and Non-Competes – What is the “Consideration”?

The Delaware Court of Chancery continues its practice of narrowly interpreting restrictive covenants, a trend underscored in North American Fire and Payscale. In North American Fire, the covenant failed because the employee forfeited equity and thus received no consideration[13]; in Payscale, the court found the restriction overbroad relative to the modest consideration offered.[14]

The lessons for Delaware-incorporated employers and for those with contracts governed by Delaware law are clear: (i) not only must restrictive covenants protect legitimate business interests and should be drafted with surgical precision to ensure that they are not overly broad and are supported by valuable, bargained-for consideration, but also, (ii) remedies that include forfeiture (or possibly even surrender of a portion) of the equity may render the non-compete unenforceable for lack of adequate consideration. As always, reasonableness is key. Employers should assess the terms of non-competes to ensure alignment with legitimate business objectives and the narrowing scope of what the courts are viewing as acceptable consideration for these provisions.

We Recommend Reevaluating Automatically Renewing Managerial Agreements

In light of these recent developments, including the movement away from the willingness of courts to blue-pencil restrictive covenants, agreements with key managerial employees (especially those with pending renewals under evergreen clauses) should be reviewed. While continuity of management is often critical for operational stability, the rapidly changing legal landscape underscores the importance of carefully assessing whether the non-compete language and recitation of consideration contained in these contracts remain sufficient and enforceable.

Employers as well as acquirors in M&A transactions should take this moment to confirm that non-compete clauses adequately reflect legitimate business interests, are geographically and temporally reasonable, and are supported by meaningful consideration – even when the employment agreements are in the context of a sale of a business or are key employee agreements that automatically renew.

We encourage you to reach out to FRB's Corporate & Securities and Labor & Employment Practice Groups for guidance on how best to tailor non-compete provisions in light of current standards of judicial scrutiny. By undertaking a thoughtful, comprehensive review of your employment agreements, employers and business acquirors alike can be confident that their contractual arrangements remain both effective and enforceable. 

[1] Kodiak Building Partners, LLC v. Philip D. Adams, 2022 WL 5240507 (Del. Ch. Oct. 6, 2022).

[2] North American Fire Ultimate Holdings, LP v. Doorly, 2025 WL 736624 (Del. Ch. Mar. 7, 2025).

[3] Payscale Inc. v. Erin Norman and BetterComp, Inc., 2025 WL 1622341 (Del. Ch. Jun. 9, 2025).

[4] See id. at 1.

[5] See id.

[6] See id. at 5.

[7] See id. at 6.

[8] See Payscale Inc. v.  Norman (Del. Ch. Jun. 9, 2025) at 5.

[9] See id.

[10] See id.at 4.

[11] See id..

[12] See id. at 5.

[13] See North American Fire v. Doorly (Del. Ch. Mar. 7, 2025) at 5.

[14] See Payscale Inc. v. Norman. (Del. Ch. Jun. 9, 2025) at 6.

DISCLAIMER: This summary is not legal advice and does not create any attorney-client relationship. This summary does not provide a definitive legal opinion for any factual situation. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation. The information contained herein is based upon the law at the time of publication.