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September 2, 2025
Update: On February 3, 2026, the Delaware Supreme Court reversed the Court of Chancery’s dismissal of North American Fire’s contract claims and remanded the case for further proceedings. The Supreme Court held that, where an employee received incentive units subject to vesting requirements and forfeiture provisions in exchange for agreeing to restrictive covenants, and those units were later forfeited due to the employee’s termination for cause, the restrictive covenants remain enforceable because consideration is measured at the time of contract formation, not at the time of enforcement.
In reaching its conclusion, the Delaware Supreme Court relied on Newell Rubbermaid Inc. v. Storm. Civil Action No. 9398-VCN, 2014 Del. Ch. LEXIS 45. In Newell, the company sought to enjoin Storm, a former employee, from violating restrictive covenants contained in several restricted stock unit (RSU) agreements. Storm alleged that the RSU agreements lack consideration and were, therefore, unenforceable because the RSUs were subject to vesting periods and, if Storm’s employment terminated for any reason before the vesting date, the RSUs were automatically forfeited. The Court of Chancery rejected Storm’s argument, holding that, at the time of formation, Storm “was granted a benefit that held actual value.” The court reasoned that, although “value is somewhat contingent, based on certain factors such as the time period in which the units will vest and…likelihood of future employment … [it was] not illusory.”
Likewise, here, the Delaware Supreme Court reasoned that, although the value of Doorly’s units was “somewhat contingent,” they were not illusory at the time of formation.
Employers: Consideration for a contract is measured at the time of formation, not at the time of enforcement.
In a recent case, the Delaware Court of Chancery deemed unenforceable for lack of consideration a restrictive covenant that was tied to a forfeited equity award. See North American Fire Ultimate Holdings LP v. Doorly, C.A. No. 2024-0023-KSJM (Mar. 7, 2025).
Case Background
Defendant Alan Doorly worked for an affiliate (Cross Fire) of North American Fire Ultimate Holdings LP (North American Fire) in New York. In February 2022, in connection with a company restructuring, North American Fire issued to Doorly 300,000 equity units (Units), subject to time and performance vesting. In exchange, Doorly executed an Incentive Unit Grant Agreement (Agreement), which is governed by Delaware law and contains restrictive covenants, including restrictions on the use of confidential information, solicitation of employees and customers, and competition. The Agreement identifies the Units as “adequate and sufficient consideration” for the restrictive covenants and provides that, if Doorly breached the restrictive covenants, his vested and unvested Units would be “automatically forfeited.”
Doorly resigned from Cross Fire in October 2023. The parties then spent weeks negotiating the terms of his separation. Discussions broke down. Cross Fire terminated Doorly’s employment for cause in December 2023, claiming that he breached the restrictive covenants in the Agreement before he resigned.[1] Pursuant to the Agreement, Doorly’s for-cause termination resulted in the automatic forfeiture of his Units.
North American Fire filed a lawsuit against Doorly for breach of the restrictive covenants. Doorly moved to dismiss the complaint, arguing that the automatic forfeiture of his Units eliminated the only consideration for the Agreement, rendering the Agreement unenforceable. The Court of Chancery granted Doorly’s motion to dismiss.
The Parties’ Arguments and the Court’s Analysis
Doorly’s primary argument was that the restrictive covenants are unenforceable for lack of consideration (i.e., something given or promised or forborne by one party in exchange for the promise or undertaking of another). According to Doorly, the Units were the sole consideration for the restrictive covenants and, when North American Fire forfeited the Units, it eliminated the sole consideration for the restrictive covenants, rendering them unenforceable.
North American Fire denied that the Units comprised the sole consideration for the Agreement, but could point to no additional consideration offered to or received by Doorly.
The Court concluded that the restrictive covenants were unenforceable for lack of consideration. North American Fire eliminated the sole consideration for the restrictive covenants when it forfeited Doorly’s Units. The Court found no support in the Agreement for North American Fire’s argument. In fact, the Court noted that language in the Agreement that referred to the Units as adequate and sufficient consideration in support of the restrictive covenants created a “negative implication” that those Units constituted the sole consideration. The Court also rejected North American Fire’s effort to distinguish a 2015 case out of New York, NBTY, Inc. v. Vigliante. In that case, the court deemed void for lack of consideration the restrictive covenants in an option agreement because the options expired when the employee engaged in competition with the company.
Employer Takeaways
This decision contradicts prior decisions of the Chancery Court and other jurisdictions on similar topics. North American Fire has appealed the decision and we will monitor the case for further developments.
In the meantime, here are three ways to improve the likelihood that your restrictive covenants will be enforceable: (1) Provide consideration in addition to the grant of equity units; (2) To the extent that equity units constitute the sole consideration for a restrictive covenant, allow the employee to retain something of value even when the equity units are forfeited; and (3) Rely on any preexisting restrictive covenants (e.g., covenants signed at the commencement of employment) in your separation documents.
The author of this article, Patricia Tsipras, is a member of the Bar of Pennsylvania. This article is designed to provide one perspective regarding recent legal developments, and is not intended to serve as legal advice in Pennsylvania, Delaware, or any other jurisdiction, nor does it establish an attorney-client relationship with any reader of the article where one does not exist. Always consult an attorney with specific legal issues.
[1] The alleged breaches included: (1) Doorly’s use of confidential Cross Fire information to facilitate a bid for a project of a Cross Fire client in competition with Cross Fire; (2) Doorly’s submission of a bid to another client of Cross Fire that was “unrealistic[ally]” underpriced and forced North American Fire to reduce its bid price to secure the project; (3) Doorly’s recruitment a Cross Fire sales employee to work with him at his new company; (4) Doorly’s purposeful disruption of Cross Fire’s business operations; and (5) two other Cross Fire clients’ contracts with Doorly’s company for alarm services.
