Delaware
Delaware: Consideration for Restrictive Covenants
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Discussion
Discussion
The Supreme Court of Delaware recently issued two opinions on the matter of consideration for restrictive covenants. Specifically, the validity of consideration given must be evaluated at the time of contract formation, and the consideration must be adequate in the context.
Consideration Must be Valid on Contract Formation
On February 3, 2026, in North American Fire Ultimate Holdings, LP v. Doorly, the Supreme Court of Delaware measured the validity of consideration at the time an agreement was made. There, an employee was given an award of shares in the employer’s company in exchange for signing a noncompete agreement. The employee subsequently violated the noncompete agreement and the company shares were forfeited as a result. The employee claimed that the noncompete agreement lacked sufficient consideration since the awarded shares were forfeited after entering into the agreement.
The Court said that the awarded shares were valid at the time of entering into the noncompete agreement, which meant there was valid consideration. The validity of consideration is not measured again later at the time of enforcement. Moreover, even though the awarded shares created an opportunity to earn money in the future, they were still a valid form of consideration as they were contractual rights that the employee would not have otherwise been entitled to receive.
Consideration Must be Adequate in the Context
On March 19, 2026, in Payscale, Inc. v. Norman, the Supreme Court of Delaware distinguished Doorly. Although the validity of consideration is evaluated at the time of contract formation, the consideration must still be adequate in the context of restrictive covenants. Specifically, the balancing-of-the-equities inquiry affords the court discretion to weigh the breadth of a restrictive covenant against the consideration that supports it. However, the lower court here did not conduct a balancing-of-the-equities analysis in its decision.
An employee was awarded company shares twice in exchange for entering into restrictive covenants for noncompete, nonsolicitation, and confidentiality. The opportunity to exercise the shares was contingent on the sale of the parent company. Even though the lower court considered the adequacy of the consideration within the context of the restriction’s geographic and temporal scope, it lacked sufficient information in the pleadings to make a factual determination. Rather, there was sufficient information in the pleading to allow the claim to move forward.
Action Items
- Review restrictive covenants with legal counsel for compliance.
Disclaimer: This document is designed to provide general information and guidance concerning employment-related issues. It is presented with the understanding that ManagEase is not engaged in rendering any legal opinions. If a legal opinion is needed, please contact the services of your own legal adviser. © 2026 ManagEase