The Delaware Supreme Court reversed a lower court's dismissal of an employer's lawsuit against a former employee over restrictive covenant violations, clarifying when courts should evaluate consideration in employment agreements.
In *North American Fire Ultimate Holdings, LP v. Alan Doorly*, the Delaware Supreme Court held that consideration for restrictive covenants must be assessed at the time the contract was formed, not when the employer seeks to enforce the agreement. The court reversed the Court of Chancery's Rule 12(b)(6) dismissal and remanded the case for further proceedings.
North American Fire filed the lawsuit against Alan Doorly, a former employee who allegedly violated restrictive covenants contained in an Incentive Unit Grant Agreement. Under the agreement, Doorly received common units in North American Fire in exchange for agreeing to abide by certain restrictive covenants that limited his post-employment activities.
Doorly had worked for approximately 20 years at Cross Fire & Security, Inc., a company he co-founded with his brother that designed, installed, and serviced life safety systems including fire alarms and smoke detectors. In May 2021, North American Fire acquired Cross Fire and continued operating it as a stand-alone business. As part of the acquisition, Doorly remained in his position at Cross Fire and received 700,000 common units in North American Fire.
The Court of Chancery originally dismissed North American Fire's amended complaint, finding that the restrictive covenants were unenforceable as a matter of law due to a lack of consideration at the time North American Fire sought to enforce the agreement. This reasoning suggested that courts should evaluate whether adequate consideration exists based on circumstances at the time of enforcement rather than contract formation.
The Delaware Supreme Court disagreed with this analysis. Writing for the court sitting en banc, the justices clarified that consideration must be measured at the time of contracting, not at the time of enforcement. This distinction is significant because it means employers cannot have previously valid restrictive covenants become unenforceable simply due to changed circumstances that occur after the agreement was signed.
The case highlights the continuing evolution of Delaware law regarding restrictive covenants in employment agreements. Delaware courts have generally taken a more employer-friendly approach to non-compete agreements compared to some other jurisdictions, but they still require adequate consideration to support such restrictions on former employees' ability to compete.
Restrictive covenants typically include non-compete clauses that prevent employees from working for competitors, non-solicitation provisions that bar recruiting former colleagues or clients, and confidentiality agreements that protect proprietary information. These agreements have become increasingly common as employers seek to protect their business interests and trade secrets.
The Delaware Supreme Court's decision provides important guidance for both employers and employees regarding when restrictive covenants will be enforceable. By clarifying that consideration is evaluated at contract formation rather than enforcement, the court has made it easier for employers to predict whether their agreements will withstand legal challenges.
For employers, the ruling suggests they should focus on ensuring adequate consideration exists when restrictive covenants are initially signed rather than worrying about whether circumstances might change before enforcement becomes necessary. Common forms of consideration include continued employment, promotions, bonuses, equity grants, or access to confidential information.
For employees, the decision means they cannot necessarily escape restrictive covenants by arguing that the consideration initially provided has diminished in value by the time the employer seeks enforcement. However, employees may still challenge these agreements on other grounds, such as arguing they are overly broad in scope or duration.
The case was submitted to the Delaware Supreme Court on Nov. 5, 2025, and decided on Feb. 3, 2026. The court heard oral arguments before issuing its decision. Chief Justice Seitz and Justices Valihura, Traynor, Legrow, and Griffiths participated in the en banc decision.
The reversal and remand means the case will return to the Court of Chancery for further proceedings on the merits. North American Fire will have another opportunity to pursue its claims that Doorly violated the restrictive covenants in his agreement, while Doorly may raise other defenses to the enforcement of those provisions.
This decision adds to Delaware's body of law on employment agreements and restrictive covenants, an area of significant importance given Delaware's status as the incorporation state for many major corporations. The ruling provides clearer guidance for businesses structuring employment agreements and for courts evaluating challenges to restrictive covenant enforcement.