The core takeaway is relatively straightforward: A covenant does not become unenforceable simply because the equity underpinning it was later forfeited or lost its value.

On February 3, 2026, the Delaware Supreme Court issued an en banc order in North American Fire Ultimate Holdings, LP v. Doorly, No. 142, 2025 (Del. 2026), reversing the Court of Chancery’s dismissal of an employer’s claim to enforce restrictive covenants contained in an equity incentive agreement after forfeiture of the equity units. The decision reaffirms a well-established principle of contract law: Consideration is measured at the time of contract formation, not at the time of enforcement. This ruling is particularly relevant for employers that use equity-based compensation as consideration for noncompete, nonsolicitation and confidentiality agreements.

Background

In May 2021, North American Fire Ultimate Holdings LP acquired Cross Fire & Security Inc., co-founded by Alan Doorly. Doorly stayed on and received common units in the acquiring entity. The following year, North American Fire restructured, and Doorly signed an incentive unit agreement swapping those units for 300,000 Class B units subject to time and performance vesting. The agreement bound Doorly to restrictive covenants covering confidential information, employee and customer nonsolicitation and noncompetition.

North American Fire later terminated Doorly for cause after discovering that he formed a competing company, triggering automatic forfeiture of all his incentive units—vested and unvested—under the terms of the agreement.

The Chancery Court Decision

North American Fire initiated an action against Doorly to, among other things, enforce the restrictive covenants. The Court of Chancery granted Doorly’s motion to dismiss. Noting that the agreement provided that incentive units were the sole consideration for the restrictive covenants, the Court of Chancery held that, once North American Fire declared Doorly’s incentive units forfeited, the agreement lacked consideration and the covenants were unenforceable.

The Delaware Supreme Court Reversal

The Delaware Supreme Court reversed, holding that the Court of Chancery applied the wrong temporal lens. The court held that “consideration must be measured at the time the parties enter into their contract and that the diminished value of the economic benefit conferred, or even a complete lack of value, does not result in a failure of consideration.”

The Delaware Supreme Court found Newell Rubbermaid Inc. v. Storm, 2014 WL 1266827 (Del. Ch. Mar. 27, 2014) instructive. In Newell, the court enforced restrictive covenants supported by restricted stock units even though those units were subject to automatic forfeiture if the employee was terminated before vesting. The Newell court reasoned that the employee “was granted a benefit that held actual value” at formation, and that the contingency did not make the consideration illusory. The Delaware Supreme Court rejected Doorly’s attempt to distinguish Newell on the ground that the employee there had received the “cash equivalent of dividends” before forfeiture, finding that the receipt of dividend equivalents was not material to Newell’s holding. Although the incentive units in Doorly were “somewhat contingent” at formation, they were not illusory, and that was enough.

What This Means for Employers

The core takeaway is relatively straightforward: A covenant does not become unenforceable simply because the equity underpinning it was later forfeited or lost its value. What matters is whether real consideration existed at the moment the parties struck their bargain.

As employment-based restrictive covenants continue to be closely scrutinized in many respects, Doorly provides a measure of comfort for employers structuring restrictive covenants around equity grants and underscores their function as an important tool for employers to protect their businesses.

Employers should consult with counsel, however, to review their equity programs, plans and agreements to ensure that they comply with the law and provide maximum available protections for the employer.

For More Information

If you have any questions about this Alert, please contact Shannon Hampton Sutherland, Lawrence H. Pockers, Kris Zhang, any of the attorneys in our Trade Secrets and Non-Compete Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.