LKQ Corporation v. Rutledge, No. 110, 2024 (Del. 2024) (Seitz, C.J.)

In this opinion, the Delaware Supreme Court (the “Court”) answered certified questions of law from the United States Court of Appeals for the Seventh Circuit, advising the holding of Cantor Fitzgerald, L.P. v. Ainslie, 312 A.3d 674 (Del. 2024), that courts should not review forfeiture-for-competition provisions for reasonableness, is not restricted to the limited partnership context.

This case arose from a dispute between LKQ Corporation (“LKQ”), a Delaware corporation in the auto salvage and recycled parts business, and Robert Rutledge, a former employee who had signed Restricted Stock Unit Agreements (the “RSU Agreements”) with non-competition provisions. Rutledge agreed to not compete with LKQ if he left the company and agreed to forfeit RSU benefits and repay proceeds from LKQ stock sales if he competed within nine months of his departure. Rutledge also signed Restrictive Covenant Agreements that contained non-competition provisions like the RSU Agreements.

After Rutledge voluntarily resigned from LKQ in 2021 and joined a competitor shortly after his departure, LKQ sued him in Illinois federal court for breaches of contract and unjust enrichment, seeking to enjoin Rutledge from working for the competitor under the Restrictive Covenant Agreements and to recover the stock proceeds under the RSU Agreements. The district court dismissed LKQ’s unjust enrichment claim and granted Rutledge’s motion for summary judgment on LKQ’s contract claims. The district court held that the Restrictive Covenant Agreements were unenforceable under Illinois law. The district court also deemed the RSU Agreements unreasonable restraints of trade and therefore unenforceable, relying on the Court of Chancery’s opinion in Cantor Fitzgerald, which had not yet been decided on appeal by the Delaware Supreme Court.

LKQ appealed to the Seventh Circuit, which affirmed the dismissal of the unjust enrichment claim and the summary judgment ruling on the Restrictive Covenant Agreements. Turning to the enforceability of the RSU Agreements’ forfeiture-for-competition provisions, the Seventh Circuit acknowledged that it had the benefit of the Delaware Supreme Court’s Cantor decision and the reasoning therein. As a result, the Seventh Circuit certified two questions to the Delaware Supreme Court: (1) whether the decision in Cantor Fitzgerald applies beyond limited partnership agreements? (2) If Cantor Fitzgerald does not apply in all other circumstances, what factors should inform its application?

Chief Justice Seitz framed the opinion through the Seventh Circuit’s two possible interpretations of Cantor Fitzgerald. Read narrowly, the decision was limited to the facts before it, including sophisticated parties, a limited partnership agreement, and forfeiture of unpaid benefits. But it could also be read broadly, to articulate public policy concerns about restrictive covenants in the context of forfeiture-for-competition provisions, and Delaware’s respect for freedom of contract.

The Court agreed with the Seventh Circuit’s “broad” view of Cantor Fitzgerald and made clear that Cantor Fitzgerald is not limited to the context of limited partnership agreements. The Court emphasized Delaware’s strong commitment to upholding and respecting private agreements, a principle underlying DRULPA and explained in earlier Delaware decisions. The Court also believed the liquidated damages precedent inapt and held that forfeiture-for-competition provisions are better viewed as conditions precedent to paying future distributions. Further, the relevant remedy available provided another distinguishing feature, because forfeiture-for-competition provisions “are not enforceable through injunctive relief” and “do not deprive the public of the employee’s services.” The Court believed that business entities would be discouraged from offering employees additional benefits if their contracts were not respected.

Additionally, the fact that the RSU Agreements required returning benefits already received did not make them unenforceable. Drawing on W.R. Berkley Corp. v. Dunai and W.R. Berkley Corp. v. Hall, the court held that such claw-backs are legitimate mechanisms to enforce the terms of a voluntary agreement and do not restrain employee’s freedom of employment.

Given its ruling that Cantor Fitzgerald was not restricted to the limited partnership context, the Supreme Court did not address the Seventh Circuit’s second question.

About Potter Anderson

Potter Anderson & Corroon LLP is one of the largest and most highly regarded Delaware law firms, providing legal services to regional, national, and international clients. With more than 100 attorneys, the firm’s practice is centered on corporate law, corporate litigation, intellectual property, commercial litigation, bankruptcy, labor and employment, and real estate.