Summary
This Seventh Circuit opinion addresses the enforceability of forfeiture-for-competition provisions in Restricted Stock Unit agreements governed by Delaware law. Following certification to the Delaware Supreme Court, the court held that such provisions are generally enforceable without judicial review for reasonableness under the employee choice doctrine when an employee voluntarily terminates employment. Accordingly, the Seventh Circuit reversed the district court's grant of summary judgment for the former employee and remanded the case for further proceedings to determine whether he actually breached the agreements.
Topics
Practice areas
Questions Presented
- Whether Delaware's employee choice doctrine precludes judicial review for reasonableness of forfeiture-for-competition provisions in Restricted Stock Unit Agreements when the employee voluntarily terminates employment.
- Whether the RSU forfeiture provision was enforceable under Delaware law on the undisputed facts.
- What proceedings should occur on remand concerning whether Rutledge actually breached the RSU Agreements.
Holdings
- Under Delaware law, Cantor Fitzgerald's employee choice doctrine is not limited to limited partnership agreements and applies to forfeiture-for-competition provisions in RSU Agreements.
- The RSU forfeiture-for-competition provisions were enforceable under Delaware law because Rutledge voluntarily terminated his employment and did not demonstrate the extraordinary hardship that could trigger the limited exception to the employee choice doctrine.
- The court could not resolve the breach issue on this appeal because the district court granted summary judgment solely on the enforceability issue and the Delaware Supreme Court's certified-answer decision addressed enforceability, not breach.
Key quotations
“The Delaware Supreme Court’s answer to our first certified question establishes that the forfeiture-for-competition provisions in the RSU Agreements are not subject to judicial review for reasonableness.” (126 F.4th at 1249)
“courts do not review forfeiture-for-competition provisions for reasonableness so long as the employee voluntarily terminated her employment.” (126 F.4th at 1250)
“Because the Delaware Supreme Court’s answer to our first certified question speaks only to the enforceability issue and not the issue of breach, we leave it to the district court on remand to determine whether to reopen summary judgment proceedings, proceed to trial, or some combination of those options.” (126 F.4th at 1252)
Factual background
Rutledge was a plant manager at LKQ for more than ten years and was designated a key person eligible for restricted stock unit awards. The RSU Agreements prohibited him from working for a competitor within nine months after leaving LKQ and allowed LKQ to claw back proceeds from the awards if he breached the provision. Rutledge voluntarily left LKQ in 2021 and began working for a competitor five days later; enforcing the provisions would permit LKQ to claw back hundreds of thousands of dollars in stock awards.
Procedural history
Rutledge worked for LKQ for more than a decade, received restricted stock unit awards, voluntarily left LKQ in 2021, and began working for a competitor five days later. LKQ sued for unjust enrichment and breach of the RSU Agreements and separate restrictive covenant agreements. The district court granted Rutledge summary judgment on all claims. The Seventh Circuit previously affirmed as to unjust enrichment and the restrictive covenant claims, certified questions regarding Delaware law to the Delaware Supreme Court, and, after receiving its answer, reversed the summary judgment ruling on the RSU-agreement claim and remanded for the district court to determine how to resolve the remaining breach issue.
Remand instructions
The district court must determine whether to reopen summary judgment proceedings, proceed to trial, or use a combination of those options to resolve whether Rutledge actually breached the RSU Agreements.