The Seventh Circuit has reinstated a lawsuit by an auto parts corporation seeking a clawback of the proceeds a former plant manager received from selling his stock shares. The Court reversed the lower court’s grant of summary judgment in favor of the former manager, stating that it should not have considered the reasonableness of the noncompete clause in the stock agreement. The case is LKQ Corporation v. Robert Rutledge, case number 23-2330, U.S. Court of Appeals for the Seventh Circuit.
LKQ Corp. is a Tennessee-based auto parts supplier who sued Rutledge in June 2021 based on his alleged violation of the forfeiture-for-compensation provision in his stock agreement. That provision prohibited him from working for a competitor within nine months of leaving his position. Violation of the provision allowed the company to claw back his stock.
In 2011, LQK deemed Rutledge a “key person”, and, as a result, began annually granting him LKQ stock. In April 2021, Rutledge resigned and began working for a direct competitor within five days of his resignation date. Rutledge then sold his LQK stock on the open market for hundreds of thousands of dollars.
The trial court granted summary judgment in favor of Rutledge, finding that the noncompete provision in the LKQ stock agreement was unenforceable without determining whether Rutledge violated the provision. However, a three-judge panel of the Seventh Circuit disagreed and asked the Delaware Supreme Court for guidance in applying a January 2024 court ruling to Rutledge. In that case, the Delaware Supreme Court reversed a Chancery Court decision that invalidated a similar forfeiture-for-compensation provision in Cantor Fitzpatrick LP’s limited partnership agreements.
The Delaware Supreme Court subsequently affirmed that its Cantor Fitzpatrick decision applied outside the limited partnership context. However, the Seventh Circuit held that Rutledge had failed to prove an extraordinary hardship that would overcome public policy considerations. As per the Delaware Supreme Court’s ruling, the Seventh Circuit found that Delaware enforces voluntary agreements of employees as a matter of “fundamental public policy.”
On remand, the Seventh Circuit instructed the trial court to either reopen summary judgment proceedings or allow the case to proceed to trial.
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