In an environment when non-competition agreements have been under attack, the Delaware Supreme Court on Jan. 29, 2024, validated and endorsed the enforcement of a limited partnership agreement’s non-compete tied to an income-forfeiture provision applicable to ex-partners who left a firm and are alleged to have taken positions with a competing business. The ruling bolsters efforts by businesses to retain valuable employees and may have nationwide implications on the enforceability of non-compete agreements. If the decision withstands judicial scrutiny, many employers may consider how to convert existing non-compete agreements using the guidance provided in the Delaware Supreme Court’s decision. The case is Cantor Fitzgerald, L.P. v. Ainslie, Delaware Supreme Court, Case No. 162, 2023 (Jan. 29, 2024).
Background
Cantor Fitzgerald, L.P. is a global financial services company that operates under a Limited Partnership Agreement (Agreement). The plaintiffs are a group of six former Cantor Fitzgerald partners, each of whom, to gain admission to the partnership, voluntarily agreed to be bound by the Agreement. The Agreement provides certain monetary benefits payable over a four-year period after a partner’s withdrawal from the partnership. However, the benefits are conditioned upon the departing partner’s obligation not to engage in defined “Competitive Activity,” among other things, for two years following the partner’s withdrawal. The six Cantor Fitzgerald partners departed and were denied their post-withdrawal benefits for allegedly engaging in the prohibited Competitive Activity.
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The Case
On appeal of an action brought by the ex-partners, the Delaware Supreme Court upheld the non-compete provision. In so ruling, the Delaware Supreme Court made a significant distinction between an employee who enters a restrictive covenant not to compete in the employee’s chosen field, effectively depriving the employee of his/her livelihood and exposing the employee to risk of financial hardship. As opposed to an unambiguous forfeiture-for-competition provision contained in a partnership agreement, entered, and agreed to by a sophisticated partner, that allows the partner to depart and compete, but at the cost of relinquishing a contingent benefit.
The court reasoned an employee non-compete agreement precludes competition, precludes the employee from remaining in their chosen profession, and is enforceable through injunctive relief. For those reasons, public policy considerations weigh against enforcement as a restraint on trade.
Whereas a “forfeiture-for-competition provision” contained in a limited partnership agreement does not preclude the employee from departing, competing, or remaining in their chosen profession. Rather, the decision to compete after departure is at the cost of forfeiting contingent post-withdrawal benefits otherwise afforded under the agreement; and thus, is not a restraint on trade.
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The court further reasoned that the common law’s disfavor of forfeitures does not extend to limited partnership agreements on the basis of the Delaware Revised Uniform Limited Partnership Act’s (“DRULPA”) statutory directive to honor the freedom of contract to bargain for the terms in partnership agreements. Those agreed upon terms are provided deference in the Delaware courts. The court held, “When sophisticated actors avail themselves of the contractual flexibility embodied [in the state’s limited partnership statutes] . . . our courts should, absent unconscionability, bad faith, or other extraordinary circumstances, hold them to their agreements. . .. [P]arties have a right to enter into good and bad contracts.” Cantor Fitzgerald, L.P. v. Ainslie, No. 162, 2023, 2024 WL 315193, at *1 (Del. Jan. 29, 2024).
The ruling sends the case back to the trial court to determine whether the ex-partners engaged in the prohibited Competitive Activity.