Seyfarth Synopsis: Delaware has long been favored by businesses for many reasons, including its courts’ deference to parties’ ability to contract. Recently, however, the Delaware Chancery Court was seemingly less deferential to restrictive covenant agreements in circumstances outside of the traditional employment agreement context.
In Cantor Fitzgerald, L.P. v. Ainslie, the Court, in a well-reasoned decision which arguably included a survey of this area of law, analyzed restrictive covenants in a partnership agreement that, if breached, resulted in the forfeiture of economic rights by former partners. Cantor Fitzgerald argued that such provisions were conditions precedent to payment and were not subject to a review for reasonableness as a restrictive covenant. The Court disagreed, analyzed the restrictive covenants for reasonableness, and found the provisions unenforceable because the covenants were broader than necessary to protect the partnership or what is commonly referred to as a protectable business interest.
On January 29, 2024, however, the Supreme Court of Delaware, in another well-reasoned and expansive analysis reversed and remanded the Chancery Court’s order. See Cantor Fitzgerald, L.P. v. Ainslie, Case No. 162, 2023, 2024 WL 315193 (Del. Jan. 29, 2024). Similar to the Chancery Court, the Supreme Court weighed the policy interests of the freedom of competition against the freedom of contract embodied in the Delaware Revised Uniform Limited Partnership Act. But, unlike the lower court, the Supreme Court held that the policy interests of contractual flexibility outweighed the state’s interest in protecting competition and determined that the Chancery Court erred by “imposing its notion of reasonableness on the very provisions that, when enforced against other departing partners, redounded to the plaintiffs’ benefit during their tenure as partners.” Id. at *1.
While Cantor Fitzgerald involved a forfeiture-for-competition clause in a partnership agreement, the reasoning underlying the opinion – deference to parties’ freedom to contract – may have broader implications and may be argued that it also applies to shareholder agreements, long-term incentive plans, and similar agreements. Hence, businesses should consider this latest foray into non-compete law when strategizing legitimate ways to protect their business interests.
We intend to closely follow how courts apply this most recent ruling and businesses are advised to consult with their counsel regarding how this opinion may affect their existing and prospective agreements.