Ainslie, Brad v. Cantor Fitzgerald LP

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
BRAD AINSLIE, JASON BOYER, )
CHRISTOPHE CORNAIRE, JOHN )
KIRLEY, ANGELINA KWAN AND )
RÉMY SERVANT, )
)
Plaintiffs, )
)
v. ) Consol. C.A. No. 9436-VCZ
)
CANTOR FITZGERALD, L.P., a )
Delaware Limited Partnership, )
)
Defendant. )
MEMORANDUM OPINION
Date Submitted: September 27, 2022
Date Decided: January 4, 2022
Blake A. Bennett, COOCH & TAYLOR P.A., Wilmington, Delaware; Joseph Delich,
Alex Potter, and Kevin Goode, FREEDMAN NORMAND FRIEDLAND LLP, New
York, New York, Attorneys for Plaintiffs.
C. Barr Flinn, Paul J. Loughman, Alberto E. Chávez, Skyler A. Speed, YOUNG
CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; David A. Paul,
CANTOR FITZGERALD, New York, New York, Attorneys for Defendant Cantor
Fitzgerald, L.P.
ZURN, Vice Chancellor.
Cantor Fitzgerald Limited Partnership (“Cantor Fitzgerald” or the
“Partnership”) operates under a limited partnership agreement (the “LP Agreement”)
containing several interlocking provisions designed to restrict former partners from
competing, soliciting clients or employees, or using the Partnership’s confidential
information for four years after the partner leaves. This action has presented the
opportunity to categorize and construe those provisions. It has also presented the
opportunity to make a choice about what types of provisions constitute restraints of
trade that should be evaluated for reasonableness under Delaware law.
The LP Agreement discourages former partners engaging in those competitive
activities in two general ways. First, the LP Agreement contains restrictive
covenants that prohibit partners from engaging in competitive activities for up to
two years (collective the “Restrictive Covenants” and each a “Restrictive
Covenant”). During the first year, the partner is bound by a noncompete covenant
and several other Restrictive Covenants. During the second year, the noncompete
provisions fall away but the nonsolicit remains. A partner will breach a Restrictive
Covenant only when the Partnership’s Managing General Partner makes the good
faith determination that the partner has done so. Cantor Fitzgerald can respond to
the violation of a Restrictive Covenant by seeking injunctive relief and damages.
This opinion refers to this one- to two-year device as the “Restrictive Covenant
2
Device” and refers to the one- or two-period in which a partner is bound by a given
Restrictive Covenant as the “Restricted Period.”
The second means of discouraging competition allows Cantor Fitzgerald to
withhold payments otherwise owed from the partner’s capital account and some
earned compensation. It operates for four years. Cantor Fitzgerald will remit to the
partner one fourth of those funds each year, unless the partner engages in any of the
same competitive activities. This opinion refers to this four-year device as the
“Conditioned Payment Device,” and the funds at issue “Conditioned Amounts.”
The Conditioned Payment Device is triggered by either of two events: (1) a
partner breaches any Restrictive Covenant in the LP Agreement, which this opinion
refers to as the “No Breach Condition,” and (2) a partner engages in competitive
activity for four years, even if doing so is not a breach of any Restrictive Covenant,
which this opinion refers to as the “Competitive Activity Condition.”
The Competitive Activity Condition and the No Breach Condition have
significant—but not complete—overlap. If, for example, during the first two years
after leaving, a partner engages in any competitive activity, the Competitive Activity
Condition will not occur. But if the Managing General Partner makes a good faith
determination that the partner has engaged in a competitive activity, the No Breach
Condition will also not occur. In both cases, Cantor Fitzgerald has no duty to pay
3
any of the Conditioned Amounts. After the Restricted Period, i.e., after the
Restrictive Covenants expire and the partner is not bound by a promise not to
compete, the Competitive Activity Condition will still allow Cantor Fitzgerald to
withhold any remaining Conditioned Payments if the partner engages in competitive
activity.
In this case, Cantor Fitzgerald withheld Conditioned Payments from six
former partners who it determined breached Restrictive Covenants by engaging in
competitive activity in the first year after leaving. Cantor Fitzgerald asserts these
breaches mean it owes no duty to pay any of the Conditioned Amounts. The six
former partners sued to obtain the withheld Conditioned Payments by attacking both
the Conditioned Payment Device and the Restrictive Covenant Device as
unreasonable restraints of trade. This opinion addresses the parties’ cross-motions
for summary judgment.
On its face, the primary issue in this case seems simple and sounds in
hornbook contract law: whether the Competitive Activity Device operates as a
remedy for a breach for a violation of the Restrictive Covenants such that it is a
penalty, or if the No Breach and Competitive Activity Conditions are conditions
precedent to Cantor Fitzgerald’s duty to make the Conditioned Payments. I find that
4
the No Breach Condition and the Competitive Activity Condition are conditions
precedent, and not penalty provisions. But this answer raises other questions.
The No Breach Condition was triggered by a breach of the Restrictive
Covenants. But for such a breach to occur, the underlying promise must be
enforceable—i.e., I cannot find the No Breach Condition was triggered by a breach
without finding that the allegedly breached Restrictive Covenants are valid. On
review, the Restrictive Covenants are facially overbroad and void against public
policy. It follows that they are not valid promises that can give rise to a breach, and
so failure to comply with them cannot trigger the No Breach Condition. Thus, the
No Breach Condition cannot excuse Cantor Fitzgerald from withholding the
Conditioned Amounts.
Cantor Fitzgerald’s second attack, relying on the Competitive Activity
Condition, fares no better. Unlike the No Breach Condition, the Competitive
Activity Condition does not depend on the unenforceable Restrictive Covenants.
Nevertheless, it raises an important policy consideration: whether Delaware views
contractual provisions requiring former employees to forfeit benefits if they compete
as restraints of trade, such that they should be subjected to the same reasonableness
analysis our courts apply to traditional noncompetes. Because I answer this question
5
in the affirmative, I find that Cantor Fitzgerald likewise cannot rely on the
Competitive Activity Condition as a basis to withhold the Conditioned Amounts.
I. BACKGROUND
This action was brought against Cantor Fitzgerald by six former Cantor
Fitzgerald limited partners—Brad Ainslie, Jason Boyer, Christophe Cornaire, John
Kirley, Angelina Kwan, and Rémy Servant (each a “Plaintiff” and collectively,
“Plaintiffs”).1 Cantor Fitzgerald “is a global financial services company with a
global institutional brokerage business.2 Each Plaintiff is a former employee of
nonparty Cantor Fitzgerald Hong Kong Limited (“Cantor Fitzgerald Hong Kong”),
a wholesale brokerage business.3 Each Plaintiff voluntarily terminated his or her
employment with Cantor Fitzgerald Hong Kong and withdrew from Cantor
Fitzgerald.
Cantor Fitzgerald is a limited partnership formed under the Delaware Limited
Partnership Act and managed by its Managing General Partner.4 To become Cantor
Fitzgerald partners, Plaintiffs signed Cantor Fitzgerald’s LP Agreement, which
1
Docket Item (“D.I.”) 31 ¶¶ 2, 7–12 [hereinafter “Am. Compl.”].
2
D.I. 121 at 40 [hereinafter “DOB”].
3
D.I. 34 ¶ 1; D.I. 125 at 13 [hereinafter “PCB”].
4
DOB at Ex. 6 § 1.04 [hereinafter, “LP Agr.”]; id. § 1.01 (defining “Act”); id. § 3.01(a).
Cantor Fitzgerald’s Managing General Partner is an entity called CF Group Management,
Inc. DOB at 6; LP Agr. § 1.01 (defining “Managing General Partner”).
6
bound each Plaintiff at the time of they withdrew. The LP Agreement contains two
devices for discouraging and prohibiting competition after a partner leaves: the
Restrictive Covenant Device and the Conditioned Payment Device.
A. The Restrictive Covenant Device
Through the Restrictive Covenant Device, partners promise not to compete
against, solicit employees or customers from, or otherwise harm Cantor Fitzgerald
for one to two years after they leave.5 Section 3.05 of the LP Agreement defines
“Partner Obligations” to include the obligation to refrain from engaging in
“Competitive Activities” during the time one is a partner and for the “Restricted
Period,” which lasts for one to two years after withdrawal from the Partnership,
depending on the activity.6 A partner engages in a Competitive Activity if, as
defined in Section 11.04(c), she:
(A) directly or indirectly, or by action in concert with others, solicits,
induces, or influences, or attempts to solicit, induce or influence, any
other partner, employee or consultant of the Partnership or any
Affiliated Entity to terminate their employment or other business
arrangements with the Partnership or any Affiliated Entity, or to engage
in any Competing Business (as hereinafter defined) or hires, employs,
engages (including as a consultant or partner) or otherwise enters into
a Competing Business with any such Person,
5
Id. §§ 3.05(a)(ii)–(iii); id. § 1.01 (defining “Restricted Period” for activities in Sections
3.05(a)(ii) and (iii) as two years and one year, respectively).
6
Id. Despite defining this term as “Competitive Activities,” the LP Agreement refers to
each activity as a “Competitive Activity.” I do the same.
7
(B) solicits any of the customers of the Partnership or any Affiliated
Entity (or any other employees), induces such customers or their
employees to reduce their volume of business with, terminate their
relationship with or otherwise adversely affect their relationship with,
the Partnership or any Affiliated Entity,
(C) does business with any person who was a customer of the
Partnership or any Affiliated Entity during the twelve-month period
prior to a Partner becoming a Terminated or Bankrupt Partner if such
business would constitute a Competing Business,
(D) directly or indirectly engages in, represents in any way, or is
connected with, any Competing Business, directly competing with the
business of the Partnership or of any Affiliated Entity, whether such
engagement shall be as an officer, director, owner, employee, partner,
consultant, affiliate or other participant in any Competing Business, or
(E) assists others in engaging in any Competing Business in the manner
described in the foregoing clause (D).7
The Restricted Period for subsection (A) ends two years after the partner withdraws,
and after one year for subsections (B) through (E).8 Section 3.05(a) further provides
that partners may not, during their time as partners and for one year after
withdrawing, “take any action that results directly or indirectly in revenues or other
benefit for that Limited Partner or any third party that is or could be considered to
be engaged in such Competitive Activity.”9
The LP Agreement defines a “Competing Business” as follows:
7
Id. § 11.04(c) (defining “Competitive Activities”); id. §§ 3.05(a)(ii)–(iii).
8
Id. §§ 3.05(a)(ii)–(iii); id. § 1.01 (defining “Restricted Period” for activities in Sections
3.05(a)(ii) and (iii) as two years and one year, respectively).
9
Id. § 3.05(a)(iii).
8
[A business that] (i) involves the conduct of the wholesale or
institutional brokerage business, (ii) consists of marketing,
manipulating or distributing financial price information of a type
supplied by the Partnership or any Affiliated Entity to information
distribution services or (iii) competes with any other business
conducted by the Partnership or any Affiliated Entity if such business
was engaged in by the Partnership or an Affiliated Entity or the
Partnership or such Affiliated Entity took substantial steps in
anticipation of commencing such business prior to the date on which
such Partner ceases to be a Partner.10
“Affiliated Entities” are “the limited and general partnerships, corporations or other
entities owned, controlled by or under common control with the Partnership.”11
Under Section 3.05, the Managing General Partner has “sole and absolute
discretion” to make a good faith determination that a partner has breached a Partner
Obligation, including by engaging in a Competitive Activity during the Restricted
Period, and that determination is “final and binding.”12 Section 3.05 also recognizes
that Cantor Fitzgerald could obtain injunctive relief preventing the ongoing breach
of a Partner Obligation, including engaging in any Competitive Activity during the
Restricted Period.13
10
Id. § 11.04(c)(E).
11
Id. §1.01 (defining “Affiliated Entities”).
12
Id. § 3.05(a)(vi).
13
See § 3.05(b) (stating that withholding Additional Amounts is “in addition to any other
rights or remedies the Managing General Partner may have”).
9
B. The Conditioned Payment Device
The Conditioned Payment Device is built on the fact that the Partnership
maintains a capital account for and owes compensation to each partner that, by
default, will be repaid to that partner in annual installments over the four years
following withdrawal.14 But if the partner competes at any time during those four
years, the Conditioned Payment Device is triggered and Cantor Fitzgerald will not
repay any remaining amounts otherwise owed.
Each partner’s capital account reflects her capital contributions, including
contributions for purchasing High Distribution Units II (“HDII Units),” and each
partner’s profit share.15 Any distributions and loss share are subtracted from the
account.16 Each partner also has an “Adjusted Capital Account,” which has a value
equal to the capital account without regard to certain regulations and adjustments.17
Five of the six Plaintiffs had purchased and were holding HDII Units at the time they
withdrew.18
14
Id. §§ 11.04(a), 11.08(b), 11.09(b), 11.10(b). Generally, awards of Grant Units,
Matching Grant Units and GP Units are not credited to a partner’s capital account. Id. §
6.01(e).
15
Id. § 6.02(b).
16
Id.
17
Id. § 1.01 (defining “Adjusted Capital Account”).
18
PCB, Ex. 13 (showing Ainslie, Boyer, Cornaire, Kwan, Servant as having purchased
HDII Units); DOB, Ex. 10, at res. 14 (stating amount of each Plaintiff’s cash contribution).
10
Within ninety days of termination, a withdrawing partner is entitled to an
initial payment consisting of a portion of her capital account, referred to as the “Base
Amount.”19 The remaining difference between a partner’s Base Amount and
Adjusted Capital Account (the “Additional Amount”) is paid out “[o]n each of the
first, second, third and fourth anniversaries” of the Base Amount payment date.20
In addition to purchasing HDII Units, Cantor Fitzgerald partners can earn
Partnership units referred to by the LP Agreement as Grant Units and Matching
Grant Units as a form of compensation.21 Sections 11.08, 11.09, and 11.10 govern
post-termination payments to Grant Unitholders, Matching Grant Unitholders, and
grant tax accounts (the “Grant Amounts”).22 The LP Agreement provides for
payment of Grant Amounts in four equal installments over four years.23
The Conditioned Payment Device attaches to the payments of the Additional
Amount and Grant Amounts (together, the “Conditioned Amounts”) per Article XI
19
LP Agr. § 11.03(c)(ii).
20
Id. § 11.04(a).
21
See id. § 6.01(a) (providing that each partner “has made a cash contribution to the capital
of the Partnership”, but “Grant Units, Matching Grant Units and GP Units shall not require
a cash contribution”); id. § 5.02; DOB, Ex. 20, at 41 (“[A grant unit is] a unit that was
given to an employee who didn’t purchase it.”).
22
Although the record is unclear as to whether Plaintiffs hold any interest in a grant tax
payment account, they nevertheless argue that they are entitled to payments under this
provision. PCB at 2, 17 (citing LP Agr. § 11.09).
23
LP Agr. §§ 11.08(b), 11.09(b), 11.10(b).
11
of the LP Agreement. In so many words, if a partner engages in a Competitive
Activity within four years after withdrawing from the Partnership, the Conditioned
Payment Device is triggered and Cantor Fitzgerald will not pay that partner any
remaining Conditioned Amounts.24 As to Grant Amounts, Cantor Fitzgerald is not
obligated to make any remaining payments if the partner has engaged in a
Competitive Activity.25 For Additional Amounts, Cantor Fitzgerald is not obligated
to make any payments if the partner has “engaged in any Competitive Activity or
otherwise breached a Partner Obligation prior to the date such payment is due.”26
This opinion refers to the Conditioned Payment Device’s trigger by engaging in
Competitive Activity as the “Competitive Activity Condition,” and the trigger by a
breach of a Partner Obligation as the “No Breach Condition.”
Section 11.02 states that “[n]othing in this Article XI shall be considered or
interpreted as restricting the ability of a former Partner in any way from engaging in
any Competitive Activity, or in other employment of any nature whatsoever.”27 The
24
See id. § 11.02(d).
25
Id. §§ 11.08(b), 11.09(b), 11.10(b).
26
Id. § 11.04(a).
27
Id. § 11.02(c).
12
Conditioned Payment Device applies regardless of the reason a partner ceases to
become a partner.28
C. The Relationship Between The Restrictive Covenant Device
And The Conditioned Payment Device
The Conditioned Payment Device has some overlap with the Restrictive
Covenant Device. The No Breach Condition for Additional Amounts is triggered if
the Managing General Partner determines that a partner has breached any of the
Partner Obligations.29 Section 3.05, which includes the Restrictive Covenants,
provides that if a Restrictive Covenant is breached, the breaching partner “shall have
no right to receive any further distributions . . . including any Additional Amounts
or other distributions or payments of cash, stock, or property, to which such Partner
otherwise might be entitled.”30 Section 3.05(b) explains that “any Limited Partner
that breaches any Partner Obligation shall be subject to all of the consequences
28
Id. § 11.04(c).
29
Id. § 11.04(a) (conditioning payment of Additional Amounts on partners not breaching
Partner Obligations); id. § 3.05(a)(vi) (stating that whether a partner has breached a Partner
Obligation is determined by the Managing General Partner).
30
Id. § 3.05(b). Section 3.05 also provides that the breaching partner must pay Cantor
Fitzgerald’s attorneys’ fees and expenses, “as well as any damages resulting from such
breach. Id.
13
(including, without limitation, the consequences provided for in Articles XI and XII)
applicable to a Limited Partner that engages in a Competitive Activity.”31
The Restrictive Covenant Device and No Breach Condition are triggered if
the Managing General Partner, in its “sole and absolute discretion,” makes the “final
and binding” good faith determination that “a Limited Partner has breached its
Partner Obligations.”32 In contrast, the Conditioned Payment Device is triggered by
“engaging in Competitive Activity”—full stop. That is, whether or not a partner has
breached a Partner Obligation is determined by the Managing General Partner, but
whether a partner has engaged in Competitive Activity after the Restricted Period is
not.
For both Additional Amounts and Grant Amounts, the Conditioned Payment
Device’s Competitive Activity Condition lasts longer than the Restrictive Covenant
Device. The Competitive Activity Condition lasts for four years, not just one or two:
a withdrawing partner forfeits some or all of the Additional Amounts and Grant
Amounts owed if she engages in any Competitive Activity for four years following
her withdrawal.33
31
Id. § 3.05(b).
32
Id. § 3.05(a)(vi).
33
Id. § 11.02(d).
14
D. Other Relevant Provisions
Several other provisions of the LP Agreement operate in the background of
this case. Section 11.12 provides that “[t]he Managing General Partner, . . . may
condition the payment of any amounts due to a Partner under this Article XI upon
obtaining a release from such Partner . . . from all claims against the Partnership
other than claims for payment pursuant to . . . Article XI.”34 Section 20.01 is a forum
selection provision providing that disputes “arising under [the] Agreement shall” be
litigated in Delaware, except that Cantor Fitzgerald has the discretion to require that
disputes be litigated elsewhere or in arbitration.35 The LP Agreement also includes
a severance provision.36
E. The Plaintiffs Withdraw From The Partnership, And Cantor
Fitzgerald Does Not Make Payments.
All six Plaintiffs voluntarily withdrew from the Partnership between 2010 and
2011.37 Within a year of their respective departures, Cantor Fitzgerald’s Managing
General Partner determined each Plaintiff breached a Partner Obligation by
accepting employment or otherwise performing services on behalf of a Competing
34
Id. § 11.12.
35
Id. § 20.01(a).
36
Id. § 20.11.
37
Am. Compl. ¶¶ 16, 18, 20, 22, 24, 26.
15
Business.38 And so, Cantor Fitzgerald did not remit them any Additional Amounts
or Grant Amounts.39
In addition, Cantor Fitzgerald did not pay Ainslie his Base Amount because
Ainslie declined to sign a release the Managing General Partner requested under
Section 11.12.40 Boyer, Cornaire, Kirley, Kwan, and Servant do not contend that
Cantor Fitzgerald wrongfully withheld their Base Amounts.41
Cantor Fitzgerald stated in its interrogatory responses that “had [Plaintiffs]
not engaged in Competitive Activities and breached the [LP Agreement] following
their terminations, and had they complied with Section 11.12” by signing any
requested releases, they would have received the following amounts:42
38
DOB at 29, 41; PCB at 15–16, 32–33; see also, e.g., PCB, Ex. 4 at RF_0034338; PCB,
Ex. 8.
39
See DOB, Ex. 7, at res. 8.
40
DOB, Ex. 19; see PCB at 56–58.
41
The record does not clearly reflect whether any actual sums were paid to these Plaintiffs
as Base Amounts or whether those amounts were set off against other debts or obligations.
See DOB, Ex. 7 at res. 8.
42
Id.
16
Additional
Plaintiff Base Amount Amounts Grant Amounts43 Total
Ainslie, Brad $ 350,749.42 $ 644,025.37 $ 458,248.75 $ 1,453,023.54
Boyer, Jason $0 $ 2,219,387.95 $ 3,272,704.50 $ 5,492,092.45
Cornaire, Christophe $0 $ 893,864.40 $ 750,000.00 $ 1,643,864.40
Kirley, John $0 $ 11,645.00 $ 85,006.00 $ 96,651.00
Kwan, Angelina $0 $ 321,721.15 $ 12,798.74 $ 334,519.89
Servant, Rémy $0 $ 42,173.50 $ 159,005.50 $ 201,179.00
F. Litigation Begins In Hong Kong.
After Plaintiffs’ departures, Cantor Fitzgerald Hong Kong and nonparty
Cantor Fitzgerald Europe sued Ainslie and Boyer, as well as two nonparties to this
case, in a Hong Kong court seeking “injunctive relief and repayment of loan
obligations.”44 The Cantor entities alleged Ainslie and Boyer violated the terms of
restrictive covenants in an employment agreement they had with Cantor Fitzgerald
Hong Kong.45 The court denied the request for an injunction.46 In doing so, the
court concluded that the noncompete in Cantor Fitzgerald Hong Kong’s employment
agreement was unenforceable under Hong Kong law.47
43
Cantor Fitzgerald’s interrogatory responses did not specify whether these “Grant
Amounts” reflect the former ownership of Grant Units, Matching Grant Units, or some
interest in Grant Tax Payment Accounts.
44
DI. 133 at 29–30 [hereinafter “DCB”]; PCB at 35–36; DOB at 3.
45
PCB at 35–36; DCB at 3.
46
PCB at 35–36; DCB at 3.
47
See PCB at 2.
17
G. This Litigation
Plaintiffs filed an amended consolidated complaint (the “Amended
Complaint”) in this action on October 4, 2016.48 After years of fits and starts, the
parties have completed fact discovery,49 and a trial is scheduled to begin on May 8,
2023.50
The Amended Complaint asserts twelve causes of action. The first six, one
for each Plaintiff, assert various claims for breach of contract against Cantor
Fitzgerald.51 Among those are claims that Cantor Fitzgerald breached the LP
Agreement by failing to pay Additional Amounts and Grant Amounts to Plaintiffs.52
In Counts Seven through Twelve, each Plaintiff seeks a declaration as to the amounts
owed to him or her, as well as a declaration that “the four-year non-compete
provision imposed by [the Conditioned Payment Device] is not appropriately limited
48
Am. Compl. The original complaint in this action was not joined by Kwan, who filed a
separate complaint in a separate action. C.A. No. 10089-VCL, D.I. 1. The Court granted
a stipulation to consolidate the two actions on June 10, 2016. D.I. 30. That original
complaint was also joined by Pierre-Henri Mallez, another former limited partner, but the
parties stipulated to Mallez’s dismissal from this case on October 15, 2014. D.I. 1 ¶ 11;
D.I. 12.
49
See DOB at 5–6.
50
D.I. 130 ¶ 1(m).
51
Am. Compl. ¶¶ 40–73. Plaintiffs Boyer, Cornaire, Kirley, and Servant asserted certain
tax claims, all of which have since been dismissed by this Court. D.I. 118.
52
Am. Compl. ¶¶ 42, 47, 53, 59, 65, 70.
18
in time or space, fails to protect a legitimate interest of CFLP, and is oppressive,”
and is therefore unenforceable.53
On March 31, 2022, Cantor Fitzgerald moved for summary judgment on all
twelve counts under Court of Chancery Rule 56.54 As to Counts One through Six,
Cantor Fitzgerald argues that all Plaintiffs engaged in Competitive Activities, which
resulted in breaches of Partner Obligations, and therefore triggered both the No
Breach Condition and the Competitive Activity Condition.55 Cantor Fitzgerald also
argues the Conditioned Payment Device should be enforced as a matter of public
policy and that Delaware should follow what is known as the employee choice
doctrine.56 As to Ainslie, Cantor Fitzgerald argues he is not entitled to his Base
Amount because he failed to sign a release.57 Regarding Counts Seven through
Twelve, Cantor Fitzgerald argues that they are duplicative of Counts One through
Six, moot, and fail on their merits because the underlying provisions are not
noncompete agreements.58 Cantor Fitzgerald emphasizes it is not seeking and has
53
Id. ¶¶ 74–93.
54
D.I. 120.
55
DOB at 24–31.
56
Id. at 34–36.
57
Id. at 31.
58
Id. at 36–44.
19
not sought to enforce any Restrictive Covenant by actually prohibiting competition,
and that it only is invoking the Conditioned Payment Device.
On May 10, Plaintiffs opposed Cantor Fitzgerald’s motion and filed a cross-
motion of their own. Plaintiffs primarily argue that the Restrictive Covenant Device
and the Conditioned Payment Device are both restraints of trade, and should be
evaluated as such.59 This opinion also reaches Plaintiffs’ arguments that the
Conditioned Payment Device is an unenforceable damages provision that is
enforcing void restrictive covenants,60 and that Cantor Fitzgerald’s request that
Ainslie sign a release was unreasonable, and therefore Cantor Fitzgerald is not
entitled to summary judgment on that basis.61 Plaintiffs conclude they are entitled
to summary judgment on their declaratory judgment claims for the same reasons.62
59
PCB at 18–23.
60
Id. at 31–33.
61
Id. at 57–58. Plaintiffs also argue that issue and claim preclusion bars Cantor Fitzgerald
from raising certain issues of law and questions of fact in light of prior litigation in Hong
Kong involving Ainslie, Boyer, and two entities apparently affiliated with Cantor
Fitzgerald. Id. at 38–41. For reasons that are explained later in this opinion, I do not reach
this argument. Because Plaintiffs prevail on striking the Conditioned Payment Device as
unenforceable, I also do not reach their argument that there is a genuine issue of material
fact as to whether they actually engaged in Competitive Activity.
62
Id. at 58.
20
The parties briefed the cross-motions,63 and I heard oral argument on October
7, 2022.64
II. ANALYSIS
This Court will grant a motion for summary judgment where there are no
genuine issues of material fact, and the moving party is entitled to judgment as a
matter of law.65 In deciding a motion for summary judgment, the facts must be
viewed in the light most favorable to the nonmoving party, and the moving party has
the burden of demonstrating that no material question of fact exists.66 Where “the
parties have filed cross motions for summary judgment and have not presented
argument to the Court that there is an issue of fact material to the disposition of either
motion, the Court shall deem the motions to be the equivalent of a stipulation for
decision on the merits based on the record submitted with the motions.”67 Summary
judgment is appropriate here because there is no material dispute of fact.68
63
DCB; D.I. 133 [hereinafter “PRB”].
64
D.I. 135; D.I. 136.
65
Ct. Ch. R. 56(c).
66
Weil v. VEREIT Operating P’ship, L.P., 2018 WL 834428, at *3 (Del. Ch.
Feb. 13, 2018).
67
Ct. Ch. R. 56(h).
68
The parties dispute whether Plaintiffs actually engaged in Competitive Activity, whether
the Managing General Partner made its determination that Plaintiffs breached a Partner
Obligation in good faith, and whether Cornaire is a “good leaver.” Because I do not reach
these issues, these disputes are not material, and so they do not preclude summary
21
Limited partnership agreements are contracts.69 Delaware follows the
objective theory of contracts, meaning “a contract’s construction should be that
which would be understood by an objective, reasonable third party.”70 Accordingly,
Delaware courts read contracts as a whole, and interpret contracts with the goal of
effectuating the parties’ intent.71 “When a contract is clear and unambiguous, the
court will give effect to the plain meaning of the contract’s terms and provisions.”72
The Court “will read a contract as a whole and we will give each provision and term
effect, so as not to render any part of the contract mere surplusage.”73
judgment. WaveDivision Hldgs., LLC v. Highland Cap. Mgmt., L.P., 49 A.3d 1168, 1175
(Del. 2012) (“Factual disputes that are immaterial as a matter of law will not preclude
summary judgment.”).
69
AlixPartners, LLP v. Mori, 2022 WL 1111404, at *12 (Del. Ch. Apr. 14, 2022)
(“Delaware courts apply rules of contract interpretation to limited partnership agreements.”
(internal quotation marks omitted) (quoting Cantera v. Marriott Senior Living Servs., Inc.,
1999 WL 118823, at *3 (Del. Ch. Feb. 18, 1999))).
70
Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010) (internal quotation
marks omitted) (quoting NBC Universal v. Paxson Commc’ns, 2005 WL 1038997, at *5
(Del. Ch. Apr. 29, 2005)).
71
Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 739 (Del. 2006); Osborn,
991 A.2d at 1159 (quoting Kuhn Constr., Inc. v. Diamond State Port Corp., 2010 WL
779992, *2 (Del. Mar. 8, 2010)).
72
Manti Hldgs., LLC v. Authentix Acq. Co., Inc., 261 A.3d 1199, 1208 (Del. 2021) (internal
quotation marks omitted) (quoting Osborn, 991 A.2d at 1159–60).
73
See Osborn, 991 A.2d at 1159 (internal quotation marks omitted) (quoting Kuhn, 2010
WL 779992, *2).
22
Some of the relevant promises in the LP Agreement inspire special
consideration under Delaware law: the Restrictive Covenants in Section 3.05.
Delaware courts do not mechanically enforce noncompete or nonsolicit
agreements.74 And they make no exception for restrictive covenants in the
partnership setting.75 “[A]greements not to compete must be closely scrutinized as
restrictive of trade.”76 Delaware courts “carefully review” noncompete and
nonsolicit agreements to ensure that they “(1) [are] reasonable in geographic scope
and temporal duration, (2) advance a legitimate economic interest of the party
seeking its enforcement, and (3) survive a balancing of the equities.”77 “Delaware
courts have favored the public interest of competition in their review of
noncompetition agreements.”78 “Where noncompete or nonsolicitation agreements
74
E.g., FP UC Hldgs., LLC v. Hamilton, 2020 WL 1492783, at *6 (Del. Ch. Mar. 27, 2020)
(citing McCann Surveyors, Inc. v. Evans, 611 A.2d 1, 3 (Del. Ch. 1987)).
75
KPMG Peat Marwick LLP v. Fernandez, 709 A.2d 1160 (Del. Ch. 1998) (noting
Delaware law requires analyzing a former partner’s agreement not to compete for whether
its “purpose and reasonable operation is to protect the legitimate interests of the former
employer”); see, e.g., Deloitte & Touche USA LLP v. Lamela, 2005 WL 2810719 (Del. Ch.
Oct. 21, 2005).
76
Faw, Casson & Co. v. Cranston, 375 A.2d 463, 466 (Del. Ch. 1977).
77
FP UC Hldgs., 2020 WL 1492783, at *6 (internal quotation marks omitted) (quoting
Lyons Ins. Agency, Inc. v. Wilson, 2018 WL 4677606, at *5 (Del. Ch. Sept. 28, 2018)).
78
Elite Cleaning Co., Inc. v. Capel, 2006 WL 1565161, at *4 (Del. Ch. June 2, 2005) (citing
Tristate Courier & Carriage, Inc. v. Berryman, 2004 WL 835886, at *15 (Del. Ch.
Apr. 15, 2004)).
23
are unreasonable in part, Delaware courts are hesitant to ‘blue pencil’ such
agreements to make them reasonable.”79 This is so even where an agreement
includes a provision providing that unenforceable contractual terms should be
revised as necessary to render them enforceable.80
Against that backdrop, the parties joined issue on the doctrinal label to be
assigned to the Conditioned Payment Device. Plaintiffs contend the Conditioned
Payment Device, as triggered by the No Breach Condition and as implemented in
Sections 3.05 and 11.04(a), is an unenforceable damages provision for breach of the
Restrictive Covenants. They also contend the Conditioned Payment Device as
implemented in Article XI against the Additional Amounts and Grant Amounts is a
restraint of trade and void as against public policy.
Cantor Fitzgerald posits that the Conditioned Payment Device is confined to
Article XI, and merely conditions its duty to pay the Conditioned Amounts. Cantor
Fitzgerald insists the Restrictive Covenants are relevant only insofar as they define
the No Breach Condition. That is, in Cantor Fitzgerald’s view, it is not seeking to
enforce the Restrictive Covenants per se. Rather, it is enforcing the standalone No
Breach Condition (which is triggered by a breach of the Restrictive Covenants) as
79
Kodiak Bldg. P’rs, LLC v. Adams, 2022 WL 5240507, at *4 (Del. Ch. Oct. 6, 2022).
80
See id. at *4 n.49.
24
to the Additional Amounts, and the standalone Competitive Activity Condition as to
all Conditioned Amounts. Cantor Fitzgerald presses that this Court should enforce
both the No Breach Condition and the Competitive Activity Condition just as any
other contractual provision, without any public policy review.
Identifying the Conditioned Payment Device as a damages provision or a
condition informs whether and how this Court may evaluate any restraint of trade
for reasonableness. If it is a damages provision enforcing a promise not to compete,
or a condition triggered by breaching a promise not to compete, the underlying
promise must be enforceable: accordingly, the Court may (and must) evaluate the
underlying Restrictive Covenants for reasonableness. If the Conditioned Payment
Device is a condition standing alone from any promise not to compete, but
nevertheless imposing financial consequences if the partners compete, the Court
must make a public policy determination as to whether the condition alone restrains
trade and so should be evaluated for reasonableness. A brief description of the
various proffered contractual labels may serve readers well.
25
A. A Primer On Promises, Breaches, Liquidated Damages And
Penalty Provisions, And Conditions
Generally speaking, contracts involve the exchange of promises.81 “A
‘promise’ is a manifestation of intention to act or refrain from acting in a specified
way, so made as to justify a promisee in understanding that a commitment has been
made.”82 If a promise creates a legal duty to act, then the failure to fulfill that
promise will result in a breach of contract.83 In the event of a breach, the law of
contract endeavors to restore the nonbreaching party to the position she would have
been in but for the breach, and compensate the nonbreaching party for her loss.84
81
1 Williston on Contracts § 1:4 (4th ed.) [hereinafter “Williston on Contracts”] (“A
‘bargain’ is an agreement to exchange promises or to exchange a promise for a performance
or to exchange performances. The Restatement Second adds the possibility that a bargain
may be struck upon an agreement to exchange performances, which seems appropriate.”
(footnote omitted)).
82
Williston on Contracts § 1:2; Restatement (Second) of Contracts § 2(1) (Am. L. Inst.
1981) [hereinafter “Restatement (Second) of Contracts”]; accord Promise, Black’s Law
Dictionary (11th ed. 2019).
83
Garfield ex rel. ODP Corp. v. Allen, 277 A.3d 296, 328 (Del. Ch. 2022) (“It is thus more
accurate to describe the elements of a claim for breach of contract as ‘(i) a contractual
obligation, (ii) a breach of that obligation by the defendant, and (iii) a causally related
injury that warrants a remedy, such as damages or in an appropriate case, specific
performance.’” (quoting AB Stable VIII LLC v. Maps Hotels & Resorts One LLC, 2020
WL 7024929, at *47 (Del. Ch. Nov. 30, 2020), aff’d, 268 A.3d 198 (Del. 2021))); see also
Weiss v. Nw. Broad. Inc., 140 F. Supp. 2d 336, 346 (D. Del. 2001) (“The non-fulfillment
of a promise is called a breach of contract, and creates in the other party a secondary right
to damages; it is the failure to perform that which was required by a legal duty.” (internal
quotation marks omitted) (quoting Merritt Hill Vineyards, Inc. v. Windy Heights Vineyard,
Inc., 94 A.D.2d 947, 947 (N.Y. App. Div. 1983))).
84
Hexion Specialty Chems., Inc. v. Huntsman Corp., 965 A.2d 715, 747 (Del. Ch. 2008)
(“It is a fundamental proposition of contract law that damages in contract are solely to give
26
But not all breaches are equal, and the law’s response to a breach hinges on
the breach’s materiality. An immaterial breach exposes the breaching party to
damages, but the counterparty must still perform.85 A material breach entitles the
nonbreaching party to damages and relieves it of its obligations to perform under the
agreement.86 “A ‘material breach’ is a failure to do something that is so fundamental
to a contract that the failure to perform that obligation defeats the essential purpose
the non-breaching party the ‘benefit of the bargain,’ and not to punish the breaching party.”
(citing Williston on Contracts § 64:1)); Williston on Contracts § 64:1 (“The fundamental
principle that underlies the availability of contract damages is that of compensation.”); 3
E. Allan Farnsworth, Farnsworth on Contracts § 12.08 at 12-68–69 (4th ed. 2019)
[hereinafter “Farnsworth on Contracts”] (“[N]o matter how reprehensible the breach,
damages are generally limited to those required to compensate the injured party for lost
expectation, for it is a fundamental tenet of the law of contract remedies, that the injured
party should not be put in a better position than had the contract been performed.”).
85
Williston on Contracts § 63:3.
86
Preferred Inv. Servs., Inc. v. T & H Bail Bonds, Inc., 2013 WL 3934992, at *11 (Del.
Ch. July 24, 2013) (“The party first guilty of a material breach of contract cannot complain
if the other party subsequently refuses to perform.”); Carey v. Est. of Myers, 2015 WL
4087056, at *20 (Del. Super. July 1, 2015) (“Material breach acts as a termination of the
contract going forward, abrogating any further obligations to perform by the non-breaching
party.”). The non-breaching party can, of course, waive the right to discharge its obligation
by continuing to perform, and doing so will not waive its right to damages for the breach.
Williams Cos., Inc. v. Energy Transfer LP, 2020 WL 3581095, at *14 (Del. Ch.
July 2, 2020) (“Faced with a material breach of a contract, a non-breaching party has two
options: it may choose to cease performance, or it may continue performance of the
contract. Continuing performance waives the argument that the waiving party’s
performance obligation was discharged, but it does not waive recovery for the material
breach.”).
27
of the contract or makes it impossible for the other party to perform under the
contract.”87
But contractual parties may contract to excuse a party’s duty to perform for
something less than a material breach by conditioning that duty on the occurrence of
a condition precedent or the nonoccurrence of a condition subsequent.88 Where the
parties have created a condition precedent, the occurrence of that condition is
necessary to give rise to the other party’s duty to perform; if the condition does not
occur, the duty never arises.89 A condition subsequent is an event that discharges a
party from a preexisting duty to perform immediately; the occurrence of the
condition extinguishes that duty.90 Such conditions can take the form of either
87
eCommerce Indus., Inc. v. MWA Intel., Inc., 2013 WL 5621678, at *13 (Del. Ch.
Sept. 30, 2013) (internal quotation marks and emphasis omitted) (quoting Shore Invs., Inc.
v. Bhole, Inc., 2011 WL 5967253, at *5 (Del. Super. Nov. 28, 2011)); see also Restatement
(Second) of Contracts § 241 (providing factors for determining whether a breach is
material).
88
Akorn, Inc. v. Fresenius Kabi AG, 2018 WL 4719347, at *85 (Del. Ch. Oct. 1, 2018)
(collecting authorities)).
89
Williston on Contracts § 38:7 (“A condition precedent is either an act of a party that must
be performed or a certain event that must happen before a contractual right accrues or a
contractual duty arises.” (footnote omitted)); Restatement (Second) of Contracts § 224 (“A
condition is an event, not certain to occur, which must occur, unless its nonoccurrence is
excused, before performance under a contract becomes due.”); Summit Invs. II, L.P. v.
Sechrist Indus., Inc., 2002 WL 31260989, at *7 (Del. Ch. Sept. 20, 2002) (“Conditions are
events that must occur before a party becomes obligated to perform.”).
90
Williston on Contracts § 38:9 (“A condition subsequent has been defined as a future
event, the happening of which discharges the parties from their otherwise binding
agreement.”); id. (“The term ‘condition subsequent,’ as normally used in contracts in
contrast to ‘condition precedent,’ should mean an event which occurs subsequent to a duty
28
performance or an event.91 The nonoccurrence of a condition precedent or the
occurrence of a condition subsequent is not itself a breach.92 Whether the agreement
establishes a condition is a question of intent to be drawn from the agreement’s plain,
unambiguous language.93 Words and phrases such as “if,” “provided that,” and “on
the condition that” generally indicate the parties have created a condition.94
of immediate performance, that is, a condition which divests a duty of immediate
performance of a contract after it has once accrued and become absolute.”); Restatement
(Second) of Contracts § 230(1) (“[I]f under the terms of the contract the occurrence of an
event is to terminate an obligor’s duty of immediate performance or one to pay damages
for breach, that duty is discharged if the event occurs.”); SLMSoft.com, Inc. v. Cross
Country Bank, 2003 WL 1769770, at *12 (Del. Super. Apr. 2, 2003) (“A term rendering
performance by one party contingent upon a condition or performance of another is
generally a condition precedent. This condition ‘must be performed or happen before a
duty of immediate performance arises on the promise which the condition qualifies.’”
(quoting Williston on Contracts § 38:7, and citing Marvel v. Conte, 1978 WL 8409, at *4
(Del. Ch. Oct. 24, 1978))).
91
Williston on Contracts § 38:7 (“A condition precedent is either an act of a party that must
be performed or a certain event that must happen before a contractual right accrues or a
contractual duty arises.” (footnote omitted)).
92
See Supernus Pharms., Inc. v. Reich Consulting Grp., Inc., 2021 WL 5046713, at *6
(Del. Ch. Oct. 29, 2021) (“[N]onperformance of a condition precedent is not a breach of
contract since the purpose of the condition is merely to qualify the duty to perform
immediately.” (internal quotation marks omitted) (quoting Williston on Contracts § 63:6)).
93
SLMSoft.com, 2003 WL 1769770, at *12; Restatement (Second) of Contracts § 226 cmt.
a. The Restatement contrasts events to conditions. See id. § 226.
94
SLMSoft.com, 2003 WL 1769770, at *12; ITG Brands, LLC v. Reynolds Am., Inc., 2017
WL 5903355, at *8 (Del. Ch. Nov. 30, 2017); Sage Software, Inc. v. CA, Inc., 2010 WL
5121961, at *8 (Del. Ch. Dec. 14, 2010); Kan. City S. v. Grupo TMM, S.A., 2003 WL
22659332, at *3 (Del. Ch. Nov. 4, 2003); see also Restatement (Second) of Contracts
§ 226 cmt. a (“No particular form of language is necessary to make an event a condition,
although such words as ‘on condition that,’ ‘provided that’ and ‘if’ are often used for this
purpose.”).
29
Delaware law offers two steps to categorize a condition.95 Courts should first
“look to the nature of the condition at issue.”96 “If the condition must be satisfied
before a duty of performance arises,” the parties have created a condition precedent;
if the event in question extinguishes an immediate duty of performance, the parties
have created a condition subsequent.97 If it is still unclear whether the parties created
a condition precedent or condition subsequent, this Court has suggested a three
factor test, as enumerated in the mergers and acquisitions context: “(i) whether the
condition turns on a specific and easily verified fact, such as the receipt of regulatory
clearance or a favorable stockholder approval, (ii) whether the condition turns on a
departure from what normally would occur between signing and closing, and (iii)
which party would have to prove a negative.”98
Conditions risk imposing a forfeiture on the party who loses the benefit of the
other party’s performance.99 “Forfeiture” is generally “the denial of compensation
95
See AB Stable VIII LLC v. Maps Hotels & Resorts One LLC, 2020 WL 7024929, at *49–
50 (Del. Ch. Nov. 30, 2020) (“[P]arties and courts can promote clarity by starting with the
Restatement approach and asking explicitly whether the condition is one that must be
satisfied before an obligation to perform arises or whether the condition extinguishes an
existing obligation to perform.” (citing Restatement (Second) of Contracts § 224 cmt. e
and Hexion, 965 A.2d at 739.
96
AB Stable, 2020 WL 7024929, at *49.
97
Id.98
Id. at *50.
99
Restatement (Second) of Contracts § 227 cmt. b (“The non-occurrence of a condition of
an obligor’s duty may cause the obligee to lose his right to the agreed exchange after he
30
that results when the obligee loses his right to the agreed exchange after he has relied
substantially, as by preparation or performance on the expectation of that
exchange.”100 Because of the risk of forfeiture, conditions are disfavored and the
law has evolved to protect parties from forfeitures in certain instances.101 Pursuant
has relied substantially on the expectation of that exchange, as by preparation or
performance. The word ‘forfeiture’ is used in this Restatement to refer to the denial of
compensation that results in such a case.”).
100
Id. § 229 cmt. b; accord Williston on Contracts § 42:1 (“[T]he word ‘forfeiture’ implies
the loss of something previously owned, or at least the prevention from acquiring
something for which one has substantially paid” (footnote omitted)); Nw. Cent. Pipeline
Corp. v. Mesa Petroleum Co., 1985 WL 44696, at *4 (Del. Ch. Apr. 10, 1985) (“A
forfeiture is generally understood as a deprivation of rights or property as a result of the
nonperformance of some obligation or condition.”); Restatement (Second) of Contracts §
227 cmt. b (“The non-occurrence of a condition of an obligor’s duty may cause the obligee
to lose his right to the agreed exchange after he has relied substantially on the expectation
of that exchange, as by preparation or performance. The word ‘forfeiture’ is used in this
Restatement to refer to the denial of compensation that results in such a case.”); see also
Forfeiture, Black’s Law Dictionary (11th ed. 2019) (“A destruction or deprivation of some
estate or right because of the failure to perform some contractual obligation or condition.”).
101
See, e.g., Snow Phipps Grp., LLC v. KCAKE Acq., Inc., 2021 WL 1714202, at *52 (Del.
Ch. Apr. 30, 2021) (“The prevention doctrine provides that ‘where a party’s breach by
nonperformance contributes materially to the non-occurrence of a condition of one of his
duties, the non-occurrence is excused.’” (citation omitted)); Eisenmann Corp. v. Gen.
Motors Corp., 2000 WL 140781, at *18 n.16 (Del. Super. Jan. 28, 2000) (“[T]he Court
may excuse the nonoccurrence of a condition that would cause a disproportionate forfeiture
unless its occurrence was a material part of the agreed Exchange.” (citing Restatement
(Second) of Contracts § 229)); Jefferson Chem. Co. v. Mobay Chem. Co., 267 A.2d 635,
637 (Del. Ch. 1970) (excusing forfeiture resulting from “technical mistake”); see also
Geronta Funding v. Brighthouse Life Ins. Co., 284 A.3d 47, 68 (Del. 2022) (“Except as
stated in §§ 198 and 199, a party has no claim in restitution for performance that he has
rendered under or in return for a promise that is unenforceable on grounds of public policy
unless denial of restitution would cause disproportionate forfeiture.” (internal quotation
marks omitted) (quoting Restatement (Second) of Contracts § 197)).
31
to one such protection, “[i]f the [agreement’s] language does not clearly provide for
a forfeiture, then a court will construe the agreement to avoid causing one.”102
Nevertheless, the Court will find the parties created a condition resulting in a
forfeiture if the language reflects an unambiguous intent to do so.103 In considering
the presence of a condition, as in all contract interpretation exercises, the Court must
read the contract as a whole.104
While the law of forfeitures protects a nonbreaching party from losing the
benefit of her bargain, the law of penalties and liquidated damages protects the
breaching party from undue punishment. As stated, the purpose of damages in
102
Tygon Peak Cap. Mgmt., LLC v. Mobile Invs. Investco, LLC, 2022 WL 34688, at *15–
16 (Del. Ch. Jan. 4, 2022); see also Restatement (Second) of Contracts § 227(1) (“In
resolving doubts as to whether an event is made a condition of an obligor’s duty, and as to
the nature of such an event, an interpretation is preferred that will reduce the obligee’s risk
of forfeiture, unless the event is within the obligee’s control or the circumstances indicate
that he has assumed the risk.”).
103
Williston on Contracts § 38:12 (“Although the court may regret the harshness of an
express condition, as it may regret the harshness of a promise, it must, nevertheless,
generally enforce the will of the parties unless doing so will violate public policy.”
(footnote omitted)); Restatement (Second) of Contracts § 227 cmt. b (“The policy favoring
freedom of contract requires that, within broad limits (see § 229), the agreement of the
parties should be honored even though forfeiture results.”); Hindman v. Salt Pond Assocs.,
1992 WL 396304, at *4 (Del. Ch. Dec. 21, 1992) (“As to the legality of forfeiture
provisions, ‘a forfeiture provision incorporated in a partnership agreement may be given
effect.’” (internal quotation marks omitted) (quoting 68 C.J.S. Partnership § 86 (1950))).
104
Headlands Tech, 2020 WL 5946962, at *5 (looking to other parts of an agreement to
determine if particular language is a condition); QC Hldgs., Inc. v. Allconnect, Inc., 2018
WL 4091721, at *7 (Del. Ch. Aug. 28, 2018) (looking to an agreement “as a whole and in
context” to avoid a forfeiture).
32
contract law is to compensate a party for her loss—not to punish the breaching
party.105 It follows that Delaware courts generally will not enforce provisions that
require the breaching party to pay a preset amount untethered to the nonbreaching
party’s actual damages.106 A penalty provision punishes a party for breaching or
otherwise attempting to coerce that party into performing “by making a breach so
expensive that it forces adherence to the contract.”107 At common law, penalty
provisions are void as against public policy.108
105
See supra note 84.
106
See CRS Proppants LLC v. Preferred Resin Hldg. Co., LLC, 2016 WL 6094167, at *4
(Del. Super. Sept. 27, 2016) (“Generally, a fixed amount regardless of the breach is
considered intent to impose a penalty.”); Lyons Ins. Agency, Inc. v. Wark, 2020 WL
429114, at *1 (Del. Ch. Jan. 28, 2020); S.H. Deliveries, Inc. TriState Courier & Carriage,
Inc., 1997 WL 817883, at *2 (Del. Super. May 21, 1997)); see also Williston on Contracts
§ 42:1; Restatement (Second) of Contracts § 356 cmt. c.
107
Williston on Contracts § 65:3; id. § 42:1 (“A penalty, as distinguished from a forfeiture,
therefore, involves the enforcement of an obligation to pay an amount fixed by law or
agreement of the parties as a punishment for the failure to fulfill some primary
obligation.”); Penalty, Black’s Law Dictionary (11th ed. 2019) (defining penalty as “[a]n
extra charge against a party who violates a contractual provision”).
108
S.H. Deliveries, 1997 WL 817883, at *2; Restatement (Second) of Contracts § 356 cmt.
a (“The central objective behind the system of contract remedies is compensatory, not
punitive. Punishment of a promisor for having broken his promise has no justification on
either economic or other grounds and a term providing such a penalty is unenforceable on
grounds of public policy.”); Restatement (First) of Contracts § 579 (Am. L. Inst. 1932) (“A
bargain for a penalty for the non-performance in the future of a contractual or other duty is
illegal.”); see Restatement (Second) of Contracts § 356; Del. Bay Surgical Servs., P.C. v.
Swier, 900 A.2d 646, 650–51 (Del. 2006) (evaluating whether a contractual provision
requiring a $25,000 payment if either party terminated the contract early would be invalid
if a penalty, but enforceable if a liquidated damages provision).
33
But when contractual damages are difficult to estimate, parties to a contract
may stipulate that a fixed amount should be paid upon a breach. If valid, these
provisions are known as liquidated damages provisions; if they are not, they are
penalties. A damages provision will be a valid liquidated damages provision rather
than an invalid penalty if: (1) the damages that would flow from a future breach are
difficult to estimate because they are indefinite or uncertain, and (2) at the time the
contract was entered into, the agreed-upon amount was a reasonable estimate of the
damages suffered.109 Liquidated damages provisions are presumptively valid and
will be enforced unless the breaching party can demonstrate that the provision fails
to meet this standard.110
In the partnership setting, the common law disfavor of penalties yields to
statute. Section 17-306 of the Limited Partnership Act, titled “Remedies for Breach
of Partnership Agreement by Limited Partner,” permits a partnership agreement to
specify “penalties.”111 It states “[a] partnership agreement may provide that: (1) A
limited partner who fails to perform in accordance with, or to comply with the terms
and conditions of, the partnership agreement shall be subject to specified penalties
109
Brazen v. Bell Atl. Corp., 695 A.2d 43, 48 (Del. 1997) (citing Lee Builders v. Wells, 103
A.2d 918, 919 (Del. Ch. 1954)).
110
Unbound P’rs Ltd. P’ship v. Invoy Hldgs. Inc., 251 A.3d 1016, 1034 (Del. Super. 2021).
111
6 Del. C. § 17-306.
34
or specified consequences . . . .”112 Section 17-306 further provides that “[s]uch
specified penalties or specified consequences may include and take the form of any
penalty or consequence set forth in § 17-502(c) of this title.”113 Section 17-502(c)
lists “reducing or eliminating the defaulting partner’s proportionate interest in the
limited partnership,” and “forfeiture of that partnership interest” as two potential
consequences.114 This Court has explained that 6 Del. C. § 18-306 which mirrors
Section 17-306, departs from the common law in that it “authorizes LLC agreements
to provide for remedies that would be unavailable in a standard commercial contract,
most notably penalties and forfeitures.”115
The enforceability of a penalty or liquidated damages provision depends on
the enforceability of the underlying promise that was breached.116 If, for example,
112
Id.
113
Id.
114
Id. § 17-502(c).
115
XRI Inv. Hldgs. LLC v. Holifield, 283 A.3d 581, 661–62 (Del. Ch. 2022) (citations
omitted); see also CML V, LLC v. Bax, 6 A.3d 238, 251 (Del. Ch. 2010) (reasoning that
Section 18-306 represents a departure from the common law rule against penalties); cf. Bay
Ctr. Apartments Owner, LLC v. Emery Bay PKI, LLC, 2009 WL 1124451, at *8 n.33 (Del.
Ch. Apr. 20, 2009) (“[W]hen addressing an LLC case and lacking authority interpreting
the LLC Act, this court often looks for help by analogy to the law of limited partnerships.”
(collecting authorities)); see also In re Cellular Tel. P’ship Litig., 2021 WL 4438046, at
*73 & n.58 (Del. Ch. Sept. 28, 2021) (discussion similar provisions in general partnership
context).
116
See Geronta Funding, 284 A.3d at 68 (quoting Restatement (Second) of Contracts §
197); Brazen, 695 A.2d at 47 (“[L]iquidated damages, by definition, are damages paid in
the event of a breach of a contract.”).
35
that promise is an unenforceable restrictive covenant, the liquidated damages
provision is unenforceable.117
With that Delaware primer on restrictive covenants, forfeitures and
conditions, and liquidated damages provisions and penalties at common law and in
the partnership setting, I turn to the appropriate labels to ascribe to the Conditioned
Payment Device.
B. The Conditioned Payment Device Comprises Two
Conditions To The Payment Of Conditioned Amounts.
I interpret Article XI to provide that the Conditioned Payment Device
conditions Cantor Fitzgerald’s duty to pay Conditioned Amounts on two conditions
precedent: (1) not engaging in any Competitive Activity (the Competitive Activity
Condition) and (2) not breaching any Partner Obligation (the No Breach Condition).
I begin with the more straightforward language of the Conditioned Payment
117
See Bhaskar S. Palekar, M.D., P.A. v. Batra, 2010 WL 2501517, at *5 (Del. Super.
May 18, 2010) (“Paragraph 4(c) contains a restrictive covenant and $200,000 in liquidated
damages. In order to enforce them, the Court must determine that both are proper.”). In
cases in which a physician is purportedly subject to a restrictive covenant, a Delaware
statute eliminates the availability of injunctive relief but permits enforcement by a
liquidated damages provision. 6 Del. C. § 2707; see, e.g., Saez v. Nephrology Assocs.,
2019 WL 5207918, at *3, *7 (Del. Super. Oct. 16, 2019). At first glance, the statute and
common law may appear to contemplate a liquidated damages provision enforcing an
otherwise enforceable promise. I read the statute to strike only the availability of injunctive
relief, leaving the Restrictive Covenant as a promise enforceable by liquidated damages
only.
36
Device’s sections addressing the Grant Amounts, which include only the
Competitive Activity Condition.
Each such section governing the payment of Grant Amounts contains
substantively identical language stating that a partner will be entitled to certain post-
termination payments “provided that . . . such Partner has not engaged in any
Competitive Activity prior to the date such payments are due.”118 The use of the
language “provided” is strong evidence that the parties intended to create a
condition.119 The plain language of the provision explains that if a partner has not
engaged in a Competitive Activity before the date each Grant Amount payment is
due, Cantor Fitzgerald has a duty to make those payments. In other words, Cantor
Fitzgerald had no duty to pay any upcoming Grant Amount installment until the
payment due date arrives and the partner has not engaged in any Competitive
Activity. The Competitive Activity Condition must be satisfied before Cantor
Fitzgerald’s obligation to pay Grant Amounts arises. Thus, it is a condition
precedent.120
118
LP Agr. §§ 11.08(b); 11.09(b), 11.10(b).
119
See supra note 94.
120
See AB Stable, 2020 WL 7024929, at *49–50; Restatement (Second) of Contracts § 224
cmt. e.
37
Reading the LP Agreement as a whole supports this conclusion. Section
11.02(d) states that nothing in Article XI limits a partner’s ability to compete or
otherwise obtain employment.121 This reiterates that Article XI itself imposes no
duty on withdrawing partners to refrain from engaging in Competitive Activities;
Article XI does not create a promise or covenant, so engaging in Competitive
Activity is not a breach of Article XI.122 Rather, engaging in such activity prevents
Cantor Fitzgerald’s duty to pay the Grant Amounts from arising.123
Having established that Article XI’s phrase “provided that such Partner has
not engaged in any Competitive Activity” creates a condition precedent, I turn to
Section 11.04(a), which states that “a Partner will be entitled to receive payment of
one-fourth of such Partner’s Additional Amounts . . . ; provided, that such Partner
. . . has not engaged in any Competitive Activity or otherwise breached a Partner
Obligation prior to the date such payment is due.”124 The first part of this language
reincorporates the Competitive Activity Condition. It also adds a disjunctive second
condition: “or otherwise breached a Partner Obligation.” The same textual reasons
121
LP Agr. § 11.02(c).
122
Of course, during the Restricted Period, Section 3.05 imposes a duty on departing
partners not to engage in Competitive Activity.
123
See, e.g., Williston on Contracts § 38:7 (explaining that where parties have created a
condition, the fulfillment of that condition is necessary to give rise to the duty to perform).
124
LP Agr. § 11.04(a) (emphasis in original).
38
reflect the express intent to condition Cantor Fitzgerald’s duty to pay Additional
Amounts on the payment due date arriving without any breach of a Partner
Obligation. The fact that the No Breach Condition is triggered by a “breach[ of] a
Partner Obligation” does not prevent it from being a condition—an agreement can
create a condition that is triggered by a failure to perform a contractual duty.125 I
interpret Section 11.04(a) to condition Cantor Fitzgerald’s duty to pay Additional
Amounts on the due date arriving without any breach of the Partner Obligations.
Like the Competitive Activity Condition, this No Breach Condition is a condition
precedent.126
C. Plaintiffs’ Structural Attacks On The Conditioned Payment
Device Fail.
In seeking to prevail on summary judgment, Plaintiffs lodge two attacks on
both conditions. First, they assert that Section 3.05(b) and the No Breach Condition
are penalties, and that they deserve a summary judgment because penalties are
125
See Restatement (Second) of Contracts § 227 cmt. d (“When an obligor wants the
obligee to do an act, the obligor may make his own duty conditional on the obligee doing
it and may also have the obligee promise to do it.”); Williston on Contracts § 38:15 (“A
provision may be both a condition and a promise if one of the parties, as part of its bargain
and in addition to the other promises it makes, agrees to ensure that the condition will occur
. . . .”); see also Restatement (Second) of Contracts § 225(3) (“Non-occurrence of a
condition is not a breach by a party unless he is under a duty that the condition occur.”);
Sechrist Indus., 2002 WL 31260989, at *7 (same).
126
See AB Stable, 2020 WL 7024929, at *49–50; Restatement (Second) of Contracts § 224
cmt. e.
39
unenforceable under Delaware law.127 But as explained, Delaware law permits
penalties for breaches of a partnership agreement. Even if the No Breach Condition
were a penalty for breach of a partnership agreement, it would not be invalid simply
because it imposes a penalty.
Second, Plaintiffs argue the Competitive Activity Condition and the No
Breach Condition cannot prevent any duty from arising because Cantor Fitzgerald
has not demonstrated that either condition is material.128 This argument reflects a
misunderstanding of conditions. A condition represents a contractual agreement that
something less than a material breach will prevent the duty to perform from arising
or extinguish an existing duty to perform.129 To require that the condition be material
would undermine the very purpose of including such conditions in contracts, and our
PCB at 31–35 (relying on Infinity Cap. LLC v. Francis David Corp., 851 F. App’x 579,
127
585 (6th Cir. 2021) (applying Ohio law)).
128
PRB at 21.
129
See supra note 89.
40
law imposes no such requirement.130 Plaintiffs’ cited cases do not compel a
conclusion to the contrary.131
130
Akorn, 2018 WL 4719347, at *85 (explaining that conditions “depart from the common
law doctrine of material breach” in that they excuse performance absent a material breach
(citing Restatement (Second) of Contracts § 241 cmt. a); Farnsworth on Contracts § 8.02,
at 8-6 (“Although a condition is usually an event of significance to the obligor, this need
not be the case. In exercising their freedom of contract the parties are not fettered by any
test of materiality or reasonableness. If they agree, they can make even an apparently
insignificant event a condition.”); Restatement (Second) of Contracts § 241 cmt. a
(providing standard for finding nonperformance was material, and contrasting this standard
with the nonoccurrence of a condition, which does not require materiality); see also
Williston on Contracts § 38:6 (“[I]f a party makes a promise to do an act on condition that
it will receive $5.01, it cannot be required to perform on being paid $5.”); Restatement
(Second) of Contracts § 229 (providing rule for where nonoccurrence of a condition would
otherwise excuse performance, and in those circumstances stating the court has the
discretion to excuse the occurrence or nonoccurrence of the condition).
131
First, in SLMSoft.com, Inc. v. Cross Country Bank, the Superior Court found that the
contract did not create a condition, rendering any discussion of the materiality of a covenant
dicta. 2003 WL 1769770, at *12–13. Further, it is not clear that the court’s passing
reference to materiality—in a footnote and not accompanied by legal support—supports
the position that only a failure of a material condition relieves the duty to perform. See id.at *5 n.22. Second, Merchantwired, LLC v. Transaction Network Services, Inc. described
some conditions precedent as material, but did not rely on that characterization in reading
the complaint to fall short of alleging that “all conditions precedent” were satisfied. 2003
WL 21689647, at *2 (Del. Super. July 16, 2003). Third, in Ewell v. Lloyd’s, while the
parties joined issue over the materiality of the condition as a gating concept, the Superior
Court acknowledged that materiality instead informs whether a court may excuse a
condition in certain circumstances. 2010 WL 3447570, at *6 (Del. Super. Aug. 27, 2010)
(quoting Restatement (Second) of Contracts § 229); see also Obsidian Fin. Grp., LLC v.
Identity Theft Guard Sols., Inc., 2021 WL 1578201, at *8 & n.76 (Del. Ch. Apr. 22, 2021)
(considering Ewell and concluding “‘materiality’ of a condition precedent” plays no role
in implementing an express condition that does not work an inequitable forfeiture). Finally,
in Akorn,, the relevant agreement included a provision that required the nonoccurrence of
any condition precedent or occurrence of any condition subsequent to be material. 2018
WL 4719347, at *86.
41
D. The No Breach Condition Is Predicated On An
Unenforceable Promise.
Cantor Fitzgerald has urged the Court to label the Competitive Activity
Device as a condition because, it argues, doing so divorces the withholding of
Conditioned Amounts from the Restrictive Covenants, and so this Court has no basis
to review the Restrictive Covenants for reasonableness. As explained, I agree that
both the No Breach Condition and the Competitive Activity Condition are conditions
precedent. I disagree that labeling them as such saves the underlying Restrictive
Covenants from scrutiny.
The No Breach Condition is triggered by a breach of Section 3.05’s
Restrictive Covenants. Its plain language provides that the condition will not be
fulfilled if a partner “breache[s].”132 In order for an action to breach a restrictive
covenant, that restrictive covenant must be enforceable.133 If the restrictive covenant
is not enforceable, that action is not a breach. If the Restrictive Covenants are not
enforceable, then Plaintiffs cannot have breached a Partner Obligation; if Plaintiffs
have not breached a Partner Obligation, then they have not triggered the No Breach
Condition. Plaintiffs’ challenge of the Restrictive Covenants therefore has traction
even in the context of the No Breach Condition operating as a condition triggered
132
LP Agr. § 11.04(a).
133
See, e.g., Batra, 2010 WL 2501517, at *5.
42
by a breach, rather than a remedy for breach. Thus, I must evaluate whether the
Restrictive Covenants are enforceable under Delaware law.
For the Restrictive Covenants to be enforceable under Delaware law, they
must (1) be “reasonable in geographic scope and temporal duration, (2) advance a
legitimate economic interest of the party seeking its enforcement, and (3) survive a
balancing of the equities.”134 The reasonableness of the covenant’s scope is
measured in relation to the employer’s legitimate interests: a greater scope must be
supported by a greater interest.135
Section 3.05 imposes a variety of restrictions on competing and soliciting
customers and employees. Five provisions prohibit, among other things, soliciting
Cantor Fitzgerald employees and partners, soliciting customers, doing business with
134
FP UC Hldgs., 2020 WL 1492783, at *6 (internal quotation marks omitted) (quoting
Wilson, 2018 WL 4677606, at *5).
135
See id. at *7 (“Given the vast geographic scope of the non-compete, [the former
employer] must demonstrate it is protecting a particularly strong economic interest to
persuade the Court that the non-compete is enforceable.”); Kodiak, 2022 WL 5240507, at
*1 (“[T]he restrictive covenants protecting all the plaintiff's business lines are
unenforceable because they are broader than the plaintiff's legitimate business interest in
the purchased assets”); Norton Petroleum Corp. v. Cameron, 1998 WL 118198, at *4 (Del.
Ch. Mar. 5, 1998) (“The scope of a restrictive covenant must be tailored to protect Norton’s
legitimate business interests and must be balanced against the hardship it will pose to the
Defendant.”); see also Cabela’s LLC v. Wellman, 2018 WL 5309954, at *14 (Del. Ch. Oct.
26, 2018) (applying Nebraska law) (“By seeking to enforce the terms of those provisions,
Cabela’s has not exceeded the scope of its legitimate business interests.”); cf. Rsch. &
Trading Corp. v. Pfuhl, 1992 WL 345465, at *12 (Del. Ch. Nov. 18, 1992) (“The relief that
RTC has requested (that the defendants be enjoined from dealing with a list of key RTC
customers) is no broader than necessary to protect [its] interests.”).
43
Cantor Fitzgerald customers, and obtaining employment with any business defined
as a “Competing Business.”136 The restrictions on soliciting employees and
customers last for two years, while the balance of the restrictions last for one.137 The
Restrictive Covenants cover the business of Cantor Fitzgerald, as well as any
“limited and general partnerships, corporations or other entities owned, controlled
by or under common control with the partnership.”138 There is no geographic
limitation on any restriction. Per the terms of Section 3.05, a partner has breached
these covenants if the Managing General Partner determines, in good faith, that such
a breach has occurred.139 Cantor Fitzgerald contends that the breadth of Competitive
Activity advances its legitimate economic interests because it protects its “business
good will and customer relationships.”140
136
See LP Agr. § 3.05(a) (stating each partner “agrees that . . . he, she or it . . . agrees during
the Restricted Period not to, either directly or indirectly” breach any Partner Obligation);
id. § 11.04(c)(A) (inducing, influencing, or attempting “to solicit, induce or influence”
partners, employees and consultants from leaving Cantor Fitzgerald); id. § 11.04(c)(B)
(soliciting customers); id. § 11.04(c)(C) (doing business with any Cantor Fitzgerald
customer and certain former customers); id. § 11.04(c)(D) (directly or indirectly engaging
in or otherwise being connected to a Competing Business); id. § 11.04(c)(E) (assisting
others in “engaging in any Competing Business”).
137
Id. § 1.01 (defining “Restricted Period”).
138
Id. (defining “Affiliated Entities”); id. § 11.04(c)(A)–(E) (defining “Competitive
Activity” to include “Affiliated Entities”).
139
Id. § 3.05(a)(vi).
140
DOB at 42. To be sure, Cantor Fitzgerald focuses its argument on the definition of
Competitive Activity in Article XI, which Section 3.05 relies on. I read these arguments
to also encompass the enforceability of Section 3.05’s restrictive covenants.
44
As an initial matter, Cantor Fitzgerald suggests the scope of Competitive
Activities should avoid reasonableness review because “Plaintiffs agreed when they
executed the Partnership Agreement that Article XI protects legitimate economic
interests of the Partnership” and that they agreed the provisions were “reasonable in
scope and duration and are necessary to protect the interests of the Partnership and
the Affiliated Entities.”141 But the fact Plaintiffs signed an agreement stipulating to
its own reasonableness does not insulate that agreement from a reasonableness
review under Delaware law.142 Similarly, the fact that Plaintiffs signed an agreement
stating that unenforceable terms shall be revised does not make this Court inclined
to blue-pencil those terms.143
The Restrictive Covenants’ worldwide geographic scope is unreasonable.
“[T]he absence of a geographic limitation does not render [a] restrictive covenant
unenforceable per se”: it can be enforceable if the restriction is narrowly tailored to
serve the employer’s interests in the circumstances of the case.144 But Cantor
141
Id. at 42–43 (internal quotation marks omitted) (quoting LP Agr. § 11.04(e)).
142
See Kodiak, 2022 WL 5240507, at *5–7 (rejecting on public policy grounds the
argument that contractual language agreeing that noncompete provisions were reasonable
precluded the Court from reviewing it for reasonableness).
143
See id.; id. at *4 n.49.
144
Del. Exp. Shuttle, Inc. v. Older, 2002 WL 31458243, at *12 (Del. Ch. Oct. 23, 2002)
(internal quotation marks omitted) (quoting Gas Oil Prod., Inc. of Del. v. Kabino, 1987
WL 18432, at *2 (Del. Ch. Oct. 13, 1987)).
45
Fitzgerald makes only the conclusory argument that Cantor Fitzgerald is a global
business and therefore a global restrictive covenant is necessary. This is not
sufficient.145
145
See Kan-Di-Ki, LLC v. Suer, 2015 WL 4503210, at *19 (Del. Ch. July 22, 2015) (stating
“the scope and duration of the Restrictive Covenants are reasonable under the
circumstances of this case” and considering the “nature of the industry” and “the depth of
[the defendant’s] knowledge of [the former employer’s] business practices”); O’Leary v.
Telecom Res. Serv., LLC, 2011 WL 379300, at *5 (Del. Super. Ct. Jan. 14, 2011) (“A non-
compete covenant will be enforced only over a geographical area reasonable under the
circumstances.”); Comput. Aid, Inc. v. MacDowell, 2001 WL 877553, at *4 (Del. Ch. July
26, 2001) (referring to the geographic and temporal scope inquiries as “fact-specific”);
McCann Surveyors, Inc. v. Evans, 611 A.2d 1, 3 (Del. Ch. 1987) (“[E]ach [restrictive
covenant] case requires a careful evaluation of the specific facts and circumstances
presented.”); Pfuhl, 1992 WL 345465, at *11 (“A non-competition agreement will only be
enforced over a geographic area that is reasonable under the circumstances.”); see also
Lyons Ins. Agency, Inc. v. Wilson, 2018 WL 4677606, at *5 (Del. Ch. Sept. 28, 2018) (“This
Court has previously held that it ‘may, in the appropriate circumstances, enforce an
agreement without express territorial scope.’ This is particularly true when an employer’s
non-compete agreement prohibits an employee from engaging in activity that is ‘in
competition with’ the employer’s business, as opposed to prohibiting activity that is
‘similar to’ that business.” (footnote omitted) (quoting Del. Exp. Shuttle, 2002 WL
31458243, at *12–13); Del. Exp. Shuttle, 2002 WL 31458243, at *12 (“[T]he Court may,
in the appropriate circumstances, enforce an agreement without express territorial scope
and establish a reasonable geographical limitation where there is none in the Non–
Competition Agreement.” (emphasis added)). The cases Cantor Fitzgerald cites
demonstrate this is true. See, e.g., Berryman, 2004 WL 835886, at *10 (enforcing global
restrictive covenant where trial testimony “showed that the courier business is a
competitive business and that personal contacts are critical to the success or failure of the
venture,” where the former employee developed contacts “as an employee and officer” of
the company, and where he “ha[d] complete knowledge [of the company’s] proprietary
information, including its business strategies, logistics, and costs”).
46
The Restrictive Covenant is most patently unreasonable in its scope of who it
protects. “Competitive Activities” includes prohibited actions taken not just against
Cantor Fitzgerald, but also “any Affiliated Entity,” defined as “the limited and
general partnerships, corporations or other entities owned, controlled by or under
common control with” Cantor Fitzgerald.146 Prohibited solicitation is not limited to
successfully convincing a Cantor Fitzgerald partner to withdraw and work for a
competitor: it also includes acting in concert with others to attempt to “solicit,
induce or influence” a consultant to terminate “other business arrangements” with
Cantor Fitzgerald,147 and inducing a customer or employee of a Cantor Fitzgerald
affiliate to “adversely affect their relationship” with an affiliate.148 Other prohibited
activities include assisting others in becoming “connected with[] any Competing
Business” of an affiliate149 and taking “any action that results directly or indirectly
in revenues or other benefit for that Limited Partner or any third party that is or could
be considered to be engaged in such Competitive Activity.”150 Under these
146
LP Agr. § 11.04(c)(A)–(E); id. § 1.01 (defining “Affiliated Entities”).
147
Id. § 11.04(c)(A).
148
Id. § 11.04(c)(B).
149
Id. § 11.04(c)(D).
150
Id. § 3.05(a)(iii) (emphasis added).
47
standards, it is highly possible that a partner could unknowingly engage in a
Competitive Activity.
A hypothetical illustrates the breadth of these restrictions. A former Cantor
Fitzgerald partner who worked as a broker in the Hong Kong office could withdraw
from the Partnership, move to Europe, and switch professions by taking a position
as an accountant for a large international accounting firm. If that accounting firm
provides services for a European-based entity in the “institutional brokerage
business,” and the Managing General Partner determines that such accounting work
“could be considered to be” “assist[ing] others in engaging in” indirectly competing
with a Cantor Fitzgerald affiliate, then Cantor Fitzgerald could seek injunctive relief
and withhold payment of all Conditioned Amounts.
Cantor Fitzgerald has advanced no convincing rationale as to why this broad
and vaguely defined scope is necessary to protect Cantor Fitzgerald’s good will and
customer relationships. Cantor Fitzgerald has not pointed to any legitimate business
interest that could be served by protecting all its unspecified affiliates,151 and
151
In response to an interrogatory requesting that it identify all “Affiliated Entities,” Cantor
Fitzgerald claimed the request was both overbroad and unduly burdensome, and then
proceeding to list eight entities, which it claimed were “among the ‘Affiliated Entities.’”
DOB, Ex. 7, at res. 4. That Cantor Fitzgerald believes it is burdensome to list out all entities
that partners are prohibited from competing with reflects poorly on the scope of these
Restrictive Covenants.
48
condemning all third parties who are or could be considered to be engaged in
Competitive Activity who might indirectly benefit from a former limited partner’s
work.152 There is no indication that Plaintiffs had access to any kind of
information—proprietary or otherwise—that would warrant that restriction. Cantor
Fitzgerald argues only that Plaintiffs have profited from Cantor’s other business
lines. While this point may be relevant to balancing the equities, it does not
constitute a legitimate business purpose for purposes of enforcing noncompetes and
nonsolicits that reverberate through Cantor Fitzgerald’s affiliates on the one hand,
and any third party who might indirectly benefit from a limited partner’s work and
who might be considered to be a competitor on the other.
Section 3.05’s overbreadth is exacerbated by how the LP Agreement defines
whether it has been breached. A partner breaches a Restrictive Covenant not when
152
See Kodiak, 2022 WL 5240507, at *10 (reasoning that a buyer’s interest in the target’s
goodwill does not extend to other unrelated industries); Norton Petroleum, 1998 WL
118198, at *3 (“The evidence unequivocally shows that Norton’s sole enterprise is to
manufacture and sell lubricants. To that extent, Norton has a legitimate business interest
to protect. Norton has no legitimate interest, however, in prohibiting Defendant from
selling non-lubricant products. Enforcing such a prohibition would significantly limit
Defendant’s ability to find suitable employment.”); see also Med. Staffing Network, Inc. v.
Ridgway, 670 S.E.2d 321, 328 (N.C. Ct. App. 2009) (“MSN presented no evidence, and
the trial court made no findings that MSN had any legitimate business interest in preventing
competition with, foreclosing the solicitation of clients and employees of, and protecting
the confidential information of an unrestricted and undefined set of MSN’s affiliated
companies that engage in business distinct from the medical staffing business in which
Ridgway had been employed. We conclude that on its face, this bar extends beyond any
legitimate interest MSN might have in this case.”).
49
she actually competes, but when the Managing General Partner determines she has
competed. This language expands the scope of prohibited employment from
competing to employment that may not actually compete, and therefore not harm
any legitimate Cantor Fitzgerald interest, so long as the Managing General Partner
believed in good faith that the employment was a Competitive Activity. Cantor has
not advanced any argument showing why this expansive condition is necessary.
In view of these broad and vaguely defined provisions, the Restrictive
Covenants’ temporal scope is unreasonable. Whether the duration of a restrictive
covenant is reasonable turns on the specific facts before the Court and the needs of
the employer.153 Cantor Fitzgerald asserts only that “Delaware courts have enforced
non-compete restrictions with five and even ten year durations”154 and that “[f]our
years is within the range of reasonable durations in Delaware.”155 That may be true
153
Deloitte & Touche USA LLP v. Lamela, 2007 WL 1114075, at *6–10 (Del. Ch. Apr. 6,
2007) (finding two year restrictive covenant reasonable as to some partnership clients but
not others, and considering year-over-year revenue derived from each client that the
defendant allegedly solicited and the defendant’s involvement with each client prior to his
departure); Elite Cleaning, 2006 WL 1565161, at *8 (finding two year restrictive covenant
unenforceable and considering that worker was unskilled and received no specialized
training); RHIS, Inc. v. Boyce, 2001 WL 1192203, at *7 (Del. Ch. Sept. 26, 2001) (finding
two years unreasonable for non-solicitation agreement for employee home inspection
services, and considering bargaining power, that the agreement was a form agreement, and
that others were not required to sign the same agreement).
50
for more tailored restrictive covenants, but it is unreasonable to subject withdrawn
partners to these Restricted Covenants for the specified Restricted Periods.
Finally, I turn to the balancing of the equities. Some factors weigh in favor
of enforcement, including the fact Cantor Fitzgerald is not seeking to prohibit
Plaintiffs from obtaining employment, and Plaintiffs did in fact move to other firms
or otherwise pursue their livelihoods.156 Further, Plaintiffs knowingly entered into
a contractual arrangement bringing them into the Partnership, fully aware of the
Restrictive Covenants and the potential to forgo certain sums in the event they left
the Partnership and competed. With that knowledge, five of the six Plaintiffs
invested additional funds to acquire HDII Units notwithstanding these provisions.
And in this partnership setting, Plaintiffs as partners profited, or at least had the
potential to profit, from the enforcement of these provisions against other departing
partners. To deny enforcement of the Restrictive Covenants would deny Cantor
Fitzgerald and its other partners the benefit of their bargain.157
156
See DOB, Ex. 10 at res. 9. The parties dispute Kwan’s path after leaving Cantor
Fitzgerald. DOB at 13 (stating “Kwan joined [a competing entity] in September 2010 and
served as Executive Managing Director, Chief Operating Officer, and Director of the Board
of [that entity]”); PCB at 15 (stating “Kwan started her own consulting firm . . . and served
on the board of directors for [an alleged competitor]”). I make no finding as to whether
Kwan accepted employment with Reorient, and my considerations for purposes of the
balancing of the equities does not take into account which party’s version of the facts is
correct.
157
All Pro Maids, Inc. v. Layton, 2004 WL 1878784, at *5 (Del. Ch. Aug. 9, 2004).
51
But there are also facts that show enforcement would not be equitable here.
Plaintiffs stand to lose between $96,651 and $5,492,092.45—a range from
meaningful to extraordinary.158 And Cantor Fitzgerald relied on the determination
of its Managing General Partner to withhold those amounts, rather than establishing
Plaintiffs actually breached the agreement before a factfinder, which weighs against
concluding these restrictions are equitable. The restrictions themselves are so broad
that it appears it would be difficult, and so vague that it would be risky, for former
Cantor Fitzgerald partners to find employment in or adjacent to the financial services
field. On balance, the considerations weighing in favor of enforcement are
insufficient to render the Restrictive Covenants reasonable.
Accordingly, I conclude the Restrictive Covenants in Section 3.05(a),
specifically the promises not to engage in Competitive Activity for the specified
Restricted Periods in Section 3.05(a)(ii) and (iii), are unreasonable and therefore
unenforceable.159 It follows that Plaintiffs’ alleged failure to comply with Section
3.05’s unenforceable promises cannot constitute the breach of a Partner Obligation.
158
DOB, Ex. 7, at res. 8. The fact that these Plaintiffs obtained employment elsewhere
does not necessarily foreclose the Court from considering these penalties’ limiting effect
on worker mobility. See Restatement (Second) of Contracts § 186 cmt. a (stating that in
assessing whether a promise is a restraint of trade, “[t]he promise is viewed in terms of the
effects that it could have had and not merely what actually occurred.”).
159
For the avoidance of doubt, I find unreasonable Section 3.05’s covenants not to engage
in any of the Competitive Activities during the Restricted Period.
52
That breach therefore cannot condition Cantor Fitzgerald’s duty to pay the
Additional Amounts.
Because the No Breach Condition is an unenforceable basis by which to
preclude Cantor Fitzgerald’s duty to pay the Additional Amounts from arising,
Cantor Fitzgerald is left with only the Competitive Activity Condition as a basis to
relieve its duty to pay Additional Amounts and Grant Amounts.
E. The Competitive Activity Condition Is Unenforceable.
The Competitive Activity Condition functions as what is commonly known
as a forfeiture-for-competition provision.160 Such provisions cause former
employees who compete with their former employer to forgo some benefit to which
they would have been entitled had they not competed.161 Delaware law is not clear
on whether such provisions are restraints of trade that should be evaluated for
reasonableness;162 other jurisdictions are split.
160
See, e.g., Deming v. Nationwide Mut. Ins. Co., 905 A.2d 623 (Conn. 2006).
161
See, e.g., DeLeo v. Equale & Cirone, LLP, 184 A.3d 1264, 1276 (Conn. App. 2018).
162
W.R. Berkley Corp. v. Hall, 2005 WL 406348, at *4 (Del. Super. Ct. Feb. 16, 2005)
(declining to apply reasonableness standard where former employee was required to repay
stock option profits after he competed); Pollard v. Autotote, Ltd., 852 F.2d 67, 70–71 (3d
Cir. 1988) (noting absence of controlling state law and predicting Delaware courts would
evaluate forfeiture-for-competition provisions for reasonableness); W. R. Berkley Corp. v.
Dunai, 2021 WL 1751347, at *2 (D. Del. May 4, 2021) (declining to apply reasonableness
review to stock clawback); see also Wark, 2020 WL 429114; Halpen, 2001 WL 985104.
53
Plaintiffs urge this Court to adopt the framework that evaluates such
provisions for reasonableness.163 At bottom, these decisions subject forfeiture-for-
competition provisions to the same policy considerations driving the review of
traditional restrictive covenants for reasonableness.164 Courts that follow this
approach reason that such clauses have the same purpose and effect as traditional
restrictive covenants, in that they are “designed to deter competition” and have a
restraining influence.165 Their analyses also reflect fairness concerns, including that
employees may be required to sign such agreements as a condition of their
employment, and whether the agreements are presented on a “take it or leave it”
basis.166
163
PCB at 19–20; see, e.g., Deming, 905 A.2d 623; Brockley v. Lozier Corp., 488 N.W.2d
556 (Neb. 1992); Cheney v. Automatic Sprinkler Corp. of Am., 385 N.E.2d 961, 965 (Mass.
1979).
164
See Harris v. Bolin, 247 N.W.2d 600, 602–03 (Minn. 1976).
165
See, e.g., Deming, 905 A.2d at 637–39 (reasoning that it would “be unduly formalistic
. . . to invalidate a covenant not to compete that was in direct restraint of trade, but approve
a forfeiture provision that indirectly accomplished the same result”); Pollard, 852 F.2d at
71 (reasoning that forfeiture-for-competition provisions “restricts an employee’s ability to
accept alternate employment”); Almers v. S.C. Nat. Bank of Charleston., 217 S.E.2d 135,
140 (S.C. 1975) (“[T]he covenant not to compete and forfeiture upon competing are but
alternative approaches to accomplish the same practical result.”); Johnson v. Country Life
Ins. Co., 300 N.E.2d 11, 15 (Ill. App. 1973) (“[T]o say that the prospective loss of those
commissions does not operate to significantly restrict his right to engage in the pursuit of
his occupation following termination of his relationship with the company, and by the same
token reduce, if not eliminate competition is, in our view, to divorce the practical
application and consequences of the covenant from the hard facts of economic reality.”).
166
Cheney, 385 N.E.2d at 965 (considering that agreements involving forfeiture-for-
competition provisions of the type before the court “are not arrived at by bargaining
54
Cantor Fitzgerald takes the opposite position. It argues that Delaware should
adopt the “employee choice” doctrine, which provides that courts should not review
forfeiture-for-competition provisions for reasonableness so long as the employee
voluntarily terminated her employment.167 The employee choice doctrine is driven
by freedom of contract principles, and the idea that one should be bound to the
agreements she signs.168 Those jurisdictions reason that the employee made the
decision to leave, and forgoing certain compensation or benefits is a part of that
decision.169 The employee choice doctrine is also built on the fact that the employee
between equals” “[t]he employer normally presents the terms on a ‘take it or leave it’
basis,” and that the employee was given the choice to either “sign or terminate his
employment”); Johnson, 300 N.E.2d at 15 (reasoning the former employer was
withholding compensation it agreed to pay the plaintiff as compensation “for the services
he rendered”).
167
See, e.g., Morris v. Schroder Cap. Mgmt. Int’l, 7 N.Y.3d 616, 621 (N.Y. 2006) (“An
essential element to the [employee choice] doctrine is the employer’s ‘continued
willingness to employ the employee.” (quoting Post v. Merrill Lynch, Pierce, Fenner &
Smith, Inc., 48 N.Y.2d 84, 89 (1979)).
168
See, e.g., Alco-Columbia Paper Serv., Inc. v. Nash, 273 So. 2d 630, 634 (La. Ct. App.
1973) (“The forfeiture provision was one of the conditions to which the defendant agreed
when he entered the plan. We are convinced that he is bound by it.”).
169
See Fraser v. Nationwide Mut. Ins. Co., 334 F. Supp. 2d 755, 760 (E.D. Pa. 2004)
(“Fraser was simply faced with the decision of whether or not to disqualify himself from a
monetary benefit. In all likelihood, Fraser made that decision as any rational actor would—
by weighing the benefits and losses attributable to each option.”); Swift v. Shop Rite Food
Stores, Inc., 489 P.2d 881, 882 (N.M. 1971) (“Swift voluntarily joined Shop Rite’s profit
sharing plan. He did so with full knowledge that the decisions of the committee would be
binding upon him. When Swift terminated his employment, he did so voluntarily with full
knowledge of the plan's provision against direct or indirect competition within one year
thereafter.”).
55
is not actually prohibited from working because the forfeiture clause does not
support injunctive relief, like a traditional noncompete.170 And some decisions view
the loss of such payments due to competition as forgoing a supplemental benefit.171
In this sense, forfeiture-for-competition provisions serve as a financial disincentive,
170
See James H. Wash. Ins. Agency, 643 N.E.2d at 150 (“The noncompetition provisions
are not unreasonable or in illegal restraint of trade because Washington is not barred from
practicing his profession. Rather, he is being denied a reward that is intended only for
agents who are loyal to Nationwide.”); Courington v. Birmingham Tr. Nat. Bank, 347 So.
2d 377, 383 (Ala. 1977) (reasoning the public policy concerns raised by noncompetes are
not raised by the forfeiture provision before the court because it “does not involve a
restriction upon the employee’s entry into a competitive endeavor”); Swift, 489 P.2d at 882
(“Nothing in the plan gives Shop Rite the right to enjoin Swift from being employed by a
competing business, nor could Swift be civilly liale [sic] to Shop Rite for any breach of
covenant. . . .”); Alldredge v. City Nat. Bank & Tr. Co. of Kan. City, 468 S.W.2d 1, 4 (Mo.
1971) (“The reasoning is that the former employe [sic] is not prohibited from engaging in
such employment or activity, but may do so if he wishes.”); Van Pelt v. Berefco, Inc., 208
N.E.2d 858, 865 (Ill. App. Ct. 1965) (embracing employee choice as to retirement plan
benefits and reasoning the employee was free to accept employment elsewhere).
171
See Dunai, 2021 WL 1751347, at *2 (“This is not a $200,000 penalty for working for a
competitor; it is returning a supplemental benefit for breaching the terms of a bargain.”);
Lavey v. Edwards, 505 P.2d 342, 345 (Or. 1973) (“Most [decisions embracing employee
choice as to pension plans] adopt the view that such a provision is not a prohibition on the
employee engaging in competitive work, but is ‘merely’ a denial of his right to participate
in the pension plan if he does so engage and that the employee has a ‘choice’ under which
he may decide whether or not to engage in competitive work, which he is ‘free’ to do even
though, as a result, he may risk losing the benefits of a pension plan to which he has
contributed nothing.”).
56
rather than a per se bar on obtaining employment with a competitor.172 Other courts
have stated that employee choice is the majority approach.173
Front and center in this debate are the competing policy interests of enforcing
private agreements on one hand,174 and disfavoring restraints of trade and allowing
172
See Capozzi v. Latsha & Capozzi, P.C., 797 A.2d 314, 320 (Pa. Super. Ct. 2002)
(“Financial-disincentive provisions differ from direct restrictive covenants. They do not
impose a blanket or geographical ban on the practice of law nor do they directly prohibit
an attorney from representing former clients.”); DeLeo, 184 A.3d at 1275 (describing
forfeiture-for-competition provisions as “to deter competition with the partnership” and
noting agreement at issue “imposes a financial disincentive on the plaintiff to deter
competition with the partnership”); James H. Washington Ins. Agency, 643 N.E.2d at 150;
see also PCB at 19 (conceding sections 11.04, 11.08, 11.09, and 11.10 contain no
prohibition on competition).
173
See Deming, 905 A.2d at 634; Cheney, 385 N.E.2d at 964; Rochester Corp. v. Rochester,
450 F.2d 118, 122–23 (4th Cir. 1971) (“The strong weight of authority holds that forfeitures
for engaging in subsequent competitive employment, included in pension retirement plans,
are valid, even though unrestricted in time or geography.”).
174
RSUI Indem. Co. v. Murdock, 248 A.3d 887, 903 (Del. 2021) (“When parties have
ordered their affairs voluntarily through a binding contract, Delaware law is strongly
inclined to respect their agreement, and will only interfere upon a strong showing that
dishonoring the contract is required to vindicate a public policy interest even stronger than
freedom of contract. Such public policy interests are not to be lightly found, as the wealth-
creating and peace-inducing effects of civil contracts are undercut if citizens cannot rely
on the law to enforce their voluntary-undertaken mutual obligations.” (quoting ev3, Inc. v.
Lesh, 103 A.3d 179, 181 n.3 (Del. 2014)); Related Westpac LLC v. JER Snowmass LLC,
2010 WL 2929708, at *1 (Del. Ch. July 23, 2010) (“Delaware law respects contractual
freedom and requires parties like the operating member to adhere to the contracts they
freely enter.”); Abry P’rs V, L.P. v. F & W Acq. LLC, 891 A.2d 1032, 1059–60 (Del. Ch.
2006) (“[T]here is also a strong American tradition of freedom of contract, and that
tradition is especially strong in our State, which prides itself on having commercial laws
that are efficient.” (footnote omitted)); State v. Tabasso Homes, 28 A.2d 248, 252 (Ct. Gen.
Sessions 1942) (“We also recognize that freedom of contract is the rule and restraints on
this freedom the exception, and to justify this exception unusual circumstances should
exist.”); see also Nemec v. Shrader, 991 A.2d 1120, 1126 (Del. 2010) (“Parties have a right
to enter into good and bad contracts, the law enforces both.”).
57
individuals to freely pursue their profession of choice, on the other. 175 For
conventional noncompete and nonsolicit agreements, Delaware courts attempt to
balance these interests by enforcing the covenants only to the extent necessary to
protect the employer’s legitimate business interests.176 While Delaware may
“frown[] on” or disfavor restrictive covenants, our law nonetheless recognizes their
validity.177 This is not out of blind adherence to freedom of contract or the right to
enter into agreements both good and bad; employers have very real interests in
protecting proprietary information or the goodwill of a business they have acquired.
But the interests of encouraging competition and ensuring that individuals are free
to earn a living are also very real. The reasonableness standard permits employers
175
See Wark, 2020 WL 429114, at *4 (“[A]s a general principle, unambiguous contracts
are enforced as written. There are, however, public policy exceptions to this general rule.
One of these exceptions is a policy against oppression in employment contracts.” (footnote
omitted)); Elite Cleaning, 2006 WL 1565161, at *4 (“Delaware courts have favored the
public interest of competition in their review of noncompetition agreements.”); Cranston,
375 A.2d at 468 (“Courts scrutinize carefully all contracts limiting a man’s natural right to
follow any trade or profession anywhere he pleases and in any lawful manner. But it is
just as important to protect the enjoyment of an establishment in trade or profession, which
its possessor has built up by his own honest application to every day duty and the faithful
performance of the tasks which every day imposes upon the ordinary man. What one
creates by his own labor is his.” (internal quotation marks omitted) (quoting Ebbeskotte v.
Tyler, 142 N.E.2d 905, 910 (Ind. 1957)).
176
FP UC Hldgs., 2020 WL 1492783, at *6 (“When assessing ‘reasonableness,’ the court
focuses on whether the non-compete is ‘essential for the protection of the employer’s
economic interests.’” (quoting Norton Petroleum, 1998 WL 118198, at *3)).
177
Wark, 2020 WL 429114, at *4.
58
to enforce restrictive covenants, but only where the circumstances show it is fair and
reasonable to do so.
In determining which approach is more consistent with Delaware law, I look
to its treatment of liquidated damages provisions enforcing noncompete and
nonsolicit agreements, as distinct from injunctive relief. Delaware has extended its
skepticism to such damages provisions, noting they are “particularly suspect as
potentially-unreasonable restraints on competition, and on ex-employees’ interests
in earning a living.”178 In Faw, Casson & Co., LLP v. Halpen, an employment
agreement provided that the employee defendant was bound by the following clause
after his employment ended:
1. Employee agrees as follows: (a) To pay an amount or amounts equal
to one hundred percent (100%) of the gross fees billed by the company
to a particular client over the twelve month period immediately
preceding such termination, which was a client of the Company within
such period, and which client is served (with the type of services set
forth above) by Employee, or any corporation, partnership, firm or
other business entity with which Employee is associated as set forth
above within three (3) years from such termination of employment.179
178
Id. at *1; Faw, Casson & Co., L.L.P. v. Halpen, 2001 WL 985104, *2–3 (Del. Super.
Aug. 7, 2001) (enforcing an employment agreement’s provision requiring remittance of
fees paid to a new employer if a client of the previous employer moves to the new
employer, describing and upholding the provision as both “a restrictive employment
covenant and a liquidated damages clause” to the extent tethered to the employee’s
actions).
179
Halpen, 2001 WL 985104, at *2.
59
The Superior Court was clear: “This is a restrictive employment covenant and a
liquidated damages clause” because “[t]he defendant promised to pay a sum of
money when plaintiff’s clients followed him. Without the covenant, defendant
would be able to service clients elsewhere without an adverse economic impact . . . .
This is a restraint that has a noncompetitive effect.”180
In the next breath, the Superior Court stated, “As the amount is fixed, it
imposes liquidated damages.”181 Considering the clause as a liquidated damages
provision (as opposed to a penalty), the Superior Court reasoned that if the liquidated
damages provision was exercised without heed to whether the employee’s actions
had actually harmed the former employer, it would create the same undue chilling
effect on employment and upward mobility as a restrictive covenant.182 A liquidated
damages provision that is triggered even if the employee has not harmed the former
employer “outweighs [the employer’s] private expectations,” “ha[s] an unlawful in
terrorem purpose and effect,”183 and is “unenforceable because ‘the restraint in these
aspects is not reasonable.’”184 Judge Stokes equated the review of the liquidated
180
Id. at *2 & n.1.
181
Id. at *2 n.1.
182
Id. at *3.
183
Id. at *2–3.
184
Wark, 2020 WL 429114, at *7 (cleaned up) (quoting Halpen, 2001 WL 985104, at *2).
60
damages provision to “equity cases that consider injunctive relief” and reasoned,
“[w]ithout considering other interests and connecting [the former employee’s]
conduct in some fashion with a resulting business loss, this liquidated damages claim
would be improper.”185
This Court has recently embraced Halpen’s “sound reasoning” and concluded
a liquidated damages provision, viewed apart from a noncompete, “is unreasonable
to the extent it purports to impose fixed damages untethered from any act or behavior
by the employee beyond that of choosing to work for a competitor—an act for which
the employer did not seek relief.”186 Vice Chancellor Glasscock concluded the
clause before him was “unenforceable as applied because it does not adequately
connect [the employer’s] business loss to [the former employee’s] conduct” and was
“untethered to [the employer’s] reasonable interests in preventing competition by
ex-employees.”187 The breadth of the provision contributed to his conclusion, in that
the employee might be penalized even if her new employer took on the former
employer’s client through no fault or effort of her own.188
185
Halpen, 2001 WL 985104, at *3 n.7.
186
Wark, 2020 WL 429114, at *7 (cleaned up).
187
Id.188
Id.61
To my mind, it is only a small step to move from a liquidated damages
provision requiring a former employee to pay amounts to a former employer if the
employee competes, to a forfeiture-for-competition provision excusing the employer
from paying amounts if the employee competes. Like liquidated damages provisions
based on competition, forfeitures are disfavored because of their potential to cause
unjust outcomes.189 Indeed, there are times when the Court will disregard a
condition provision where the resulting forfeiture would be particularly inequitable
or against public policy.190 Forfeitures do not enjoy this Court’s contractarian
deference.
Whether a forfeiture-for-competition provision will effectively restrain trade
or an employee’s ability to earn a living will vary by provision and by employee. In
some instances, an employee and society’s interest in worker mobility may be better
189
See, e.g., QC Hldgs., 2018 WL 4091721, at *6 (explaining that a contractual
interpretation finding a condition that would result in a forfeiture was “suspect and
disfavored”); see also supra note 101.
190
See, e.g., Snow Phipps Grp., 2021 WL 1714202, at *55 (applying the prevention
doctrine to excuse the nonoccurrence of a condition); Stoltz Realty Co. v. Paul, 1995 WL
654152, at *9 (Del. Super. Sept. 20, 1995) (declining to read agreement as creating
condition precedent because to do so would result in an inequitable forfeiture); Jefferson
Chem. Co., 267 A.2d at 637 (refusing to enforce condition precedent where forfeiture
would result from a “technical mistake”); see also Restatement (Second) of Contracts §
227(1) (explaining that a court should prefer a contractual interpretation that reduces the
risk of forfeiture resulting from a condition “unless the event is within the obligee’s control
or the circumstances indicate that he has assumed the risk.”); Restatement (Second) of
Contracts § 229 (explaining that “a court may excuse the non-occurrence of” a condition
“unless its occurrence was a material part of the agreed exchange”).
62
served by a forfeiture-for-competition provision in lieu of a traditional restrictive
covenant that carries the threat of injunctive relief. But forfeiture-for-competition
provisions may still meaningfully deter or prevent employees from seeking other
employment in a manner that is disproportionate to the employer’s interest.191 In my
view, to embrace the employee choice doctrine wholesale would be to turn a blind
eye to these concerns that Delaware law has prioritized.192 Applying the
reasonableness standard to forfeiture-for-competition provisions can weed out
abusive and harmful forfeiture provisions while still permitting employers to
discourage competition insofar as their interests warrant it.
191
Deming, 905 A.2d at 637 (“We conclude that the provision in the contract at issue in
the present case, under which deferred compensation accrued under the agency security
compensation plan is forfeited if the employee engages in a competing business, does not
differ meaningfully from a covenant not to compete. The total prohibition against
competition, enforced by a forfeiture of accrued benefits, subjecting the employee to an
economic loss undoubtedly is designed to deter competition.”); Pollard, 852 F.2d at 71
(reasoning a forfeiture-for-competition provision “restricts an employee’s ability to accept
alternative employment”).
192
Tatom v. Ameritech Corp., 305 F.3d 737, 745 (7th Cir. 2002) (“[W]e acknowledged the
possibility that an Illinois court might likewise ‘pierce the formal wrappings’ of a stock
option forfeiture provision and deem it the equivalent of an anti-competitive provision.”);
Johnson v. Country Life Ins. Co., 300 N.E.2d 11, 15 (Ill. App. Ct. 1973) (“[T]o say that
the prospective loss of those commissions does not operate to significantly restrict his right
to engage in the pursuit of his occupation following termination of his relationship with the
company, and by the same token reduce, if not eliminate competition is, in our view, to
divorce the practical application and consequences of the covenant from the hard facts of
economic reality.”).
63
If Delaware law were amenable to adopting the employee choice doctrine, the
LP Agreement is a poor fit for it. The employee choice doctrine operates only where
the employee voluntarily terminates her employment, but the Conditioned Payment
Device works a forfeiture regardless of the reason a partner ceases to become a
partner.193
And it is a significant forfeiture: Plaintiffs here stood to lose (and did lose)
between nearly $100,000 to just under $5.5 million. These amounts are not tethered
to any competition that actually harms Cantor Fitzgerald: they are tethered to the
partner’s capital contributions and earned compensation. And, as explained, the
breadth of “Competitive Activity” makes it possible, if not likely, that a former
partner will engage in it accidentally or unknowingly. Delaware law is clear that
imposing financial consequences on former employees for competitive
circumstances that are not their fault, and in an amount that is untethered to the
former employer’s loss, has an in terrorem effect and operates as an unreasonable
restraint of trade.194
193
LP Agr. § 11.04(c); see, e.g., Morris, 7 N.Y.3d at 621 (“An essential element to the
doctrine is the employer’s ‘continued willingness to employ’ the employee. Where the
employer terminates the employment relationship without cause, ‘his action necessarily
destroys the mutuality of obligation on which the covenant rests as well as the employer's
ability to impose a forfeiture.’” (citation omitted)). Plaintiffs here did leave voluntarily.
194
Halpen, 2001 WL 985104, at *2; Wark, 2020 WL 429114, at *1, *7.
64
The Competitive Activity Condition is intended to dissuade partners from
competing: it states that partners will suffer a forfeiture if they “engage[] in any
Competitive Activity,” which pulls in the same exact conduct as the Restrictive
Covenants.195 And Plaintiffs did not have the opportunity to negotiate any aspect of
the LP Agreement: it was provided on a take-it-or-leave-it basis as a condition of
joining the Partnership.196
And so, I believe Delaware’s emphasis on balancing an employer’s ability to
contractually protect its good will, confidential information, customers, and other
assets against the public policy favoring free competition and employee mobility,
and Delaware’s distaste for liquidated damages provisions that restrain trade by
requiring employees to pay former employers if they compete—even unknowingly
and in an amount untethered to the employer’s loss—supports joining the ranks of
jurisdictions that review forfeiture-for-competition provisions for reasonableness as
restraints on trade. I also believe that the fact that partners are is still free to compete
justifies scaling the review back to the more lenient or employer-friendly review
Delaware affords restrictive covenants in the sale of a business as compared to an
195
See, LP Agr. § 11.04(a).
196
The LP Agreement is a form agreement, and each Plaintiff signed an identical version.
65
employment agreement.197 I will evaluate whether the Competitive Activity
Condition is reasonable under that standard.198
Even under this more lenient standard, nearly all of the reasons I offered above
for concluding the Restrictive Covenants are unreasonable apply.199 The
Competitive Activity Condition is more reasonable than the Restrictive Covenants
in two respects: the scope of prohibited activity is narrower,200 and the condition
197
See, e.g., Berryman, 2004 WL 835886, at *10.
198
In coming to this conclusion, I am mindful of Section 11.02(c)’s language that “Nothing
in this Article XI shall be considered or interpreted as restricting the ability of a former
Partner in any way from engaging in any Competitive Activity, or in other employment of
any nature whatsoever.” LP Agr. § 11.02(c). This does not compel a different decision.
First, I have already read the language as having independent significance in that it clarified
the provisions in Article XI do not reflect additional promises by partners. Second, this
language could not otherwise preclude a reasonableness review as parties cannot stipulate
that a restrictive covenant does not violate public policy. See Kodiak, 2022 WL 5240507,
at *5–7.
199
Cantor Fitzgerald makes the conclusory argument that contingent payments enjoy some
latitude under the Limited Partnership Act, specifically Sections 17-306 and 17-502, that
they do not under common law. Those sections permit partnership agreements to impose
penalties (not otherwise permissible under the common law) and other consequences for
failure to comply with a limited partnership agreement. See 6 Del. C. §§ 17-306, 17-502.
While Cantor Fitzgerald points out this distinction, it offers no reason to treat forfeiture-
for-competition provisions in a partnership agreement differently than in the typical
employment agreement. DCB at 9–10. And I read Section 17-306’s leniency to stop short
of consequences to conditions precedent, like the Competitive Activity Condition, which
informs Cantor Fitzgerald’s duty but imposes none on the partner. Even the most generous
reading of the statute covers only consequences flowing from a limited partner’s breaches
and failures to “comply” with a condition, i.e., a condition that imposes some obligation
on that partner. 6 Del. C. § 17-306(1); see also id. § 17-306(2) (addressing consequences
from “the happening of events” but not the nonoccurrence of an event).
200
Specifically, the definition of Competitive Activity does not include “tak[ing] any action
that results directly or indirectly in revenues or other benefit for that Limited Partner or any
66
does not delegate the conclusion of whether a partner engaged in a Competitive
Activity to the Managing General Partner. But the Competitive Activity Condition
effectively restrains former partners for at least two years longer. And the additional
years compound a one- to two-year Restricted Period: Cantor Fitzgerald’s departed
partners are free to compete and solicit subject to forfeiture only after a period of
being forbidden from doing so. Cantor Fitzgerald has advanced no compelling
interest that could justify the breadth of this forfeiture. Nearly any legitimate interest
it had in the scope of the Restrictive Covenants in years one and two is stale by years
three and four. I conclude the Competitive Activity Condition as a forfeiture-for-
competition provision is unenforceable as an unreasonable restraint of trade. Thus,
Cantor Fitzgerald may not rely on the Competitive Activity Condition to withhold
any Additional Amounts or Grant Amounts.
F. Ainslie Is Not Entitled To His Base Amount Because He
Failed To Sign A Release.
Cantor Fitzgerald seeks a summary judgment on the issue of whether Plaintiff
Ainslie is entitled to his Base Amount because of his failure to sign a release.201
Cantor Fitzgerald’s position is straightforward: The LP Agreement expressly
third party that is or could be considered to be engaged in such Competitive Activity.”
Compare LP Agr. § 3.05(a)(iii), with id. § 11.04(c).
201
DOB at 31.
67
permits Cantor Fitzgerald’s Managing General Partner to request releases in
connection with the payment of a withdrawing partner’s Base Amount, and Ainslie
declined to sign the release he was sent. LP Agreement Section 11.12 provides as
follows:
The Managing General Partner, in its sole and absolute discretion, may
condition the payment of any amounts due to a Partner under this
Article XI upon obtaining a release from such Partner and its Affiliates
in a form and substance satisfactory to the Managing General Partner
from all claims against the Partnership other than claims for payment
pursuant to and in accordance with the terms of this Article XI.202
After departing Cantor Fitzgerald, Ainslie was involved in ongoing litigation
with Cantor Fitzgerald Hong Kong.203 On August 24, 2011, an assistant general
counsel for Cantor Fitzgerald sent Ainslie a release in connection with the payment
of Ainslie’s Base Amount, which purported to release any claims Ainslie had against
Cantor Fitzgerald and would set off amounts he allegedly owed Cantor Fitzgerald
pursuant to Section 2.02(c) of the LP Agreement.204 To date, Ainslie has not signed
that release, and Cantor Fitzgerald has not paid him his Base Amount.205
202
LP Agr. § 11.12.
203
PCB at 35–36, 57.
204
See DOB, Ex. 19, at RF_0008806; see also LP Agr. § 2.02(c).
205
See PCB at 57–58; DOB, Ex. 7, at res. 8.
68
Ainslie argues that Cantor Fitzgerald is not entitled to summary judgment on
this issue because it requested the release while he was in the midst of ongoing
litigation against Cantor Fitzgerald Hong Kong.206 Ainslie argues that in those
circumstances, his failure to sign the release should not preclude him from receiving
his Base Amount.207 Ainslie offers no legal support for this position, making no
effort to explain how it relieves him of the plain, unambiguous terms of the LP
Agreement. I grant Cantor Fitzgerald’s motion for summary judgment on this
issue.208
206
PCB at 57.
207
PCB at 56–58. I understand Ainslie to be contending that the language releasing claims
against “[Cantor Fitzgerald], and all successors and assigns” would somehow impede his
defensive position (which I do not believe included any counterclaims) against Cantor
Fitzgerald Hong Kong.
208
Ainslie also argues that “the Court should declare in conjunction with the resolution of
this matter that ‘if the release is signed, and once executed, the compensation must be paid’
rather than finding Ainslie is not entitled to his Base Amount.” Id. at 57. Ainslie has not
signed the release, rendering this request unripe. XL Specialty Ins. Co. v. WMI Liquid. Tr.,
93 A.3d 1208, 1211 (Del. 2014) (declining to resolve issue where “it has not yet assumed
a concrete or final form,” reasoning “judicial resolution at this stage would necessarily be
based on speculation and hypothetical facts, and ultimately could prove unnecessary”).
Moreover, the Amended Complaint does not plead such a claim for a declaratory judgment,
which is a separate ground to deny this request. See CALPERS v. Coulter, 2002 WL
31888343, at *12 (Del. Ch. Dec. 18, 2002) (“Arguments in briefs do not serve to amend
the pleadings.”).
Finally, Plaintiffs brief an argument that Cantor Fitzgerald is precluded from
asserting the anticompetition clauses against Ainslie, as well as certain issues of fact. PCB
at 35–42. None of these issues pertain to Cantor Fitzgerald’s release, and the release is a
ground for withholding the Base Amount independent from the “anticompetition clauses”
Plaintiffs briefed. I do not reach these arguments.
69
G. Plaintiffs Are Entitled To Partial Judgment On Their
Declaratory Judgment Claims, And Judgment On Their
Breach Of Contract Claims.
The Amended Complaint includes six claims seeking declaratory judgments,
one on behalf of each Plaintiff.209 Each claim seeks two forms of declaratory relief:
(1) a statement of the amounts owed to each Plaintiff under the LP Agreement, and
(2) that “the four-year noncompete provision imposed by the Partnership Agreement
is not appropriately limited time or space, fails to protect a legitimate interest of
CFLP, and is oppressive, thus rendering it unenforceable in its entirety.”210 Cantor
Fitzgerald opposes these claims on the grounds that they are duplicative of Counts 1
through 6, moot, and that the Conditioned Payment Device is not a non-compete or
restrictive covenant.
Counts 7 through 12 are not duplicative of Counts 1 through 6. Claims are
not duplicative where they would require either different proof of provide for a
different scope of relief.211 Counts 7 through 12 seek to invalidate the provisions
pursuant to which Plaintiffs’ post-termination payments were withheld, as well as a
declaration as to the amounts owed to each Plaintiff. To prevail on these counts,
209
Am. Compl. ¶¶ 74–93.
210
Id.211
Hospitalists of Del., LLC v. Lutz, 2012 WL 3679219, at *16 (Del. Ch. Aug. 28, 2012).
70
Plaintiffs necessarily must establish different elements and meet different standards
than their breach of contract claims.
Cantor Fitzgerald argues Plaintiffs’ declaratory judgment claims are moot
because any restrictions in Article XI expired years ago.212 “Under the mootness
doctrine, ‘although there may have been a justiciable controversy at the time the
litigation was commenced, the action will be dismissed if that controversy ceases to
exist.’”213 “A proceeding may become moot if the legal issue in dispute is no longer
amenable to a judicial resolution.”214 But as demonstrated above, the validity of
Article XI’s restraints directly informs the dispute over whether Plaintiffs are owed
any Conditioned Amounts under the LP Agreement. Plaintiffs’ declaratory
judgment claims are not moot.
Because I have found that Plaintiffs have prevailed on Counts 7 through 12
by striking the Conditioned Payment Device as an unreasonable restraint built on
unreasonable restrictive covenants, the conditions in the Conditioned Payment
Device did not operate to preclude Cantor Fitzgerald’s duty to make those payments
from arising. Cantor Fitzgerald did not make those payments when they became
212
DOB at 37.
213
Am. Littoral Soc., Inc. v. Bernie’s Conchs, LLC, 954 A.2d 909 (Del. 2008) (quoting
Gen. Motors Corp. v. New Castle Cnty., 701 A.2d 819, 823 (Del. 1997)).
214
Id.71
due, and so it has breached the LP Agreement. Thus, Plaintiffs also prevail on
Claims 1 through 6.
The principal amounts owed appear undisputed.215 Plaintiffs are entitled to a
declaratory judgment that they are owed the “Additional Amount” and “Grants”
Cantor Fitzgerald set forth in Cantor Fitzgerald’s interrogatory responses.216
III. CONCLUSION
For the forgoing reasons, Cantor Fitzgerald’s Motion for Summary Judgment
is GRANTED IN PART AND DENIED IN PART. Plaintiffs’ Motion for
Summary Judgment is GRANTED IN PART AND DENIED IN PART. The
parties shall submit a stipulated implementing order, including a final amount owed
with any interest, within twenty days. Counsel shall also advise as to what remains
to be done in this matter.
215
Cantor Fitzgerald disputes the fact that any funds are owed, but if they are, the amounts
Cantor Fitzgerald supplied in its interrogatory responses appear to be undisputed. PCB at
4 (describing the “amounts CFLP concedes [Plaintiffs] would be owed under the
Partnership Agreement”); id. at 17 (citing DOB, Ex. 7 at 9–10); see Ct. Ch. R. 56(h) (noting
that in the absence of an argument of an issue of material fact, cross-motions are the
equivalent of a stipulation for decision on the merits based on the record submitted with
the motions).
216
DOB, Ex. 7 at res. 8.
72