Cantor Fitzgerald, L.P. V. Ainslie : Competing Comes At A Cost

• Published date: 07 March 2024
• Subject Matter: ntitrust/Competition Law, Antitrust, EU Competition
• Law Firm: Quinn Emanuel Urquhart & Sullivan
• Author: Andrew J. Rossman, Ellison Ward Merkel, Nicholas Hoy, Courtney C. Whang and Salvadore Diaz

On January 29, 2024, the Delaware Supreme Court decided Cantor Fitzgerald, L.P. v. Ainslie, a closely-watched case involving the enforceability of forfeiture-for-competition provisions in a Delaware limited partnership agreement. The Delaware high court reversed a decision by the Court of Chancery, which invalidated the provisions as unreasonable restraints on trade. The Supreme Court's decision establishes that, absent exceptional circumstances, Delaware courts will enforce forfeiture-for-competition provisions as written between sophisticated parties, without subjecting them to a reasonableness review. Several other states have reached the opposite conclusion, and Cantor Fitzgerald reinforces Delaware's reputation as a contractarian jurisdiction that will hold parties to their bargain, good or bad. The decision has significant implications'particularly so for private investment firms, which are commonly structured as Delaware partnerships like Cantor Fitzgerald.

I. Background

Cantor Fitzgerald, L.P. is a financial services company operating under a Limited Partnership Agreement ("LPA") governed by Delaware law. At issue was the LPA's forfeiture-for-competition provision, called the "Competitive Activity Condition," which conditions departing limited partners' entitlement to future profits distributions. Under the LPA, former partners trigger the Competitive Activity Condition by engaging in broadly-defined "Competitive Activity" in the four years following their resignation. Partners who engage in Competitive Activity lose their right to distributions from the time at which they engage in such Competitive Activity.

Six former Cantor Fitzgerald partners put the enforceability of these restrictions to the test. The partners withdrew from the LPA between September 2010 and November 2011, taking positions at other brokerages. Cantor Fitzgerald determined that the former partners were engaged in Competitive Activity in their new roles, and forfeited their future distributions, which ranged from approximately $100,000 to $5 million.

The former partners then sued Cantor Fitzgerald in the Delaware Court of Chancery, asserting breach of contract and declaratory judgment claims and arguing, among other things, that the LPA's forfeiture-for-competition provisions were unenforceable restraints on trade. In January 2023, the Court of Chancery agreed, granting the former partners summary judgment. The Court of Chancery relied on precedent involving restrictive employment covenants reasoning that, like non-compete provisions, forfeiture-for-competition provisions should be scrutinized for reasonableness. According to the Court of Chancery, Cantor Fitzgerald's Competitive Activity Condition...