CANTOR FITZGERALD, L.P., A Delaware limited partnership v. BRAD AINSLIE, JASON BOYER, CHRISTOPHE CORNAIRE, JOHN KIRLEY, ANGELINA KWAN, and REMY SERVANT
No. 162, 2023
IN THE SUPREME COURT OF THE STATE OF DELAWARE
January 29, 2024
Submitted: November 1, 2023; Court Below: Court of Chancery of the State of Delaware; C.A. No. 9436
Before SEITZ, Chief Justice; TRAYNOR, LEGROW, and GRIFFITHS, Justices and JURDEN, President Judge1 constituting the Court en banc.
Upon
C. Barr Flinn, Esquire, Paul J. Loughman, Esquire, Alberto E. Chavez, Esquire, Skyler A. C. Speed, Esquire, YOUNG, CONAWAY, STARGATT & TAYLOR, LLP, Wilmington, Delaware; David A. Paul, Esquire (argued), Virginia J. Cardenas, Esquire, Sid Nadkarni, Esquire, CANTOR FITZGERALD, New York, New York, for Appellant Cantor Fitzgerald, L.P.
Blake A. Bennett, Esquire, COOCH & TAYLOR P.A., Wilmington, Delaware; Kyle W. Roche, Esquire (argued) KYLE ROCHE P.A., New York, New York; Velvel Freedman, Esquire, Alex Potter, Esquire, FREEDMAN NORMAND FRIEDLAND LLP, New York, New York, for Appellees Brad Ainslie, Jason Boyer, Christophe Cornaire, John Kirley, Angelina Kwan and Remy Servant.
Richard L. Renck, Esquire, DUANE MORRIS LLP, Wilmington, Delaware; Robert M. Palumbos, Esquire, Ryan F. Monahan, Esquire, DUANE MORRIS LLP, Philadelphia, Pennsylvania; Jordan L. Von Bokern, Esquire, Tyler S. Badgley, Esquire, U.S. Chamber of Commerce, Washington, DC, for the United States of America, Delaware State Chamber of Commerce, Managed Funds Association, and Securities Industry and Financial Markets Association amici curiae in support of Appellant.
Michael L. Vild, Esquire, David G. Holmes, Esquire, CROSS & SIMON, LLC, Wilmington, Delaware; Kenneth W. Gage, Esquire, Dan Richards, Esquire, PAUL HASTINGS LLP, New York, New York; Corey L. Andrews, Esquire, John M. Masslon, II, Esquire, WASHINGTON LEGAL FOUNDATION, Washington, DC, for Washington Legal Foundation amicus curiae in support of the Appellant.
Anthony A. Rickey, Esquire, MARGAVE LAW LLC, Wilmington, Delaware; Eric A. Posner, Esquire, for Small Business Majority in support of the Appellee.
TRAYNOR, Justice:
The courts of this State hold freedom of contract in high—some might say, reverential—regard. Only “a strong showing
This appeal, which concerns the enforceability of the “forfeiture for competition” provisions of a limited partnership agreement, puts this principle to the test. The provisions authorize the partnership to withhold distributions otherwise owed to a partner who withdraws from the partnership if he engages in specified activities in competition with the partnership. The provisions in this case remain operative for four years following a partner‘s withdrawal and, among the six plaintiffs, resulted in forfeitures ranging from just under $100,000 to over $5 million.
The Court of Chancery recognized that the debate surrounding the enforceability of forfeiture-for-competition devices raises important, and often divergent, policy considerations: policies favoring “enforcing private agreements on [the] one hand, and disfavoring restraints of trade and allowing individuals to freely pursue their profession of choice, on the other.”3 In a thoughtful opinion that draws heavily from our case law governing covenants not to compete, the court concluded that, in this context, our State‘s interest in protecting competition outweighs our interest in enforcing voluntarily entered contracts. It follows, the court reasoned, that, unlike ordinary contract provisions, forfeiture-for-competition provisions should be subject—much like restrictive employment covenants are—to scrutiny for reasonableness. According to the Court of Chancery, they could not pass this test and are therefore unenforceable.
Under the circumstances of this case, we balance the relevant policy interests differently. When sophisticated actors avail themselves of the contractual flexibility embodied in the Delaware Revised Uniform Limited Partnership Act—a statute that is expressly designed “to give maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements”4—and agree that a departing partner will forfeit a specified benefit should he engage in competition with the partnership, our courts should, absent unconscionability, bad faith, or other extraordinary circumstances, hold them to their agreements. As we have observed, “[p]arties have a right to enter into good and bad contracts[;] the law enforces both.”5 Here, the Court of Chancery erred by imposing its notion of reasonableness on the very provisions that, when enforced against other departing partners, redounded to the plaintiffs’ benefit during their tenure as partners.
I
A
Cantor Fitzgerald, L.P., a global financial services company formed under Delaware law, operates under an Agreement of Limited Partnership (the “Agreement” or “§ _“).6 The plaintiffs in this case—Brad
B
Cantor Fitzgerald maintains a “Capital Account”11 for each of its partners that, by default, is to be paid out in annual installments over four years following a partner‘s withdrawal.12 A partner‘s Capital Account contains any High Distribution Units II (“HDII Units“) that the partner elects to purchase as well as the partner‘s profit share.13 Any distributions and loss share are subtracted from the Capital Account.14 Each partner‘s “Adjusted Capital Account” balance, used to determine the amounts payable to certain partners upon termination of their partner status, contains a value equal to the Capital Account without regard to certain regulations and adjustments.15
Within ninety days of the date on which a partner ceases to be one, Cantor Fitzgerald will make an initial payment to each former partner consisting of what the Agreement calls a “Base Amount.”16 The remaining difference between the Base Amount and the partner‘s Adjusted Capital Account is an “Additional Amount” which is paid out annually on the first, second, third, and fourth anniversaries of the Base Amount payment date.17
In addition to purchasing HDII Units, Cantor Fitzgerald partners can earn Partnership Units defined as Grant Units and Matching Grant Units.18 Sections 11.08, 11.09, and 11.10 govern payments to former partners who are Grant Unitholders and Matching Grant Unitholders (the “Grant Amounts“).19 Grant Amounts are not held in a partner‘s Capital Account; like a former partner‘s Capital Account balance, however, Grant Amounts are to be paid out in four equal installments over four years following a partner‘s departure.20 In this opinion, we refer to the Grant Amounts and the Additional Amounts collectively as the “Conditioned Amounts.”
The Agreement contains two inter-related mechanisms designed to discourage former partners from competing with the partnership following their departure from the firm. The Court of Chancery referred to these mechanisms as the “Restrictive
Under § 3.05 of the Agreement, partners agree to a series of “Partner Obligations” for a “Restricted Period” following withdrawal from the partnership.21 These Partner Obligations require former partners to refrain from, directly or indirectly,22 (i) breaching the duty of loyalty to Cantor Fitzgerald; (ii) engaging in certain “Competitive Activity” as defined by § 11.04(c);23 (iii) making or participating in the making of any disparaging comments to the media regarding Cantor Fitzgerald; (iv) taking advantage of, or providing another person with the opportunity to take advantage of a “corporate opportunity“; or (v) taking any action to harm, that harms, or that reasonably could be expected to harm, the partnership.
The obligation mentioned above to refrain from “Competitive Activity” is considered a Partner Obligation and is in force as such for two years following a partner‘s withdrawal.24 According to Section 11.04(c), Competitive Activity occurs when a partner (i) 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 an “Affiliated Entity”25 to terminate their employment or other business arrangements with the partnership or any Affiliated entity or to engage in any “Competing Business,”26 or hires, employs, or engages (including as a consultant or partner) or otherwise enters into a Competing Business with any such person, (ii) solicits any of the customers of the partnership or an Affiliated Entity, induces such customers to reduce their volume of business with, to terminate their relationship with, or otherwise adversely affects their relationship with the partnership or an Affiliated Entity, (iii) does business with any person who was a customer of the partnership or an Affiliated Entity during the twelve-month period prior to a partner‘s withdraw, (iv) directly or indirectly engages in, represents in any way, or is any way connected with, any Competing Business that directly competes with the business
The determination of whether a limited partner has breached a Partner Obligation is to be made “in good faith by the Managing General Partner in its sole and absolute discretion,” and that determination is final and binding.28 Under § 3.05(b), if a partner breaches his or her Partner Obligations, then, “in addition to any other rights or remedies,” Cantor Fitzgerald shall redeem all of the Units held by such partner for a redemption price equal to their Base Amount, and the partner loses the right to any further distributions, including any Additional Amounts, to which the partner would otherwise be entitled.29 A partner that breaches her Partner Obligations must also indemnify Cantor Fitzgerald and pay any resulting attorneys’ fees and expenses, as well as any and all damages resulting from a breach.30 Moreover, the Agreement provides that Cantor Fitzgerald may seek injunctive relief to prevent ongoing breaches of Partner Obligations, including engaging in any Competitive Activity, during the Restricted Period.31
As mentioned above, the Agreement contains a separate, but overlapping, mechanism designed to discourage competition by former partners. Under Article XI of the Agreement, the partnership is not obligated to pay the Conditioned Amounts if a former limited partner triggers the Conditioned Payment Device. The device is triggered by either of two occurrences—a former partner (i) breaching her Partner Obligations (the “No Breach Condition“) or (ii) engaging in Competitive Activity (the “Competitive Activity Condition“). The Conditioned Payment Device operates regardless of the reason a partner ceases to be a partner.32
If, during the Restricted Period, the Managing General Partner makes a good faith determination that a partner has breached her Partner Obligations, the “No Breach Condition,” will not be satisfied, and Cantor Fitzgerald is not obligated to pay the Conditioned Amounts.33 Section 3.05(b) contemplates that a partner who breaches any Partner Obligation will be subject not only to the restrictive covenants contained in § 3.05 permitting Cantor Fitzgerald to seek injunctive relief, but also to “all of the consequences,” including those provided for in Article XI, applicable to a partner that engages in a Competitive Activity.34
The same Competitive Activity that may trigger the Restrictive Covenants likewise triggers the Conditioned Payment Device. But whether or not a partner has engaged in Competitive Activity after the Restricted Period is not subject to a “final and binding” good faith determination of the Managing General Partner in its “sole and absolute discretion”37 as is a breach of Partner Obligations during the initial two-year post-separation period.
To remain eligible to receive the Conditioned Amounts, a former limited partner must refrain from Competitive Activity “prior to the date such payment is due.”38 In other words, the financial disincentive for engaging in Competitive Activity is in place for the four years during which the former limited partner is eligible to receive payments from the partnership. So, for example, a partner who refrains from Competitive Activity for two years will receive distributions during that period, but, upon commencement of competition in the third year forfeits distributions thereafter through the fourth year.
Following their withdrawal as limited partners, Cantor Fitzgerald determined that all the former-limited-partner plaintiffs were ineligible to receive the Conditioned Amounts because each had engaged in Competitive Activity within one year of voluntarily withdrawing from the partnership.39
Cantor Fitzgerald determined that Kwan, who was employed as managing director and chief operating officer of Cantor HK, after voluntarily resigning from her employment and withdrawing as a partner of Cantor Fitzgerald in September 2010, immediately began working at Reorient Group Limited (“Reorient“), a global financial services group providing institutional brokerage services.40 Following suit in May 2011, Ainslie, Cantor HK‘s then-managing director and head of Asian equities, and Boyer, Cantor HK‘s executive managing director, also voluntarily resigned from employment with Cantor HK and withdrew as partners of Cantor Fitzgerald, and went to work for Reorient in October and September 2011, respectively.41 Ainslie and Boyer‘s resignation letters, both dated May 30, 2011, stated that they intended to join “an entity which may be viewed as a competitor[.]”42
Kwan joined Reorient as executive managing director and chief operating officer.43 Ainslie joined as executive managing director and head of global markets.44 And
Cantor Fitzgerald also determined that in March, September, and November 2011, Cornaire, Servant, and Kirley, each of whom were employed in Cantor HK‘s equity derivatives division, resigned from Cantor HK and withdrew as partners of Cantor Fitzgerald.47 Within a year, each joined ICAP, Cornaire as a managing director for equity products, and Kirley and Servant as equities derivatives brokers.48 ICAP is a global interdealer brokerage that offers many of the same services as Cantor Fitzgerald affiliates.49
Cantor Fitzgerald also determined, as a separate basis for withholding the Conditioned Amounts, that the former partners had each breached at least one Partner Obligation related to their Competitive Activity.50 Accordingly, Cantor Fitzgerald withheld the Conditioned Amounts, which, as mentioned, ranged from just under $100,000 to over $5 million.51
C
Approximately three years following their voluntary resignations from employment with Cantor HK and withdrawal from the Cantor Fitzgerald limited partnership, the plaintiffs filed suit in the Court of Chancery asserting breach-of-contract claims related to the partnership‘s enforcement of the Agreement and requesting a declaration that “the four-year non-compete provision imposed by [§ 11.04] is not appropriately limited in time or space, fails to protect a legitimate interest of [Cantor Fitzgerald], and is oppressive, and is therefore unenforceable.”52
Cantor Fitzgerald moved for summary judgment on all counts (in the amended consolidated complaint filed in 2016, there were twelve of them—a breach of contract claim and a request for declaratory relief for each plaintiff).53 It argued that, because the plaintiffs had engaged in Competitive Activities and also breached their Partner Obligations, Cantor Fitzgerald was not contractually obligated to pay any Conditioned Amounts to the plaintiffs.54 Cantor Fitzgerald did not move for enforcement of the restrictive covenants or request any injunctive relief. From Cantor Fitzgerald‘s perspective, as far as the Conditioned Payment Device is concerned the plaintiffs were free to compete but only at the cost of forfeiting their rights to the Conditioned Amounts.
The plaintiffs opposed Cantor Fitzgerald‘s motion and cross-moved for summary judgment.55 The plaintiffs’ cross-motion argued that (i) the restrictive covenants and Conditioned Payment Device were restraints of trade that should be evaluated as such for reasonableness,56 (ii) the Conditioned
Thus, the parties’ summary judgment motions posed competing frameworks for assessing the enforceability of the Conditioned Payment Device. The plaintiffs framed the device as either a penalty that rested on the validity of the underlying Restrictive Covenants, as triggered by the No Breach Condition, or as a restraint of trade voidable under public policy, as triggered by the Competitive Activity Condition.61 In the plaintiffs’ view, enforcement of the Conditioned Payment Device under either condition required a review of the Restrictive Covenants for reasonableness.
Cantor Fitzgerald took issue with those characterizations, insisting instead that the Conditioned Payment Device merely acted as a condition precedent to Cantor Fitzgerald‘s duty to pay the Conditioned Amounts, not as a per se restraint of trade.62 Cantor Fitzgerald argued that the Restrictive Covenants were only relevant to determining whether the No Breach Condition was satisfied. That is, Cantor Fitzgerald argued that it was not seeking to enforce the Restrictive Covenants; rather, it was seeking to ensure the plaintiffs’ compliance with the standalone No Breach Condition, as to the Additional Amounts, and the standalone Competitive Activity Condition, as to all Conditioned Amounts, before it paid the Conditioned Amounts.63 Cantor Fitzgerald pressed the Court to view both the No Breach Condition and the Competitive Activity Condition of the Conditioned Payment Device as any other bargained-for contractual provision—that is, without evaluating their reasonableness.64
D
The Court of Chancery rejected the plaintiffs’ characterization of the Conditioned Payment Device as a damages provision triggered by a breach of the Restrictive Covenants. The court also rejected the plaintiffs’ contention that § 3.05(b) and the No Breach Condition imposed unenforceable penalties. Instead, the court agreed with Cantor Fitzgerald that the absence of a breach of Partner Obligations and, separately, the absence of competition were conditions precedent to Cantor Fitzgerald‘s duty to pay the Conditioned Amounts.
Even so, the Court of Chancery assessed the enforceability of the Restrictive
The court then turned to the Competitive Activity Condition, a critical component of the Conditioned Payment Device that operates independently from the No Breach Condition. These provisions, as the Court of Chancery observed, are commonly known as “forfeiture for competition” provisions. The plaintiffs urged the Court of Chancery to treat these provisions as restraints of trade that should be evaluated for reasonableness. Cantor Fitzgerald, by contrast, pressed the court to view the forfeiture provisions in the Agreement as financial consequences attending a withdrawing partner‘s decision to compete and argued in favor of adoption of the “employee choice” doctrine under which courts do not review forfeiture-for-competition provisions for reasonableness so long as the employee voluntarily terminated her employment.
The Court of Chancery noted that “other jurisdictions are split” between these positions but that “[o]ther courts have stated that employee choice is the majority approach.”66 Giving great weight to two trial court opinions that viewed liquidated damages provisions enforcing noncompete and nonsolicit agreements with skepticism, the Court of Chancery chose not to apply the employee-choice doctrine and subjected the Competitive Activity Condition and the forfeiture resulting from its failure to a reasonableness review.
The court did not select the restraint-of-trade framework to the exclusion of the employee-choice doctrine without first considering the contending policy interests. It concluded that:
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.67
Then, analyzing the Competitive Activity Conditions under the reasonableness standards that it earlier applied to the No Breach Condition, the Court of Chancery determined that, although the provision was “more reasonable,” it was unenforceable due in large part to its four-year duration, and thus was invalid as an unreasonable restraint of trade.68
E
Cantor Fitzgerald presses three arguments germane to our resolution of this appeal. First, Cantor Fitzgerald depicts the Court of Chancery‘s analysis as unfaithful to our strong contractarian tradition as reflected in the Delaware Revised Uniform Partnership Act and our case law. Second—and not entirely unrelated to
the first—it contends that the Conditioned Payment Device should not be subject to judicial review for reasonableness but, instead, should be enforced according to the terms to which the parties agreed. Third and finally, Cantor Fitzgerald argues that the Court of Chancery misconstrued the parties’ relationship, focusing on the plaintiffs as employees of Cantor HK and not, as it should have, as partners in Cantor Fitzgerald.70The plaintiffs counter that the Court of Chancery correctly (i) weighed the competing policy interests in enforcing private agreements and disfavoring restraints of trade, (ii) determined that the Conditioned Payment Device was predicated on an unenforceable promise, and (iii) focused on the plaintiffs’ status as Cantor HK employees over their status as Cantor Fitzgerald partners.
II
A
There is no dispute that, if the Conditioned Payment Device is enforced according to its terms, Cantor Fitzgerald is not required to pay the Conditioned Amounts to the plaintiffs. On the other hand, Cantor Fitzgerald must pay those amounts if we determine—as the Court of Chancery did—first, that a public policy of this State overrides the parties’ unambiguous agreement that the Conditioned Amounts are not payable unless the Competitive Activity Condition has been met and, second, that the scope of the Competitive Activity Condition is unreasonable. We review such questions—that is, questions that hinge on public policy grounds—de novo.71
B
We agree with, and the plaintiffs have not challenged on appeal, the Court of Chancery‘s conclusion that the Conditioned
C
In determining whether to review the Conditioned Payment Device for reasonableness when the device is triggered by the failure of the Competitive Activity Condition, the Court of Chancery relied heavily on Delaware law‘s “treatment of liquidated damages provisions enforcing noncompete and nonsolicit agreements, as distinct from injunctive relief.”73 At the heart of the court‘s decision was its conclusion that “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.”74 The court‘s reliance on this liquidated damages analogy was, in our view, misplaced.
It bears noting here that, earlier in its opinion, the court had rejected the plaintiffs’ argument that the Conditioned Payment Device was an unenforceable damages provision. It found, instead, that the Competitive Activity Condition was a condition precedent to Cantor Fitzgerald‘s duty to pay the Conditioned Amounts. We agree with that conclusion, and the plaintiffs do not contest it on appeal.75 This distinction is significant; liquidated damages, by definition, are a remedy for breach of contract and are not recoverable for a failure to meet a condition precedent.76
Despite concluding that the Competitive Activity Condition was a condition precedent, the court rested its policy analysis on case law reviewing liquidated damages provisions “enforcing noncompete and nonsolicit agreements,”77 as contained in employment agreements whose underlying covenants were subject to a review for reasonableness. This comparison is, in our view, inapt. It does not follow that, because courts review restrictive non-competition covenants and liquidated damages provisions enforcing them in a particular manner—subjecting them to review for
Moreover, the two liquidated damages cases on which the Court of Chancery grounded its policy discussion—Faw, Casson & Co., L.L.P. v. Halpen,78 and Lyons Insurance Agency, Inc. v. Wark,79—are distinguishable from this case. Both Wark and Halpen dealt with lawsuits initiated by former employers seeking to enforce liquidated damages provisions contained in employment agreements against former employees—an insurance agent and accountant, respectively.80 In both cases, the court considered whether the damages the employer demanded for breach of the restrictive covenant were reasonable in light of the employees’ actions and concluded that damages provisions untethered to an employer‘s reasonable interests in preventing competition, and unrelated to any action taken by a former employee, were unreasonable restraints of trade.81
Here the claims under review were not brought by an employer seeking to enforce a liquidated damages provision for an employee‘s breach of a restrictive covenant in an employment agreement; rather, this is a lawsuit initiated by former limited partners against the partnership requesting that a forfeiture-for-competition provision be declared invalid under the same test as applied to traditional noncompete agreements. Unlike in Halpen and Wark, the provision at issue here is not a penalty enforced against an employee based on the breach of a restrictive covenant; it is a condition precedent that excuses Cantor Fitzgerald from its duty to pay if the plaintiffs fail to satisfy the condition to which they agreed to be bound in order to receive a deferred financial benefit.
That cases concerning liquidated damages as a remedy for breach of restrictive covenants do not provide reliable guidance here finds support in decisions of the United States District Court for the District of Delaware and the Superior Court. For example, in W.R. Berkley Corporation v. Dunai,82 the district court determined that a provision requiring a corporate vice president to return $200,000 in stock benefits if she engaged in competitive activity within one year of leaving the company was not, as Dunai asserted, a noncompete. Relying in part on W.R. Berkeley Corporation v. Hall,83 the court reasoned that this was so because the considerations underlying a traditional noncompete, such as a restriction on freedom of employment, were absent from a provision calling only for a forfeiture of benefits.84 The court also rejected Dunai‘s argument that the clawback provision was an unenforceable liquidated damages provision. In the court‘s words, the clawback was not “a $200,000 penalty for working for a competitor; it [wa]s returning a supplemental benefit for breaching the terms of a bargain. That is not a liquidated-damages provision.”85
Hall reached a similar conclusion. There, a senior vice president quit his
In short, we are not satisfied that our liquidated damages jurisprudence provides a policy-based counterweight sufficient to override our strong interest in enforcing contracts as written. We turn then to the policy considerations that weigh in favor of enforcing the Conditioned Payment Device.
D
In ascertaining the public policy of this State as it relates to the enforceability of the provisions of limited partnership agreements, we need not look far. The Delaware General Assembly explicitly declared that it is the policy of the Delaware
[DRULPA‘s] basic approach is to permit partners to have the broadest possible discretion in drafting their partnership agreements and to furnish answers only in situations where the partners have not expressly made provisions in their partnership agreement. Truly, the partnership agreement is the cornerstone of Delaware limited partnership, and effectively constitutes the entire agreement among the partners with respect to the admission of partners to, and the creation, operation and termination of, the limited partnership. Once partners exercise their contractual freedom in their partnership agreement, the partners have a great deal of certainty that their partnership agreement will be enforced in accordance with its terms.93
The emphatic policy statement in DRULPA corresponds with our courts’ tradition of “ensur[ing] freedom of contract . . . in order to facilitate commerce.”94 We “uphold[] the freedom of
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 voluntarily-undertaken mutual obligations.96
Of course, as this quotation notes, freedom of contract is not absolute. For instance, “contracts that offend public policy or harm the public are deemed void, as opposed to voidable.”97 But, given our “strong interest in freedom of contract[,]” covenants not to compete subject to Delaware law do not fall into this category.98
Here, the Court of Chancery recognized that the Competitive Activity Condition, which does not “limit[] a partner‘s ability to compete or otherwise obtain employment,”99 stands on different footing than underlies non-competition covenants such as the Restrictive Covenants underpinning the No Breach Condition. The Agreement, and in particular Section 11.02(c), states unambiguously:
Each partner acknowledges that this Article XI is intended solely to reflect the economic agreement between the Partners with respect to amounts payable upon a Partner‘s Bankruptcy or Termination. 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,
subject in either case to the restrictions elsewhere in this Agreement (including without limitation in Sections 3.05 and 8.06).100
Thus, the Competitive Activity Condition does not restrict competition or a former partner‘s ability to work; nor does competition support injunctive relief. But if the former partner wishes to compete with Cantor Fitzgerald during the relevant time, Cantor Fitzgerald need not confer the deferred benefit on the former partner, who has agreed to forfeit that benefit upon engaging in competition.
E
With these principles in mind, we turn to the parties’ competing perspectives on the policy implications surrounding enforcement of the Conditioned Payment Device. The plaintiffs, on the one hand, argue that the forfeiture-for-competition provision implicates the public policy disfavoring restraints of trade and thus urge the Court to adopt the same reasonableness
Jurisdictions adopting the plaintiffs’ view conclude that the threat of economic loss from a forfeiture provision operates as a restraint of trade. Additionally, because the purpose of a forfeiture provision—to deter competitive employment—is identical to a typical restrictive covenant, those courts find it appropriate to evaluate forfeiture provisions for reasonableness using the same lens through which they would view a traditional noncompete agreement.102
Jurisdictions adopting the employee-choice doctrine reason that the forfeiture, unlike the restraint prohibiting competition included in an employment contract, does not prohibit the employee from engaging in competitive work but merely denies her the right to some financial benefit if she chooses to engage in competitive activity,103 and thus they are not restraints of trade.104
The distinction between a restrictive non-competition covenant that precludes a former employee from earning a living in his chosen field and an agreement that allows a former partner to compete but at the cost of relinquishing a contingent benefit is, in our observation, significant. In the restrictive-covenant context, the former employee is effectively deprived of his livelihood and, correspondingly, exposed to the risk of serious financial hardship. This gives rise to the strong policy interest that justifies the review of unambiguous contract provisions for reasonableness and a balancing of the equities, two exercises typically foreign to judicial review in contract actions. By contrast, however, forfeiture-for-competition provisions, which, unlike restrictive covenants, are not enforceable through injunctive relief, do not prohibit employees from competing and remaining in their chosen profession, and do not deprive the public of the employee‘s services, present no such concern. The policy interest that preponderates in the former case is diminished—if it does not vanish—in the latter. To put it another way, the interest to be vindicated when evaluating a covenant that prohibits competition and that might even preclude gainful employment is significantly weakened when competition—often (as in this case) highly remunerative—is permitted. That diminished interest is insufficient to override DRULPA‘s directive to “give maximum effect to the principle of freedom of contract and the enforceability of partnership agreements.”
Finally, we address the Court of Chancery‘s observation that forfeitures are disfavored and do not enjoy our courts’ contractarian deference.105 This is so, the court reasoned, because, like liquidated damages provisions, forfeiture provisions might conflict with public policy or result in inequitable outcomes.106
We disagree that the common law‘s disfavor of forfeitures extends to limited partnership agreements. As the Court of Chancery recognized,
This express divergence from the common law on forfeitures, considered in light of DRULPA‘s statutory mandate to honor freedom of contract in partnership agreements, leads us to conclude that forfeitures in limited partnership agreements should enjoy this court‘s deference on equal footing with any other bargained-for-term in a limited partnership agreement.108 Although it is conceivable that a public-policy interest or inequitable outcome could, under some circumstances, outweigh the interest in freedom of contract enshrined in DRULPA, such circumstances are not present here.109 In this case, the plaintiffs voluntarily entered into the partnership and the Agreement, elected to compete with the partnership upon their departure, and thereby assumed the risk of the forfeiture.110
III
To sum up, we disagree with the Court of Chancery‘s conclusion that forfeiture-for-competition provisions like the one at issue here are restraints of trade subject to review for reasonableness. When sophisticated parties agree in a limited partnership agreement that a partner, who voluntarily withdraws from, and then competes with, the partnership, will forfeit contingent post-withdrawal financial benefits, public-policy considerations weigh in favor of enforcing that agreement. It follows that the court erred in ruling that Cantor Fitzgerald could not rely on the Competitive Activity Condition and the Conditioned Payment Device to withhold the Conditioned Payments from the plaintiffs. We therefore reverse the Court of Chancery‘s final judgment and remand for