“Today’s decision confirms that when it comes to arm’s-length negotiations by sophisticated parties, the plain terms of the parties’ contract—not post-hoc policy decrees from the bench—should prevail.”
—Cory Andrews, WLF General Counsel & Vice President of Litigation
WASHINGTON, DC—Sitting en banc, a unanimous Delaware Supreme Court today reversed a controversial Chancery Court decision that invalidated part of a routine partnership agreement on public policy grounds. The decision was welcome news for Washington Legal Foundation (WLF), which filed an amicus brief in the case urging reversal. WLF’s brief was prepared and filed with assistance from Kenneth Gage and Daniel Richards of Paul Hastings LLP and Michael Vild and David Holmes of Cross & Simon LLP.
The appeal arose from a suit by former partners of Cantor Fitzgerald over their partnership agreement. The agreement contained a “forfeiture for competition” (FFC) provision. Under that provision, a former partner forfeits the right to additional capital disbursements if he engages in competitive activity during a four-year period during which he receives annual payouts from his capital account. Applying “reasonableness review,” the Chancery Court held that the agreement’s FFC provision was unreasonable and therefore invalid.
It its amicus brief urging reversal, WLF argued that the Chancery Court’s holding is at odds with Delaware law’s strong preference for freedom of contract. In its unanimous opinion today, the Delaware Supreme Court agreed: “When sophisticated actors avail themselves of the contractual flexibility embodied in the Delaware Revised Uniform Limited Partnership Act . . . 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.”