Delaware Business Litigation Report

Delaware Supreme Court Upholds Forfeiture for Competition Provision in Partnership Agreement

Cantor Fitzgerald, L.P., v. Ainslie, No. 162, 2023 (Del. Jan. 29, 2024)
Here, a limited partnership agreement authorized the partnership to withhold distributions owed to a partner who withdraws from the partnership and engages in specified competitive activities. The partnership attempted to enforce the agreement and several former partners sued in Delaware. At the trial court level, the Court of Chancery scrutinized the provision using the standard for non-compete covenants and found the provision overbroad and unreasonable and thus invalid on policy grounds. On appeal, the Delaware Supreme Court reversed and remanded. The Supreme Court held that forfeiture for competition provisions in partnership agreements should not be reviewed for reasonableness. Rather, they should “enjoy … deference on equal footing with any other bargained-for-term in a limited partnership agreement.” The Supreme Court’s reasoning largely turned on the express policy of the Delaware limited partnership statute (DRULPA) to give maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements.

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