GUEST BLOG: [In]Securities: Wanting to Break Free: The Delaware Chancery Court Strikes Down Cantor Fitzgerald's Non-Compete Clauses by Aegis Frumento Esq

March 24, 2023

a Guest Blog by

Wanting to Break Free:
The Delaware Chancery Court Strikes Down
Cantor Fitzgerald's Non-Compete Clauses

Non-compete agreements are ubiquitous in the securities industry. Hardly any employee of a securities firm, be they broker, advisor, investment banker, or trader, has not at one point or another in their career been required to sign an employment agreement that prohibits them from competing against the firm for some time after they leave the firm. Generally, these provisions fall into two categories. Some prohibit an ex-employee from soliciting his coworkers, generally for a period of a year or two years. Others forbid a terminated employee from working for a competitor for anytime from six months to a year or more. That’s the one I want to talk about today.

These clauses rarely find their way into the courts for a couple of reasons. For one thing most of these disputes are settled in a FINRA arbitration. FINRA awards are not considered precedent even if they are rationally explained, and they seldom are. Since FINRA arbitrations don’t leave much of a paper trail, they don’t teach us anything about the validity of non-competes. But on a more practical level, these clauses tend to have an in terrorem effect. No potential next employer is going to hire someone who is subject to non-compete agreement, for fear of being sued the former employer. For those reasons, non-compete agreements in the financial industry have tended to be self-enforcing, with no good way to attack them.

And many of us think they are eminently attackable, if only they could be brought into the daylight of a real courtroom. Non-competition agreements in other contexts are generally enforceable only if they are reasonable in duration, geographic breadth, economic consequence, and tailored to protect the employer’s legitimate business interests. They are not enforced if the effect is to unduly prevent someone from being able to work. We don’t want to add to the welfare rolls, and it is generally better for society to keep well-paid financial professionals employed and paying taxes. So that’s the basic balance to be struck.

However, the nature of financial markets is such that to put an investment professional on the beach for a year or even six months is generally to risk destroying their career. Their success is built on keeping and growing relationships. As all of us who have lost touch with old friends know, relationships go stale if they are not regularly nurtured. The real reason that firms insist on these non-compete agreements is so they can develop new relationships with the ex-employee’s customers and contacts without the ex-employee interfering. The end result, for most industry professionals, is that when they come off the beach, they find their old contacts have made new “friends” so that they have to restart their careers from near scratch. I think these non-compete provisions are so onerous in their ability to destroy a professional’s livelihood that a real court is unlikely to enforce them.

So it was a rare treat to read the 72-page opinion issued in January by Delaware Vice Chancellor Zurn in Ainslie v. Cantor Fitzgerald LP.
In the opinion, the Delaware Chancery Court ruled that non-compete clauses like Cantor’s—which were typical of many we see—are not enforceable. It's nice to be right now and then. 

One of the features of Cantor’s provisions is that they are triggered if the “Managing General Partner” “believes in good faith” that the ex-employee is engaged in competition. The court does not name the Managing General Partner, but, spoiler alert: that person is Howard Lutnick, Cantor’s Chairman and CEO. Having spent a very pleasant day once negotiating an employment agreement with Howard, I can tell you that he is a very charming man and a delightful negotiating companion. But he is also a very smart businessman, and like all smart businessman, he likes to play with loaded dice. Relying on his belief that someone is competing against him is one loaded die. The other is the structure of Cantor’s non-compete scheme.

Cantor’s provisions are not your typical employment agreement. They appear in the various limited partnership agreements through which Cantor employees theoretically build equity in the firm. To go into the details of Cantor’s limited partnership arrangements is far beyond the scope of a short article like this; that's why it took 72 pages for the Chancery Court to reach a decision, and having litigated their Rube-Goldberg-like provisions myself I'm not sure the Court really understood them.

But the Court understood them well enough. The basic idea is that Cantor employees are paid in part in equity awards consisting of these limited partnership interests. Those awards are generally some percentage of their earnings, so you could call it a form of deferred compensation. Except that in order to be paid those awards they have to abide by certain conditions, and one of those conditions is that they not compete against Cantor. Some awards are forfeited if you compete; others are not paid so long as you do compete. As a result, it is a running joke amongst former Cantor folk that the only time you will ever be paid your limited partnership awards is if you really and truly retire (or die, I suppose). And, of course, its all up to Howard Lutnick.

The limited partnership agreements are therefore very clever in that they don't really forbid anyone from taking another job. But they do identify taking a competitive position as either a "breach" of, or a failure to satisfy a “condition” of, the limited partnership agreements. That "breach" or failure of condition is what justifies not paying the partnership awards.The hope, I guess, was that by making these provisions part of a partnership agreement, they would be judged under partnership laws that generally permit partners to arrange their affairs at will, rather than the public policies favoring free employment that generally would govern non-compete clauses in employment agreements.  But that was also the fatal flaw that allowed the Delaware Court even to look at it. It became a Delaware partnership dispute, and it didn't go to FINRA Arbitration.

The Delaware Court saw through all this. The Court’s logic was, basically, if the partnership provision being “breached” or the “condition” required to be satisfied imposed a legally unenforceable obligation on the employee, then they were void. If they were void, then there could never be a “breach,” nor any “condition” to be met. Finally, if there was no breach or failure of a condition, Cantor has to pay the awards. 

And that's what the court decided. It is one of the very few times -- it may be the only time -- that a non-compete provision affecting industry professionals has ever been reviewed by an actual court and been evaluated by legal standards. The Delaware court essentially said that Cantor's restrictions on post-employment competition are illegal restraints of trade, because they did not appear to protect any real economic interest of Cantor, but unduly punished the employee for simply working. Amongst the factors the Court noted were that the non-compete provisions applied everywhere in the world; they lasted longer than needed, even at one year, to protect any legitimate interest that Cantor could come up with; they prohibited competition not only against Cantor, but also against all its myriad of affiliates and subsidiaries, known and unknown. The Court noted that Cantor defined competition so broadly that a broker could violate the non-compete clause if he changed careers, became an accountant, and went to work for an accounting firm that assisted one of Cantor's competitors. Moreover, the amount of money at risk for the employee bore no relationship to any legitimate injury Cantor was trying to protect itself against, being a function of the employee’s past earnings. And, of course, there was the capriciousness of having Cantor’s Chairman and CEO be the sole judge of it all.

It's difficult to say how much impact the Delaware decision will have on non-competition provisions generally. Most of these provisions are still contained in employment agreements that will be adjudicated, if at all, in FINRA arbitrations, their outcomes shrouded in mists, and new employers are still going to be afraid to hire someone if it means inviting a lawsuit. But at least the Delaware court has provided the legal framework for anyone in the securities industry looking to contest non-compete agreements. And that’s a glimmer of hope for all those wanting to break free of them.


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Aegis Frumento co-heads the Financial Markets Practice of Stern Tannenbaum & Bell, New York City.  He represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations).  He has decades of experience representing SEC, CFTC and FINRA regulated firms and persons in regulatory enforcement investigations, hearings and lawsuits.  Drawing on his five years managing the Executive Financial Services Department of Morgan Stanley Smith Barney, Aegis has more experience than most in the securities and corporate governance laws affecting senior executives of public corporations.  When not litigating, Aegis enjoys working with new and existing broker-dealers, registered investment advisers, and private equity funds, covering all legal aspects from formation to capital raising. Those clients now include pre-IPO funds, fintech firms, and industry professionals looking to adapt blockchain technologies to finance and financial market enterprises, including the use of cryptosecurities to represent equity and debt interests. 

Aegis's long and distinguished career includes having been a Managing Director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP.  He graduated from Harvard College in 1976 and New York University School of Law in 1979.  Aegis is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.  He is a Fellow of the American Bar Foundation, rated A-V Preeminent by Martindale-Hubbell, named a New York Metro Area “Super Lawyer,” the current Chairman of the New York City Bar Association's standing Committee on Professional Responsibility, and most recently a Founding Member of the Financial Professionals Coalition.  

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