Labor & Employment Law Daily Wrap Up, CONTRACT CLAIMS—D. Del.: Noncompete claims dismissed for violating California law, (Jan 29, 2025)

By Martin A. Steinberg, J.D.

An investment advisor was accused of breaching the parties’ agreements by forming a competing investment advisory company and misappropriating the plaintiff’s client and trade secrets.

In a breach of contract case between investment advisors primarily based on violations of a contractual nationwide noncompete clause, the federal district court in Wilmington, Delaware, granted Defendant Darren Reinig’s motion to dismiss four counts without prejudice for violating California public policy against most noncompete provisions. Wealth management firm Hightower Holding, LLC was granted leave to amend no later than February 8, 2025. The court, however, denied the investment advisor’s motion for a more definitive statement concerning two counts alleging a misappropriation of trade secrets. The court found these claims were sufficiently intelligible (Hightower Holding, LLC v. Reinig, No. 1:24-cv-00323-RGA (D. Del. Jan. 24, 2025)).

Background. Hightower is an investment advisory and wealth management firm operating nationwide. Reinig is an investment advisor. From July 2019 to May 2023, the parties executed a series of agreements. In the first agreement, executed in July of 2019, Hightower purchased "materially all of the assets" of Delphi, an investment advisory business of which Reinig was a 50% owner and member, and merged it with another company, Lourd, into a newly formed business operating under the name "LourdMurray." Hightower and Reinig were both members of LMDP, the company managing and operating LourdMurray. One of the terms of the Initial Acquisition required that Reinig execute another agreement, the "Standard Protective Agreement" (SPA), "which provides for post-sale restrictions [against Reinig] on competition, solicitation, and use of confidential information, among other things."

From July 2019 to December 2021, Reinig provided investment advice and financial services through Hightower. In December 2021, Reinig sold his interest in LMDP to Hightower and assisted Hightower in transitioning his clients to other Hightower advisors affiliated with LourdMurray until the end of 2022, when his relationship with Hightower ended. In May 2023, Reinig and Hightower executed a Letter Agreement modifying the terms of the SPA to accommodate "Reinig's expressed intent to pursue business and investment opportunities in the field of venture capital and private equity, which (Reinig stated) would not interfere with Hightower's client relationships."

Hightower alleges that Reinig breached the covenants in the SPA. Specifically, Hightower asserts that in February of 2024, Reinig started a new wealth management and investment advisory business in southern California called Torren Management, LLC. Hightower also alleges that Reinig leveraged Hightower's confidential, proprietary, and trade secret information to solicit Hightower's clients. Reinig moved to dismiss for failure to state a claim under Rule 12(b)(6) and moved for a more definite statement under Rule 12(e).

Non-compete provision. The primary dispute between the parties concerned the validity of the SPA's non-compete provision. The noncompete provision prohibits Reinig from engaging in investment advisory business anywhere in the U.S. Because the SPA violates the public policy of California, the default state, it is invalid. Thus, the court dismissed Counts I, III, IV, and VI.

The SPA includes a choice of law provision favoring Delaware. Under Delaware law, the parties' choice of law controls unless the "application of Delaware law would be contrary to a fundamental policy of a state which has a materially greater interest than Delaware in [the] matter." The parties agreed that California has a materially greater interest than Delaware, so this analysis focused on determining whether the SPA violated California's public policy.

Under California law, non-compete clauses are illegal, absent the application of a specific exception. The governing statute, Cal. Bus. & Prof Code § 16600 "evinces a settled legislative policy in favor of open competition and employee mobility[,]" and "following the Legislature, [the California Supreme Court] generally condemns noncompetition agreements." Because the SPA prohibited Reinig from engaging in investment advisory business anywhere in the U.S., this violates California public policy.

The court rejected Hightower’s argument that the SPA fell under an exception under Cal. Bus. & Prof. Code § 16601, which states that any person who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which business was conducted. However, for a non-compete provision to qualify for the exception, its geographic scope must be tied to the sold business. Because Delphi was headquartered in San Diego restricting Reinig from engaging in investment advisory business throughout the U.S. was untenable.

Trade secrets claims. The court denied Reinig’s motion for a more definite statement for Counts II and V, claims for misappropriation of trade secrets under the Defend Trade Secrets Act and conversion of trade secrets, respectively. Courts typically restrict the use of a motion for a more definite statement to pleadings “suffering from unintelligibility rather than the want of detail." The complaint identified trade secrets such as "client lists, client contact, financial information, and proprietary investment strategies." This description sounded intelligible to the court. Trade secrets do not need to be detailed in a complaint alleging misappropriation because such a requirement would result in public disclosure of the purported trade secrets.

The Case is No. 1:24-cv-00323-RGA.

Judge: Andrews, R.

Attorneys: Daniel Charles Herr (Law Office of Daniel C. Herr) for HighTower Holding, LLC. Kenneth Laurence Dorsney (Morris James) for Darren Reinig.

Companies: HighTower Holding, LLC

Cases: ContractClaims TortClaims StateLawClaims DelawareNews