A Delaware District Court has ruled that a non-compete agreement between Hightower and advisor Darren Reinig was unenforceable and void under California law.
Reinig’s motion to dismiss Hightower’s lawsuit against him was granted in part on Hightower’s claims around the non-compete violations. But Hightower can still fight claims he stole trade secrets from the firm. Reinig still has an ongoing arbitration against Hightower with the American Arbitration Association.
“Hightower just shot themselves in the foot,” said Robert “Robin” Traylor, Reinig’s attorney. “They raised an issue that didn’t have to be fought over, and that is the validity and enforceability of their restrictive covenants. And Judge Andrews has just decided that those restrictive covenants are illegal and unenforceable.”
“While we are still evaluating the Delaware court’s decision and our next steps, our proceedings with Mr. Reinig are moving forward in arbitration where we remain confident that we will prevail,” a Hightower spokesperson said in a statement.
San Diego, Calif.-based Reinig was the founding partner of Delphi Private Advisors, an RIA Hightower acquired in 2019 and merged with LourdMurray, another California-based firm. However, several years later, Reinig opted to leave and registered a new RIA with the SEC. When he began work at Hightower, Reinig signed a contract including confidentiality, non-compete and non-solicitation mandates.
He was subject to a two-year non-compete, which ran through the end of December 2023, according to Traylor. Traylor said they reached out to Hightower and tried to get them to acknowledge the non-compete had expired. But the firm now claims the non-compete rolls on forever through a tolling provision.
“Hightower chose to reject any of those overtures, and they picked a fight,” Traylor said.
In the Delaware court decision, Judge Richard G. Andrews said Hightower’s non-compete was void under California law. Under an exception to California law, if a restrictive covenant is made in connection with the sale of a business, it’s legal. However, this exception is limited to the geographic scope of the sold business. And since Delphi was headquartered in San Diego, “restricting Reinig from engaging in investment advisory business throughout the United States is untenable,” the decision said.
“What the court says is, you’ve violated California law because you’ve tried to impose nationwide restrictive covenants,” Traylor said.
Traylor said the court’s decision has implications for other California-based advisors.
“The logic applies far more broadly than that because any state that has a California-like statute or applicable law that says, ‘We don’t allow for restrictive covenants except in limited situations like the sale of the business,’ the same logic would apply,” he said. “It’s a real blow to their business model, which tries to tie up advisors and impede the possibility that assets under management will transfer away.”
“They’re trying to make an example of Darren Reinig so they can send a message to the broader advisor community that if you try to leave Hightower, we’re going to make your life expensive and litigious. And essentially, that message has now popped,” Traylor said.
