Hightower Holding, LLC v. Gibson

Decision Date09 February 2023
Docket NumberC. A. 2022-0086-LWW
PartiesHIGHTOWER HOLDING, LLC, Plaintiff, v. JOHN GIBSON, Defendant.
CourtCourt of Chancery of Delaware

HIGHTOWER HOLDING, LLC, Plaintiff,
v.

JOHN GIBSON, Defendant.

C. A. No. 2022-0086-LWW

Court of Chancery of Delaware

February 9, 2023


Date Submitted: November 9, 2022

Daniel C. Herr, LAW OFFICE OF DANIEL C. HERR LLC, Wilmington, Delaware; Matthew D. Henneman &Scott D. Smith, HENNEMAN RAU KIRKLIN &SMITH LLP, Houston, Texas; Attorneys for Plaintiff HighTower Holding, LLC

John H. Newcomer, Jr., MORRIS JAMES LLP, Wilmington, Delaware; Andrew P. Campbell, Todd Campbell &Erin G. Godwin, CAMPBELL PARTNERS, LLC, Birmingham, Alabama; Attorneys for Defendant John Gibson

MEMORANDUM OPINION

WILL, VICE CHANCELLOR.

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This decision considers plaintiff HighTower Holding, LLC's request for a preliminary injunction enjoining defendant John Gibson from breaching covenants not to compete. Gibson agreed to these covenants when HighTower purchased an investment advisory business in which Gibson was a partner. If enforced, the covenants would arguably bar Gibson from managing a hedge fund he launched after separating from HighTower.

I conclude that HighTower has not carried its burden of demonstrating that it is likely to succeed after trial on its claims that Gibson breached the non-compete provisions. Despite the parties' choice of Delaware law to govern their contracts, Alabama law-which has a substantially stronger relationship to this dispute than Delaware-applies. Alabama maintains a legislatively expressed public policy against broad non-compete provisions (particularly concerning professionals) that outweighs Delaware's interest in enforcing contracts. HighTower's motion for a preliminary injunction is therefore denied.

I. FACTUAL BACKGROUND

The background is drawn from the plaintiff's Verified Original Complaint (the "Complaint"), the record developed in connection with the plaintiff's motion

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for a preliminary injunction, and documents subject to judicial notice. Based on the current record, the following facts are those that I would likely find after trial.[1]

A. The Protective Agreement and the LLC Agreement

Defendant John Gibson is a licensed financial advisor residing in Alabama.[2] In 2012, Gibson was hired as a Financial Analyst at Twickenham Wealth Advisors, a financial advisory firm in Huntsville, Alabama.[3]

Around September 2013, Twickenham became an affiliate firm of plaintiff HighTower Holding, LLC, which provides financial advisory services through subsidiaries across the United States.[4] In January 2019, Gibson and his Twickenham

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partners-Henry "Moss" Crosby, Jr., Rob Warren, Jamie Day, Wes Clayton, and Michael Ahearn (collectively, with Gibson, the "Partners")-sold a majority interest in Twickenham to HighTower.[5]

The sale was made pursuant to a Unit Purchase Agreement and other ancillary agreements.[6] Gibson received more than $600,000 in cash and more than 100,000

HT Holding, LLC units valued at $1.80 per unit.[7] In connection with the transaction, each Partner signed a Standard Protective Agreement (the "Protective Agreement") containing restrictive covenants.[8] Section 5 of the Protective Agreement provides:

During the Restricted Period [ending February 1, 2024] Principal [Gibson] shall not, directly or indirectly . . . (i) own any interest in, manage, control, participate in, consult with or be or become engaged or involved in any Person engaged in or to engage in the Business within the United States or any other jurisdiction in which HighTower or the Partner Firm [HTT Newco] does business (the "Territory") . . . or (ii) make any investment (whether equity, debt or other) in, lend or otherwise provide any money or assets to, or provide any guaranty
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or other financial assistance to any Person engaged in or to engage in the Business in the Territory ....[9]

The Partners, HighTower, and HT Holding also became members in a new HighTower entity-HTT Newco, LLC.[10] HighTower became the majority member of HTT Newco, and the Partners were designated as principals.[11] HTT Newco was formed to provide certain services-pursuant to a Partnership Services and Affiliation Agreement-to facilitate HighTower's operation of the Twickenham business.[12]

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The members of HTT Newco, including Gibson, executed a February 1, 2019 Amended and Restated Limited Liability Company Agreement (the "LLC Agreement") that also contained restrictive covenants.[13] Section 6.7(c) of the LLC Agreement provides:

During the Restricted Period [ending July 7, 2025], no Restricted Member [Gibson] shall, directly or indirectly, on such Restricted Member's own behalf or on behalf of any other Person . . . (i) own any interest in, manage, control, participate in, consult with or be or become engaged or involved in any Person engaged in or to engage in the Business within the United States or any other jurisdiction in which any Restrictive Covenant Beneficiary [HighTower or HTT Newco] does business (the "Territory") . . . or (ii) make any investment (whether equity, debt or other) in, lend or otherwise provide any money or assets to, or provide any guaranty or other financial assistance to any Person engaged in or to engage in the Business in the Territory ....[14]
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B. Gibson's Resignation

On November 30, 2020, Gibson told Crosby of his desire to start a hedge fund.[15] Crosby was concerned about the potential implications for HighTower and asked Gibson to raise the idea with all of the Partners.[16]

Gibson met with the Partners on December 9.[17] He expressed his intention to start an "Opportunistic Hedge Fund" that would allow him to deliver favorable returns to HighTower clients.[18] Gibson hoped to run the fund as a separate entity within HighTower.[19] But he indicated that if he were unable to do so, he would leave HighTower to launch the fund on his own.[20]

The Partners warned Gibson that opening a hedge fund apart from HighTower could violate the restrictive covenants in the Protective Agreement and the LLC Agreement.[21] Gibson said that he would wait to launch the fund until the agreements

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expired.[22] On December 11, HighTower's Executive Director of Compliance called Crosby to report that Gibson had asked for guidance on avoiding the restrictive covenants with HighTower.[23]

On December 14, the Partners confronted Gibson about his planned course of action and asked him to reconsider.[24] The Partners suggested that they reconvene a few days later, but Gibson turned over his office keys and laptop.[25] On December 16, Gibson tendered a resignation letter and told the Partners that he intended to adhere to the restrictive covenants.[26] Two days after Gibson's resignation, HighTower sent Gibson a letter reminding him of his post-employment obligations under the Protective Agreement and the LLC Agreement.[27]

In June 2021, the Partners and Gibson reached an agreement for the repurchase of Gibson's equity interests in HTT Newco.[28]

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C. BrightHaven's Formation

In March 2020, Gibson formed BrightHaven Capital, LLC under Alabama law and the fund BrightHaven Alpha, LP under Delaware law.[29] In November, Gibson formed BrightHaven Capital Management, LLC as an Alabama entity.[30]

On July 26, 2021, Gibson registered BrightHaven Capital Management as an investment advisor firm with the Securities and Exchange Committee.[31] Gibson registered as an investment advisor representative with BrightHaven Capital Management the next day.[32]

On September 8, 2021, BrightHaven Alpha filed a Notice of Exempt Offering of Securities that listed BrightHaven Capital as its General Partner, BrightHaven Capital Management as its Investment Manager, and Gibson as the Manager of

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BrightHaven Capital Management.[33] BrightHaven Alpha also listed an Alabama address as its "Principal Place of Business and Contact Information."[34]

D. HighTower Loses Clients.

While at HighTower, Gibson managed relationships with about 40 clients.[35] He was also responsible for leading Portfolio Allocation and Management for HighTower's entire client base, comprised of nearly $1.5 billion in assets under management.[36] HighTower alleges that since Gibson's resignation, accounts totaling $3.3 million in assets under management have terminated their relationships with HighTower.[37]

E. This Litigation

On January 26, 2022, HighTower filed its Complaint against Gibson. The Complaint advances seven claims. Only two claims-that Gibson breached the

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Protective Agreement (Count I) and the LLC Agreement (Count II)-are relevant to this decision.[38]

Along with the Complaint, HighTower filed a motion for expedited proceedings and a motion for a preliminary injunction.[39] On June 24, I granted the motion to expedite and permitted the parties to undertake limited discovery before a preliminary injunction hearing.[40] I heard oral argument on HighTower's motion for a preliminary injunction on November 9.[41]

II. LEGAL ANALYSIS

"A preliminary injunction may be granted where the movant[] demonstrate[s]: (1) a reasonable probability of success on the merits at a final hearing; (2) an imminent threat of irreparable injury; and (3) a balance of the equities that tips in favor of issuance of the requested relief."[42] The three elements are not necessarily

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given equal weight. "A strong showing on one element may overcome a weak showing on another element."[43]

HighTower's motion for a preliminary injunction focuses on whether it has a reasonable probability of succeeding on its claims that Gibson breached the non-compete provisions in the Protective Agreement and the LLC Agreement.[44]HighTower does not need to prove that it will prevail on those claims at trial. Rather, it need only "show that there is a reasonable probability that it would prevail at a final hearing on the merits of one or more of these claims."[45]

For the reasons discussed below, HighTower has not established a reasonable...

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