The Protocol for Broker Recruiting makes it easier and less expensive to hire representatives from competitor firms.  However, firms need to beware of certain pitfalls which could eliminate the protection of the Protocol and subject the hiring firm and its new representative to costly and time-consuming litigation, injunctions and damages.  Below are five things to consider when representatives transition under the protection of the Protocol:

1. You must comply in good faith with the express terms of the Protocol.  If you fail to do so, a court may decide that you’re not entitled to its protection or may enter injunctive relief against you.  That is exactly what happened in the recent case of Ameriprise v. Koenig (copy in .pdf format below).  In that case, the representative was fired by Ameriprise.  The representative then tried to “resign” pursuant to the Protocol and provide Ameriprise with a Protocol compliant list – that is a list containing only client names, addresses, telephone numbers, email addresses and account titles.   However, the U.S. District Court for New Jersey found that the Protocol did not allow the representative to keep the considerable data that he had emailed to himself at home before he was fired – information that he was not entitled to take under the Protocol.  As a result, the court held that he had taken information beyond that permitted and entered injunctive relief requiring return of the information. 

2. Consider whether you are hiring a team or an individual who is part of a team.  If an individual is part of a team or partnership and the entire team is not moving to the new firm, then the terms of the partnership agreement control as to which clients the departing representatives can take information for and solicit.  Even if there is a team or partnership agreement, it cannot prevent a representative from taking information for and soliciting those clients that the representative introduced to the team. 

A more contentious situation can arise when there is no team or partnership agreement and the departing representative has been a producing member of the team or partnership for at least four years.  In those circumstances, the departing representative can take information for all of the clients serviced by the team or partnership and solicit those clients to transfer their accounts.

3. Be aware that the Protocol does not absolve firms and representatives of all of their legal obligations.  The Protocol only protects representatives and their new firms from claims relating to their taking of certain information and solicitation of customers.  It does not prevent suits to enforce training cost agreements, promissory notes or for raiding.  Therefore, when hiring under the Protocol you still want to consider whether any of these types of agreements are at issue and how they will be addressed.  The hiring firm should also consider whether its conduct could expose it to a claim for raiding.  Otherwise, you may still be dealing with litigation and possible exposure even if you follow the Protocol.

4. The Protocol only permits representatives to solicit customers after they resign.  As tempting as it may be to ask customers if they would be willing to transfer while still working for the old firm, the Protocol does not protect this conduct.  In fact, it specifically states that firms are free to enforce whatever contractual, statutory or common law restrictions the representative may have had on the ability to solicit customers prior to leaving the firm.

5. Consider whether a retirement program is involved.  If any of the clients at issue were transferred to the departing representative as a result of a retirement program, then the terms of that agreement will control.  Ignoring those agreements can cause the return of an angry retiree and subject you and your new employee to liability.

In short, utilizing the Protocol for Broker Recruitment can be beneficial when transitioning registered representatives from one Protocol signatory firm to another, but careful planning, analysis and consideration is required.

Susan Guerette is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips.  Susan has litigated departing broker matters for nearly fifteen years.

Ameriprise v. Koenig.pdf (119.29 kb)

Give me ninety days notice, or sit on the sidelines for ninety days.  That's what a financial services firm just said to a former employee who resigned to join UBS Financial Services with support from the United States District Court for the Northern District of New York. 

In The Ayco Company, L.P. v. Brian D. Feldman, Ayco successfully obtained a preliminary injunction enforcing a ninety-day non-compete clause after Feldman failed to provide ninety days notice as required by his employment agreement.  Ayco is a financial services company that provides comprehensive financial counseling and education services for corporate executives, employees and wealthy individuals.  As a subsidiary of The Goldman Sachs Group, Inc., Ayco is not a broker-dealer itself, but it is an affiliate of Mercer, a broker-dealer primarily involved in the sale of variable annuities and variable life insurance. 

Brian Feldman began employment with Ayco in 2005 and had no prior industry experience and brought no clients with him to Ayco.  His employment agreement contained a provision requiring him to provide Ayco with ninety days notice of termination, during which time he would remain with Ayco and continue to be paid his base salary.  Although it is unclear whether Feldman would be permitted to continue working with clients during the notice period or whether he would be paid to stay home in the nature of a Garden Leave provision, the point became moot when Feldman resigned without notice to join UBS.  Feldman’s agreement stated that if he terminated employment prior to the end of the notice period, he would not work for a competitor anywhere in the United States for ninety days or for the unfulfilled balance of the notice period.  Feldman’s agreement (as well as another agreement he signed) acknowledged that Ayco’s customer list and related information was a trade secret, and noted Ayco’s legitimate interest in protecting such information and customer relationships.

After Feldman resigned without providing notice, Ayco sought a temporary restraining order and preliminary injunction to preclude him from working for UBS or any other U.S. competitor for ninety days.  To support its case, Ayco noted that Feldman retained a list of customer names, addresses, telephone numbers, and email addresses after he left.  Feldman argued that his conduct was consistent with the Protocol for Broker Recruiting, but the Court rejected this argument because Ayco was not a signatory to the Protocol. 

Feldman also argued that the agreement was unenforceable because its terms were unreasonable and because it prevented clients from working with the broker of their choice.  These arguments likewise fell on unsympathetic ears as the Court found the ninety-day limitation to be “well within what has been found to be a reasonable time frame for non-compete provisions.”  The Court also noted that Ayco had offered to continue to pay Feldman his salary during the non-compete period.  As for the argument that the non-compete prevented clients from working with the broker of their choice, the Court noted that Ayco did not seek to interfere with the transfer of any customer’s accounts and seeks only to enforce the non-compete for ninety days.

In short, the Court showed no reluctance in granting a preliminary injunction to preclude Feldman from working for a competitor for ninety days, and it directed Ayco to continue paying Feldman his salary retroactive from the date of the temporary restraining order.

A copy of the Court's opinion is available in pdf format below. 

As always, please feel free to share your thoughts and questions in the comment space below.  And if you have a topic or a case you believe we ought to address in an upcoming post, please let us know. 

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either by Mr. Greco or other members of the Practice Group, you may subscribe to this blog's RSS feed or follow Mr. Greco on Twitter at @MGrecoEsquire or Fisher & Phillips on Twitter at @labor_attorneys.

The Ayco Company v. Brian Feldman.pdf (212.29 kb)