As we have discussed on this Blog over the past several years, the Protocol for Broker Recruiting (“Protocol”) allows for reciprocal poaching of brokers. More specifically, if a broker leaves one Protocol firm for another Protocol firm, the broker can (a) take certain account information (client names, addresses, telephone numbers, email addresses, and account title information) to his/her new firm and (b) solicit the clients he/she serviced at his/her former firm. Naturally then, the Protocol’s requirements conflict with confidentiality and restrictive covenant provisions that are commonly found in broker employment agreements and firm policies. Continue Reading Former Protocol Members Are Stepping Up Their Restrictive Covenant Enforcement

In Smith Barney, Inc. v. Darling, No. 09-C-540, 2009 WL 1544756 (E.D. Wis. Jun. 3, 2009), the United States District Court for the Eastern District of Wisconsin denied Smith Barney’s request for temporary injunctive relief in aid of arbitration against five departing financial consultants and their new employer. Smith Barney sought an injunction to: (1) require the former employees to return all customer information; and (2) prevent the departing employees from soliciting Smith Barney customers. The former employees countered by arguing that the non-solicitation and non-disclosure covenants relied upon by Smith Barney were unenforceable under Wisconsin law. They also argued that they were entitled to retain client contact information.

The District Court agreed with the departing employees on all fronts. It found that the non-disclosure of confidential information provisions were unenforceable because they did not contain time limitations. (Wisconsin and Georgia are the only two states that we are aware of that have such requirements.) It also found that the non-solicitation of customers provisions found in the former employees’ employment agreements were unenforceable because they covered customers “whose name became known” to the former employees during their time at Smith Barney. The Court reasoned that the provision would cover individuals who came into Smith Barney’s office to ask for directions, as well as individuals whom the former employees met at softball games. In fact, the Court went so far as to point out that the restriction covered customers of the departing employees’ new employer – Robert W. Baird & Co. – about whose existence the departing employees learned during their employment with Smith Barney. The Court went on to conclude that additional non-solicitation covenants in various agreements with the five former employees were unenforceable because they covered customers that did not do business with Smith Barney and/or with whom the departing employees had not had contact in years. Because Wisconsin courts do not blue pencil otherwise unenforceable restrictive covenants, these flaws in the provisions were fatal.

The Court also addressed the impact of the Protocol for Broker Recruiting, to which Smith Barney is a signatory. Even though Baird & Co. is not a signatory to the Protocol, the departing employees argued that Smith Barney could not show entitlement to injunctive relief because it had tacitly conceded that departing employees are not a threat by signing the Protocol. Smith Barney countered by noting that some of the accounts at issue were excluded from the Protocol. The Court concluded that Smith Barney’s argument was “not sufficiently developed” to merit an award of temporary injunctive relief. 

Ultimately, the Court ordered the departing employees to return or destroy client account information, but not client names, addresses, telephone numbers, and email addresses. The Court did not address explicitly in its published decision whether Smith Barney had shown that some or all of this information constituted a trade secret under Wisconsin law, despite the fact that Smith Barney had pled a claim for trade secret misappropriation against the defendants. The Court did state that Smith Barney could have an evidentiary hearing on an expedited basis, if it chose.

On February 2, 2009, the Wall Street Journal published an “advisor alert” for “The World of Investment Planning.” The alert, titled “Staying Mum When Switching Firms” discusses the sensitive issues a broker faces when he/she leaves one financial investment firm for another. Although the alert correctly notes that “discussing an impending move with clients before resigning is probably the most dangerous thing you can do,” the article provides flawed advice with respect to removing the former employer’s confidential information.

Specifically, the alert discusses an initiative called the “Protocol for Broker Recruiting.” The protocol, which has been signed by companies such as Bank of America (which signed the protocol in order to retain brokers from Merrill Lynch) and Citigroup, concerns certain client information such as addresses, phone numbers, email addresses and account types. Under the protocol and despite the fact that this information is typically considered confidential/trade secret information, a broker may take this client information to his new firm. More importantly, the protocol allows the broker to use this confidential information to contact his/her former clients about transferring their accounts to the new firm. 

The Wall Street Journal alert states that brokers who are moving to or from “firms that are not part of the [protocol] should still follow its guidelines.” This advice is flawed because the advice/alert fails to inform the broker that a non-protocol firm will not excuse a broker’s removal of confidential information simply because the broker followed the protocol. Nor will following the protocol allow the broker to ignore the confidentiality and non-solicitation provisions that are likely founder in the broker’s employment agreement with the non-protocol firm. Put another way, following the Wall Street Journal’s advice when leaving a firm that has not signed the protocol could subject the broker, and the broker’s new firm, to litigation.  Such litigation could concern the breach of an employment agreement and the theft of confidential trade secret information and could lead to restraining orders and injunctions being entered against the former broker and the broker’s new firm.

In addition, firms who signed the protocol should be aware of the protocol’s impact on their ability to enforce restrictive covenants contained in their employment agreements. For example, Merrill Lynch found out in 2007 that it could not enforce its non-disclosure and non-solicitation agreements against a former broker because Merrill Lynch had signed the protocol. Merrill Lynch, Pierce, Fenner, and Smith, Inc. v. Brennan, 2007 WL 632904 (N.D. Ohio, Feb. 23, 2007). Consequently, both brokers and firms need to be aware of the protocol’s potential impact and should consult with competent counsel prior to hiring brokers.