Trade Secrets and Noncompete Blog : Non-Compete Lawyer & Attorney : Epstein Becker Green Law Firm : Trade Secrets & Confidentiality Agreements

Lawyers and clients alike often believe that it is easier to enforce a non-solicitation agreement than a non-competition agreement. Sometimes, that’s true. However, that does not mean that companies can do so without demonstrating a legitimate business interest in the enforcement of that non-solicitation agreement. The recent Illinois Appellate Court decision in Gastroenterology Consultants of the North Shore, S.C. v. Meiselman (2013 Il. App. 1st 123672) highlights this point.

In that case, a doctor named Meiselman left Gastroenterology Consultants (referred to here as GC for short) to work for NorthShore University HealthSystem Medical Group. In his new position, Meiselman treated any patient who sought out his services, including patients he treated while working for GC. GC sued, claiming that Meiselman’s conduct violated a restrictive covenant not to solicit any of its patients for a competitor located within 15 miles of GC’s offices for three years after separating employment, except in situations involving a genuine emergency. GC requested that the court issue a preliminary injunction, but the trial court refused after determining that GC had failed to show (among other things) that it had a legitimate business interest in enforcing Meiselman’s agreement.

The appellate court affirmed. The appellate court observed that, before Meiselman helped form GC, he had practiced medicine for approximately 10 years in the same geographic region later serviced by GC and treated thousands of patients there. Additionally, after Meiselman formed GC, he continued treating patients (and accepting referrals from physicians) with whom he had developed relationships prior to affiliating with GC. Furthermore, the appellate court spent a good bit of time in its opinion explaining that Meiselman’s practice at GC operated quite independently from GC itself: GC did not introduce Meiselman to his patients or physician-referral sources; physicians would refer patients to Meiselman individually rather than to GC generally; GC did not advertise, promote, or market Meiselman’s practice; Meiselman maintained his own office with its own telephone number; Meiselman billed for his services and his compensation was dependent on the revenue that he personally generated rather than GC’s revenue; and GC was not materially involved in other aspects of Meiselman’s practice aside from providing administrative support. Under those circumstances, the appellate court agreed with the trial court that GC did not have a legitimate business interest in enforcing the agreement.
 

The potential antitrust impact of no-hire agreements between competitors has been a hot topic over the last few years, particularly in the high-tech industry where competition for the most talented programmers, developers and engineers is intense. An antitrust class action pending in the US District Court for the Northern District of California against six high tech firms -- Intuit, Apple, Google, Intel, Intuit and Pixar – illustrates just how high the stakes can be when a no-hire agreement among competitors is challenged under federal and state antitrust laws. The plaintiffs in that putative class action are five software engineers who claim that the defendants entered into a series of no-hire agreements between 2005 through 2009 that eliminated competition for labor, artificially reduced compensation and job mobility and cost employees to suffer hundreds of millions of dollars in lost wages. That class action stems from a similar antitrust action brought by the DOJ in 2010 against the same six firms, which asserted that the defendants violated Section 1 of the Sherman Act by agreeing that they would not cold-call each other's employees. Although the DOJ's antitrust action against Google, et al. settled shortly after it was filed, the class action challenge to the alleged no-hire agreements rages on. Additionally, on November 16, 2012, the DOJ filed a civil antitrust action against eBay, Inc., claiming that from 2006 to 2009, eBay violated federal antitrust laws by entering into a "handshake" agreement with Intuit to not hire each other's employees.

Does the recent spate of antitrust challenges to no-hire agreements mean that negotiated no-hire provisions, which are commonly found in settlement agreements and commercial contracts, face an increased risk of being held unenforceable or, even worse, giving rise to a claim for damages? Probably not. In the 2010 Competitive Impact Statement filed by the DOJ when it settled its antitrust action against Google, et al., the government acknowledged that no-hire agreements that are ancillary to legitimate, pro-competitive collaborations -- including contracts with consultants, settlement agreements or mergers and acquisitions -- are not per se unlawful under the Sherman Act.

But even a no-hire provision that is ancillary to a legitimate business interest can face a challenge under federal or state antitrust laws if it is broader than necessary to achieve the legitimate business objective. Such challenge could come from the DOJ, a state enforcement agency or even employees who claim to have been adversely affected by the no-hire. In the event of such a challenge, the no-hire agreement must satisfy the rule of reason test, which balances the restraint's procompetitive benefits against its anticompetitive effects.

In most cases, reasonable no-hire provisions that are ancillary to settlement agreements, consulting contracts, acquisition agreements and similar commercial transactions will satisfy the rule of reason test and present little if any risk of antitrust injury. Employers negotiating a no-hire provision in a settlement agreement or commercial contract can further minimize the risk of a successful antitrust challenge to a no-hire provision by observing a few basic principles. First, no-hire provisions should not be drafted as standalone agreements. Instead, they should be incorporated into a broader agreement so it is crystal clear that the no-hire provision is ancillary to a legitimate business interest, such as settling an employee poaching claim, retaining an outside consulting firm or facilitating a joint venture. Second, the no-hire agreement should be as narrowly tailored as possible by limiting its scope to specific categories of employees, products or services and geographic territories. Third, the no-hire should not be open-ended and should have a reasonable duration. The definition of reasonable in this context will depend to a large extent on the nature and size of the affected industry, the level of competition within the industry and the economic impact the no-hire provision will have within the industry. The inclusion of a severability clause, as well as a provision authorizing a court to “blue pencil” a potentially overbroad no-hire provision, can also be helpful. Finally, employers should carefully review any applicable state laws that could affect the enforceability of a no-hire provision. In California, for example, a no-hire provision that is perfectly reasonable under federal antitrust laws could still run afoul of California's statutory prohibition of restrictive covenants.

While the outcome and potential impact of the present challenges to no-hire agreements in the high-tech industry remains to be seen, employers can take some comfort that a carefully drafted no-hire provision is unlikely to violate any state or federal antitrust laws provided care is taken to ensure that it is ancillary to a legitimate business purpose, narrowly tailored to accomplish that business purpose and reasonable in scope.
 

Peter Steinmeyer, a Member of the Firm in the Labor and Employment practice and Managing Shareholder of the Chicago office, was quoted in an article in Law360.com titled "5 Tips for Drafting Employment Pacts in the Social Media Era." (Read the full version – subscription required.)

Following is an excerpt:

Facebook, LinkedIn and Twitter have radically changed how companies and employees connect to each other as well as clients or customers, and those changes have left the law — and employment contracts — struggling to keep up, lawyers say.

"Technology and society move quicker than the law, and the law is catching up right now," said Peter Steinmeyer, co-chairman of the noncompetes, unfair competition and trade secrets practice group at Epstein Becker Green. …

Exactly what constitutes "solicitation" may be the biggest unresolved question for lawyers trying to enforce agreements barring departing workers from luring clients or former co-workers away from a company in the social media realm, Steinmeyer said. …

"In the social media era, it makes sense to have a more specific definition of solicitation, but an awful lot of agreements simply use the word 'solicit' without defining what that means," Steinmeyer said. …

But in light of the uncertainty swirling around what constitutes a solicitation on the social media sphere, employers might want to go against the grain and make sure their nonsolicitation agreements are accompanied by restrictions that prohibit departing employees from doing business with their former customers, Steinmeyer said. …

In addition to making sure workers understand the significance of any confidential information they may have access to, companies should clearly label confidential information as such and hold exit interviews with departing employees that stress the need to protect confidential data, according to Steinmeyer.
 

In a new case filed by Charles Schwab & Co. Inc. against former employees who staggered their departures to a competitor, we have a prime example of the risks involved when a team departs over time versus simultaneously. To avoid claims of violations of fiduciary duties or non-poaching clauses, some advise that teams should have the junior members resign first and at a later time the senior members of the group should follow. This approach is fraught with the danger apparently exemplified by the allegations of misconduct made in a case brought by Schwab against several of its former employees in Texas state court yesterday.

According to the Petition, in 2009, Connie Mack Jr. left Schwab and his teammates Richard Rosso and Mark Blom to form his own financial advisory firm, Clarity Financial LLC. After Blom gave notice in March 2012 that he was resigning to go to work for Clarity, Schwab alleges it asked Rosso if he intended to join Blom and he responded that he had “no plans to leave.” The Petition alleges that thereafter Rosso engaged in conduct to deter other Schwab representatives from establishing relationships with Blom’s clients and that his subsequent contact with those clients enabled him to lay the foundation for his future departure to Clarity with those clients. Rosso allegedly compounded his “bad leaver” conduct by providing misleading information about his future business plans when he resigned from Schwab by saying he was pursuing a career in communications when he shortly thereafter joined his former team members at Clarity.

Schwab has a history of aggressively enforcing its restrictive covenants and its success has in the past hinged in part on pre-departure conduct. In a recent FINRA arbitration award, a panel awarded compensatory and punitive damages as well as attorneys’ fees against a broker who had spoken to customers about moving prior to his resignation.

The lesson to be learned from this situation is that it is often very difficult to manage and control the behavior of the team member(s) left behind. Communications among team members will necessarily continue and are laden with risks. On balance, the exposure to claims against the senior member of the team for breach of duty or of any non-solicit of employees covenant is often less than the consequences and resultant claims when departures are staged over time and inevitable mis-steps occur in the interim period. Former employers are also better equipped to handle a definitive all-at-once group departure rather than one where they are continually dealing with re-assignments, replacement and re-training.
 

In the latest salvo in a long-running legal dispute stemming from a classic raid by a competitor upon a commercial insurance broker’s business and employees, a New York appellate court has refused to dismiss a New York lawsuit in favor of a prior-filed California lawsuit which has already addressed many of the same issues.

One year ago, we blogged about a preliminary injunction issued by the Supreme Court, New York County, in a lawsuit then pitting Aon Risk Services Northeast and Aon Corporation (collectively, “Aon”) v. Michael Cusack and Alliant Insurance Services, Inc. (“Alliant”).

The case arose from a raid upon Aon’s business by Mr. Cusack, a senior executive and Managing Director at Aon, who resigned on June 13, 2011 with several other senior executives (as part of a group of 38 total employees) to join Alliant. In the ensuing few months, 60 employees in total resigned from Aon to join Alliant, and Aon received more than 100 broker of record letters from clients transferring more than $20 million in revenue from Aon to Alliant.

When we last checked in on the lawsuit, the New York court had preliminarily enjoined Mr. Cusack, Alliant, and other former Aon employees who were subject to restrictive covenants from, during the pendency of the litigation, (1) soliciting business or entering into any business relationship with any Aon client on whose account they worked, or (2) soliciting any Aon Construction Services Group employees to work for Alliant. Much has happened since that December 21, 2011 injunction, and not only in the New York action.

On June 13, 2011, the day of first resignations, three Aon employees (including Aon Construction Services Group CEO Peter Arkley, a long-time California resident) and Alliant filed suit against Aon in California state court seeking a declaratory judgment that their restrictive covenants were unenforceable pursuant to California’s pro-employee Business and Professions Code §16600. After amendments to their complaint, the case was removed to the United States Central District of California, which on June 13, 2012 granted summary judgment to those plaintiffs, holding the covenants to be unenforceable under California law and public policy.

A lawsuit was also filed in Illinois. Aon sued Mr. Arkley and Alliant in Illinois Chancery Court and sought a TRO pending a preliminary injunction hearing. On June 17, 2011, the Illinois Chancery Court granted Aon's application, and issued a TRO prohibiting Alliant, Arkley, and all other former Aon CSG employees, including Cusack, from soliciting Aon's clients and employees, pending a preliminary injunction hearing. Subsequently, Alliant moved to dismiss the Illinois action on the ground of forum non conveniens, arguing that California was a more convenient forum than Illinois for Aon to litigate its claims against Arkley. The Illinois court granted the forum non conveniens motion.

In April 2012, Peter Arkley was added as a defendant to the New York action. The Supreme Court, New York County denied his motion to dismiss on July 2, 2012, and entered a preliminary injunction against him on September 21, 2012, along the same lines as the preliminary injunction it previously entered against Mr. Cusack in December 2011. Mr. Arkley appealed both of those orders.

In its January 10, 2013 order, New York’s Appellate Division, First Department, affirmed the two orders. The Appellate Division noted that the California action was commenced only a few days before the New York action, and on the very same day that the mass exodus of Aon employees began. It was evident to the New York court that, given California’s hostility to restrictive covenants, the California action was merely “a preemptive measure undertaken to gain a tactical advantage so as to negate the force and effect of the restrictive covenants, which the parties had freely agreed upon.” The New York court also noted that in their agreements, the parties had selected Illinois law, not California law, to govern.

Finally and interestingly, in rejecting Mr. Arkley’s forum non conveniens arguments, the Appellate Division stated that he was available to the New York forum not only because he had conducted business in New York in the past but also because he had participated in the New York litigation as a non-party by submitting affidavits in opposition to Aon’s application for a preliminary injunction against Mr. Cusack.

 So this transcontinental legal dispute continues, in New York (applying Illinois law) and California (where it has now been remanded to state court). Stay tuned for further developments…
 

Co-authored by Ted A. Gehring.

Although the California courts have steadily eroded employers’ ability to contractually limit their former employees’ solicitation of their customers, a stipulated injunction limiting solicitation can still be enforced. In Wanke, Industrial, Commercial, Residential, Inc. v. Superior Court, 2012 WL 4711888, the California Court of Appeal, 4th Appellate District, reversed a trial court order that found a stipulated injunction prohibiting solicitation of a specific customer identified on a customer list could not enforced based on the trial court’s conclusion that the identity of that customer was not a trade secret.

In the underlying action, Wanke, Industrial, Commercial, Residential, Inc. (“Wanke”) sued two former employees and their new company for, in part, misappropriation of trade secrets, after the employees started a competing business. The parties resolved the action by entering into a settlement agreement and mutual release, as well as a stipulated injunction that, in part, prohibited the former employees from “contacting or soliciting” any customer identified in a customer list which was attached to the stipulated injunction. The stipulated injunction also had a $50,000 liquidated damages provision for the initial violation and $10,000 for each subsequent violation.

Thereafter, Wanke filed (1) an application for an order to show cause why the former employees should not be held in contempt for having, in part, contacted a customer identified on the customer list, Con Am Management (“Con Am”), and (2) a motion to enforce the settlement agreement. The trial court refused to hold the defendants in contempt because it concluded that Wanke had failed to establish the “existence of a lawful order.” The trial court concluded that the stipulated injunction was invalid under California Business & Professions Code Section 16600 (which provides, with limited exceptions, that every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void), because the identity of the customer, Con Am, was not a trade secret because it could be easily identified as a potential customer. The trial court stated that the stipulated injunction was enforceable only with respect to jobs undertaken or proposed to be undertaken for Con Am while the individual defendants were employed by Wanke.

Wanke filed a subsequent motion to enforce the settlement agreement with respect to different customers. The court granted that motion because it related to jobs that were undertaken while the individual defendants were employed by Wanke. The defendants appealed and Wanke filed a cross-appeal. Wanke also filed a petition for writ of mandate challenging the trial court’s order insofar as the court refused to hold the individual defendants in contempt for violating the stipulated injunction.

The Court of Appeal denied the writ petition, finding that the underlying contempt proceeding was a criminal proceeding, and therefore, the double-jeopardy clause contained in the Fifth Amendment of the U.S. Constitution precluded the appellate court from reviewing the trial court’s “acquittal” of the individual defendants on the contempt charges.

The Court of Appeal, however, reversed the trial court’s finding that the stipulated injunction was not enforceable as to Con Am. The Court held that a party may not defend against the enforcement of a court order by contending merely that the order is legally erroneous. The Court stated a party may successfully defend against the enforcement of an injunction on the ground that the injunction is invalid only in the narrow circumstance in which the party can demonstrate that the injunction was beyond the trial court’s jurisdiction to issue in the first instance.

Since the trial court had jurisdiction over the parties and it could not be concluded from the face of the stipulated injunction that it did not protect Wanke’s trade secrets, the stipulated injunction was facially valid. The Court of Appeal further stated that even assuming the former employees could demonstrate the trial court erred in issuing the stipulated injunction because the customer list attached thereto was not a protected trade secret, such a showing would be insufficient to avoid enforcement of the injunction. The court also noted that the trial court’s decision was contrary to fundamental fairness and common sense, and that the former employees could not stipulate to an injunction that identifies certain customers whom they will not solicit in order to resolve a misappropriation claim, and then proceed to violate the injunction by claiming the same customer list is not a trade secret.

As such, at least for now, stipulated injunctions in trade secret actions will be enforced in California as long as the court properly has jurisdiction and the injunction, on its face, is not invalid.
 

In December 2010, our restrictive covenant group blogged about the Department of Justice’s complaint against Adobe, Apple, Google, Intel, Intuit, and Pixar. In that complaint, the DOJ alleged that those companies entered into agreements in which they agreed not to solicit each other’s highly skilled technical employees in violation of antitrust law. In the wake of that complaint, we recommended paying particular attention to any no-hire agreements to make sure that they do not draw unwanted scrutiny from the Department of Justice.

More than 18 months later, some of those companies continue to experience the negative ramifications of that attention. On Friday, Google asked the United States District Court for the Northern District of California to dismiss another lawsuit (Santiago v. Intuit Inc., et al.; case no. 12-cv-1262) filed concerning those agreements. In that case, a former Intuit employee filed a class action alleging that these no-hire agreements limited the employment options available to Intuit employees and allowed Intuit to depress wages. This continued litigation serves as a reminder to carefully consider both the costs and benefits of any no-hire agreements.

In an article appearing in the January 25, 2012 edition of www.law360.com, Peter L. Altieri and David J. Clark discuss how -- over a dozen years after the New York Court of Appeals specifically recognized, in BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 690 N.Y.S.2d 854 (1999), that an employer may have a legitimate and protectable business interest in preventing former employees from exploiting or appropriating the relationships and goodwill of its customers which had been created and maintained at the employer’s expense -- some New York courts still appear to be reluctant to uphold contractual provisions in employment agreements that are designed simply to protect customer goodwill.

In an exhaustive opinion, dated December 21, 2011, in the case Aon Risk Services, Northeast v. Cusack, Index No. 651673/11, 2011 WL 6955890, Justice Bernard Fried of the Supreme Court of New York, New York County, awarded a preliminary injunction sought by Plaintiffs Aon Risk Services, Northeast and Aon Corporation (collectively, “Aon”) against Aon’s former employee Michael Cusack and its competitor Alliant Insurance Services, Inc. (“Alliant”).

The case arose from a raid upon Aon’s business by Mr. Cusack, a senior executive and Managing Director at Aon, who resigned with several other senior executives on June 13, 2011 to join Alliant. That same day, 38 Aon employees left Aon to join Alliant, and 15 Aon clients soon followed. In the ensuing few months, 60 employees in total resigned from Aon to join Alliant, and Aon received more than 100 broker of record letters from clients transferring more than $20 million in revenue from Aon to Alliant.

After issuing temporary restraining orders in September and October 2011, the Court held a two day preliminary injunction hearing in November 2011, and in December 2011 issued its preliminary injunction, barring Mr. Cusack, Alliant, and other former Aon employees who were subject to restrictive covenants from, during the pendency of the litigation, (1) soliciting business or entering into any business relationship with any Aon client on whose account they worked, or (2) soliciting any Aon Construction Services Group employees to work for Alliant.

The substantial scope of the damage suffered by Aon provided the basis for the Court’s finding of irreparable harm. The Court found credible Aon’s assertions that “the loss of 60 employees and dozens of clients doing business with [Aon] in hundreds of lines of insurance and surety harms Aon’s goodwill, reputation in the marketplace with its clients and prospects, and relations with its remaining employees, because it causes clients to question Aon’s ability to service the business” and that competitors would be encouraged to solicit Aon’s employees, clients and prospects because they believe Aon to be “wounded.” Aon also argued, credibly to the Court, that monetary damages could not compensate for the loss of expertise and relationships of both employees and clients suffered by Aon, and that it was impossible to put a value on the loss of 60 Aon employees in one week.

A company that has been raided and is seeking an injunction sometimes hesitates to articulate in court filings the true extent of damage to its business, for fear that it will suffer reputational harm in the marketplace. If, however, the damage is already well-known and the loss of marketplace confidence is clear, a comprehensive recounting of such facts could help to secure some relief from a court as the company tries to rebuild its business, as shown by this recent court New York decision.
 

In a recent decision in the matter Alliance Bernstein, L.P. v. William Clements, the Supreme Court of the State of New York, New York County (Justice Louis B. York), enjoined a former employee of AllianceBernstein, L.P. (“AllianceBernstein”) from working for a competitor for 60 days, pursuant to a provision in an agreement requiring the individual to provide 60 days notice of his intention to resign. Although the original 60 days extending from the date of his resignation had already elapsed, the Court in effect granted a new 60 day period of non-competition, because the individual had started working for the competitor immediately upon his resignation from AllianceBernstein.

The facts as set forth in the decision were that the defendant individual, a California resident, had no experience in the securities industry when first hired, but AllianceBernstein gave him extensive training and paid for his registration with various securities exchanges. He then became a successful financial advisor. In 2009, AllianceBernstein and the defendant entered into an extensive incentive plan, in which defendant promised (a) to give 60 days notice of his resignation, (b) not to solicit clients or employees of AllianceBernstein during those 60 days, and (c) to keep permanently the confidentiality of AllianceBernstein’s trade secrets and confidential information.

Later, defendant resigned and immediately began working for a competing company, Barclays Global Wealth Management (“Barclays”). On that same day, Barclays sent an email to AllianceBernstein clients informing them of defendant’s change of employment.

Rejecting defendant’s argument that is was Barclays and not him who sent the email, the Court asked “Where did Barclays get these [client] lists, if not from defendant?” and issued a preliminary injunction restraining defendant during a new 60 day period from (a) engaging in any activities or being employed in competition with AllianceBernstein, (b) soliciting clients or employees of AllianceBernstein, or (c) using, copying or sharing the client lists of AllianceBernstein. The injunction was issued even though defendant had been employed at Barclays for more than 60 days. The Court also rejected defendant’s arguments that the matter should be heard in a California court and should be subject to arbitration. The incentive plan included provisions requiring the matter to be heard in a New York court, subject to New York law.

This decision is noteworthy as an example of a court enforcing a provision requiring employees to provide notice of their intention to resign and, further, doing so by enforcing the full notice period despite the expiration of the original notice period which was ignored.
 

In an article published in yesterday’s New York Law Journal (December 22, 2010, New York Law Journal, p.4 (col. 4), Nonhire Agreements as Antitrust Violations), we discuss a complaint filed in September 2010 by the Department of Justice ("DOJ") against Adobe Systems, Inc., Apple Inc., Google Inc., Intel Corporation, Intuit, Inc., and Pixar, which alleges that those companies entered into various bilateral agreements in which they agreed not to actively solicit each other’s highly skilled technical employees, and that those agreements violated Section 1 of the Sherman Act, 15 U.S.C. § 1. Calling such agreements “facially anticompetitive,” the DOJ alleged that such concerted behavior both reduced the companies’ ability to compete for employees and disrupted the normal price-setting mechanisms that apply in the labor arena. At the same time that it filed the Complaint, the DOJ filed a proposed Final Judgment, Stipulation and Competitive Impact Statement, effectively announcing the settlement of its claims, by which the defendant companies would agree to refrain from entering into similar agreements in the future.

On December 21, 2010, the DOJ filed a similar complaint against Lucasfilm Ltd., alleging that company agreed with Pixar to restrict certain employee recruiting practices. The DOJ also filed a Competitive Impact Statement in the Lucasfilm matter, in connection with a proposed settlement that would restrict Lucasfilm from agreeing with any person to refrain from cold-calling, soliciting, recruiting or otherwise competing for the employees of the other person.

Legal practitioners thus should be aware that a corporate client entering into mutual non-solicitation and non-hire agreements with certain competitors, seeking relief from those competitors’ efforts to recruit away its employees, could expose the company to unwanted interest and even prosecution by governmental authorities under the antitrust laws. In most cases, particularly for large, high-profile corporate clients operating in a concentrated market, this quick fix should be avoided. There are a few legitimate business reasons that could support a “no direct solicitation provision,” and these are discussed further in our New York Law Journal article on the prior DOJ suit.
 

We previously wrote concerning a May 22, 2009 temporary restraining order (“TRO”) granted by the U.S. District Court for the Southern District of Ohio against three former employees of UBS Financial Services Inc. (“UBS”), in effect pending an arbitration hearing before the Financial Industry Regulatory Authority (“FINRA”).

Under FINRA rules, a hearing on UBS’ requested injunctive relief would need to be held within 15 days of the date of the TRO, May 22, 2009.

Prior to that arbitration hearing, on June 3, 2009, UBS moved the District Court to expand the TRO and for a preliminary injunction on the basis of additional evidence, as detailed in UBS’ motion. On May 27, 2009, the individual defendants returned to UBS ten large plastic storage bins containing original hardcopy working files they removed from UBS, two laptop computers, a USB flash drive and other documents. The plastic storage bins alone contained roughly 350 original client files for customers the defendants serviced at UBS as well as prospects. These client files contained such sensitive information as original client contact notes and reports, client investment objectives, account numbers, social security numbers, legal documents such as powers of attorney, trust instruments, and several original signed client documents.

On the basis of UBS’ motion, the District Court granted UBS an expanded TRO. Where the earlier TRO enjoined defendants Timothy Lofton and Kyle Poland from soliciting business or otherwise initiating contact with any accounts transferred to them upon the retirement of defendant Shawn Anderson, the expanded TRO extended those prohibitions to any client of UBS whom they served or whose name became known to them while in the employ of UBS, and further prohibited them from any contact or communication with any client of UBS whose records or information they used in violation of their agreements with UBS and/or applicable Ohio law. The expanded TRO also barred Lofton and Poland from disclosing, transmitting, or destroying the information contained in the records of UBS or concerning its clients.

Also, where the previous TRO had called for all customer information in electronic form in defendants’ custody to be deleted by a “computer consultant agreed to by the parties,” the expanded TRO called for such deletion by a “UBS representative.”

The expanded TRO shows that even a plaintiff who has secured temporary injunctive relief from a court need not wait for a scheduled FINRA injunctive hearing if its business interests continue to be threatened in the interim.
 

A recent article in Lawyer USA discusses how litigation over noncompetition and nonsolicitation agreements has been on the rise in recent years. Currently, when employers’ most valuable assets are their people and ideas, and the spread of technology has lead to increased concerns regarding theft of confidential information, employers have dramatically stepped up their use of noncompetition agreements to limit what departing employees can do.

A dispute between UBS Financial Services Inc. (“UBS”) and three of its former brokers highlights various issues involving trade secrets and non-solicitation covenants in the financial services industry. UBS sued the three brokers after they were hired by Morgan Stanley, accusing the brokers of stealing confidential customer information and trying to steal customer accounts assigned to them while they worked at UBS, in breach of nonsolicitation and nondisclosure covenants contained in the brokers’ agreements with UBS.

On May 22, 2009, on UBS’s motion in UBS Financial Services Inc. v. Lofton, Case No. 1:09 CV 367, the U.S. District Court for the Southern District of Ohio entered a temporary restraining order prohibiting the three individuals from soliciting any securities investment business from UBS customers pending an arbitration hearing before the Financial Industry Regulatory Authority (“FINRA”).

The three brokers were Timothy Lofton, Kyle Poland and Shawn Anderson. Anderson retired from UBS around January 2008. In connection with his retirement, Anderson entered into an agreement with UBS whereby the customer accounts he had serviced were transferred to Lofton and Poland, and Anderson received an income stream on those accounts for some period, as well as forgiveness by UBS of an outstanding employee loan. Anderson also agreed not to solicit or refer those customer accounts away from UBS. At the same time, Lofton and Poland entered into agreements with UBS granting them commission revenues from the transferred accounts and obliging Lofton and Poland not to solicit such customer accounts or to disclose customer information upon their departure from UBS.

On May 19, 2009, Lofton and Poland resigned from UBS without prior notice, and they were found not to be “good leavers.” Although reminded of their nonsolicitation obligations in a brief exit interview, Lofton and Poland apparently paid no heed. Indeed, it seems they already had orchestrated a raid upon the UBS customers. UBS alleges that within 20 minutes after Lofton and Poland left the UBS branch office, and before their securities licenses had been transferred over to Morgan Stanley, UBS customers began receiving automated phone calls from Lofton advising of his and Poland’s resignation from UBS and their new employment with Morgan Stanley. UBS also alleges that many customers received account transfer forms by mail on May 19, 2009, meaning those forms had been mailed out prior to Lofton and Poland’s resignation. Apparently, Anderson came out of retirement to join Morgan Stanley at that time as well.

UBS also alleges that when they resigned, Lofton and Poland provided UBS with defective lists of the customers they had serviced for UBS. In accordance with the Protocol for Broker Recruiting (a forbearance agreement among numerous securities brokerage firms, including UBS and Morgan Stanley, which provides guidelines that, if followed, permit financial advisors to take a limited client contact list when transitioning to a new firm), Lofton and Poland were required to leave customer lists with their UBS branch manager upon their termination. UBS alleges, however, that the lists they left contained only addresses and phone numbers, not customer names. They did not provide corrected lists until after the close of business on May 19.

In any event, Lofton and Poland would not have been allowed to solicit the customer accounts previously transferred from Anderson to Lofton and Poland in January 2008. The Protocol for Broker Recruiting expressly excludes from its coverage accounts introduced to a financial advisor pursuant to a retiring financial advisor agreement.

Given the findings of deliberate and egregious conduct of the individual brokers, the Court granted the temporary restraining order sought by UBS, pending an expedited hearing at FINRA.