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

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.
 

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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.

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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.
 

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