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