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

For noncompete and trade secret lawyers in the healthcare industry, the recent Michigan Court of Appeals case of Isidore Steiner, DPM v. Bonanni highlights the importance of understanding applicable state privacy laws as well as the federal Health Insurance Portability and Accountability Act (HIPAA).

In Steiner, the plaintiff claimed that the defendant (a former employee) stole its patients after separating employment. The plaintiff moved to compel the former employee to provide his patient list in discovery, but the trial court denied the motion. Even though the plaintiff claimed it needed the patient list to prove elements of its case and the amount of damages, the Court of Appeals subsequently affirmed. The Court of Appeals reasoned that, while HIPAA asserts supremacy over state law, it allows for the application of state law regarding physician-patient privilege if the state law is more protective of patients’ privacy rights. The Court then observed that, unlike HIPAA, Michigan’s law does not provide for disclosure in judicial proceedings, does not authorize disclosure under a qualified protective order, and protects the mere existence of a physician-patient relationship from disclosure. Thus, the Court held that Michigan’s privacy law was more restrictive than HIPAA, that it applied, and that it protected the names addresses, and telephone numbers of the defendant’s patients from disclosure.

Be sure to understand applicable state privacy laws in addition to HIPAA when analyzing your ability to obtain information in discovery to prove liability and damages.

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.