Q:

I joined a regional bank brokerage firm three years ago. When I hired on, I was asked to sign a nonsolicitation agreement. Eleven months later, at a cocktail party no less, I was asked to sign a revised version of the nonsolicitation, which included a “cannot do business” clause. Now, I am contemplating leaving the firm, and I fear my firm will move to enforce the agreement.

Some individuals who have left the firm have been pursued; others haven't. I don't have any idea of the rhyme or reason behind whom the firm goes after. Is such selective prosecution legal? Is there anything I can do to prepare myself prior to my departure to limit any future legal actions against me? If a client absolutely wants to do business with a broker, how can a firm or judge restrict the client?

A:

Your question raises several excellent questions and is very timely. First, a defense based on selective enforcement is almost never successful. A firm can choose to enforce its contract with one employee and, for its own reasons, decide not to enforce a similar contract against others.

As for the right of the client to do business with the broker of his or her choice, you are right. In fact, the NASD has passed a rule (IM 2110-7) that prohibits a member firm in a departing-broker dispute from even asking a court for an injunction that would in any way interfere with the transfer of an account. In adopting the rule, the NASD described the right of a customer to choose his or her broker as a “fundamental” one that should not be affected by the fact that the broker has changed firms.

Though the rule does not specifically outlaw pure noncompetition clauses, such as the one you have signed (I am not clear on whether the clause you signed is a pure noncompete that prevents you from working as a broker within a certain geographic area for a certain time, or if it is a promise not to accept or do business with your clients), it is highly unlikely that any arbitration panel of the NASD would grant such injunctive relief, because it would be so inconsistent with 2110-7. A busy judge might grant a temporary restraining order (TRO), but you would then be entitled to a hearing at the NASD within 15 days, and the panel would almost certainly lift any injunction that would prevent you from working as a broker or accepting business from your clients. A lot depends on what state you are in, since different states have different views of contracts that restrict someone's right to make a living.

Nonsolicitation provisions are another matter, and sometimes they do get enforced by arbitration panels, depending on the facts of the case. (How firms can justify these restrictions is beyond me, but sometimes arbitrators “buy” the notion that the client belongs to the firm.) But the landscape is changing there as well. Last month, Merrill Lynch, Smith Barney and UBS signed a protocol in which they agreed that as long as a broker took with him or her only a list of the names of his/her clients, their addresses, email addresses, phone numbers and account titles, then the broker was free to go to any other signatory firm and solicit his or her clients — even if he or she has signed a nonsolicitation agreement.

We are waiting to see how many other firms sign on to this protocol, but in terms of preparing to leave, you would be well advised to strictly adhere to the protocol standard, thus preserving the argument that you did nothing more than is generally accepted in the industry.

The best thing you can do, of course, is to spend a little money on your own legal counsel, who can walk you through the process and help you avoid mistakes that you might not even think about, and explore possible defenses to your contract, such as lack of consideration, fraudulent inducement and others that vary from state to state.

Dana Pescosolido
Saul Ewing LLP
Baltimore
410-332-8738
dpescosolido@saul.com

A:

Nonsolicitation agreements are commonplace in the brokerage industry. However, if you change firms and choose to contact clients, whether you will be pursued is a business decision that your former firm would have to make. Some firms have concluded that litigating these agreements has a chilling effect on future conduct and makes good sense in both the short and long term.

Remember that you are the one who has built a relationship of trust over the years with your customers. You've recommended suitable investments and monitored their portfolios. You've been there to answer questions and, sometimes, to hold hands.

The brokerage firm has no personal relationship with the customer, and they know that. So the firm will often do everything possible to prevent you from taking your customers with you when you leave. Letters and calls to customers from newly assigned brokers should be expected.

Keep in mind that noncompetition clauses must be limited in time and scope to be valid, and that many factors enter into the decision as to who will be sued. For example, if you have a small book or an inactive one, an action is less likely than if your book is large and active.

Nothing compels a firm to file against every departing employee. In other words, you may be sued upon leaving, while the broker who was in the next office might escape that fate, even though you both engaged in the same or similar conduct.

It is not clear from your question whether you actually signed the revised agreement. While much depends on the language, most “cannot do business” clauses are unenforceable. It is the threat of litigation that the firm is relying on to keep you away from the customers.

As to what you can do to prepare prior to your departure, that is easy to address. You would be wise to contact local counsel before, rather than after, you leave.

Philip M. Aidikoff
Aidikoff & Uhl
Beverly Hills, Calif.
310-274-0666
PAIDI@aol.com

Ethical Rep is a monthly feature in which more than 30 prominent securities attorneys, experts and law school professors help Rep. readers deal with work-related ethical quandaries. Have you encountered a situation at work that makes you uncomfortable? Are you confused about how your responsibilities to clients might change as regulations continue to evolve? Drop a line to Rep.'s contributing editor, Ann Therese Palmer, and our group of experts will help you work through the problem.

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