Brokerage firm Edward Jones has lost an effort to crack down on a departing financial advisor, and failed to prove that he was soliciting clients to move with him in violation of his employment contract.
U.S. District Court Judge for the Southern District of Indiana Sarah Evans Baker signed an order Thursday denying Edward Jones a temporary restraining order and preliminary injunction through which it had sought to keep John Kerr, a 20-year company veteran who left the firm’s Westfield, Ind., branch office in August, from his former Edward Jones clients. Kerr, who was forced to resign from Edward Jones, is now at independent wealth management firm Thurston Springer Financial in Indianapolis.
The order “protects every advisor’s right to earn a living after leaving his or her current firm,” said Brian Sweeney, Thurston Springer’s general counsel and chief compliance officer. “Judge Barker’s decision highlights that Edward Jones instituted these proceedings against Mr. Kerr with no evidence of wrongdoing. This comprehensive lack of evidence caused Edward Jones to abandon most of the claims before the Court, but not before Mr. Kerr suffered considerable financial and reputational harm.”
Sweeney accused Jones of “filing frivolous litigation in an attempt to harm advisors’ reputations, interrupt advisor client relationships, and impermissibly retain clients and assets when experienced advisors depart…for greener pastures.”
Edward Jones spokesman John G. Boul wrote in an email that the company "is disappointed in the outcome of the court proceedings. Further proceedings will now take place in arbitration before FINRA." The company's attorneys on the case declined comment on the ruling.
The judge said in the order that Edward Jones was largely unable to factually substantiate many of its claims, including that Kerr verbally asked his clients to come to his new firm, and that he sent clients solicitation packets with information about his new firm. The judge's order agrees that Jones was seeking the restraining order for "reputational harm" to the departing advisor, not to prevent the theft of company information.
Sharon Ash, chief litigation counsel at the Hamburger Law Firm, which was not involved in the dispute, said the decision was not precedent setting, and not particularly unusual; rather, Edward Jones just failed to rally the facts to prove its case. "Had they tapped the brake pedal before filing, they would have learned the dots did not connect in the way they thought," she said. "There are cases where a firm needs to send a message, and lawsuits are undoubtedly filed as part of a firm’s efforts to disparage a departed rep. But the outcome in this case, like every case in this area, was dictated by the underlying facts. The court repeatedly cited to the facts in this case, and specifically the lack thereof, as the basis for her decision."
At issue was whether a series of announcements Kerr made to former clients, informing them that he had left Edward Jones and naming the firm he was going to, was, in fact, a form of solicitation for those clients.
"The issue of when a communication becomes a solicitation is in a sense a “metaphysical” question, the answer to which turns out to be highly contextual," the judge wrote, ultimately deciding Kerr's announcement to clients that he was leaving was not asking those clients to come with him.
She added that Jones allows its own incoming reps to make such announcements.
Kerr asserts that “a substantial portion of the Westfield branch’s client base was generated from Mr. Kerr’s personal network in the community.” Yet the court order pointed out only $8.7 million of Kerr's $113 million book of business had transferred over to his new firm, and about 70% of that business was with individuals who had a "personal relationship" with Kerr who, it was claimed, proactively moved their accounts on their own.
According to his employment agreement with the firm, which was executed when he joined in 1998, it was understood and agreed that the identities of and information concerning the customers of Edward Jones are confidential information, constitute a trade secret, and are the sole and exclusive property of Edward Jones.
The agreement prohibits solicitation of Edward Jones’ clients for one year “if you contacted or dealt with such customer during the course of, or by reason of, your employment with Edward Jones or if the identity of such person was learned by you by reasons of your employment with Edward Jones.”
The two parties’ versions of what happened between them differ severely, and Jones failed to produce much evidence for its side, the judge said.
According to the order, the company alleged in its complaint that Kerr was facing “disciplinary issues” and was called to its St. Louis headquarters to be informed by human resources that he would be terminated. But the firm was unable to provide any details about the meeting or what the disciplinary issues were.
Edward Jones accused Kerr of “illicitly” printing out confidential client account information prior to that meeting in anticipation of being asked to resign, so he could take it to his new landing place, alleging that he “had worked for Edward Jones long enough to understand that a human resources meeting at headquarters was always a precursor to termination.”
Kerr countered that he was called to St. Louis after he returned from a business trip to Ireland on behalf of Edward Jones and found find that much of his client load had been reassigned; he assumed the St. Louis meeting was meant to resolve a dispute between himself and his long-time branch office administrator, Kennetta White. He had only printed out three client reports with the intention of discussing them with home office employees at the St. Louis meeting, had no knowledge he was to be fired, and that he subsequently destroyed the information. The order said Edward Jones claimed that discovery would “uncover e-mails between Mr. Kerr and Thurston discussing employment opportunities prior to the human resources meeting,” but was unable to produce any such evidence.
What’s more, Jones conceded it had no evidence Kerr “had retained or used the client reports following his resignation” and separately admitted that it had not accused Kerr of any “wrongful retention or use of Edward Jones information.”
"The real disappointment is that cases like this still happen," Ash said. FIrms do deploy strategies that seek to discredit departing reps, she said, including filing specious claims and regulatory red flags in the hopes of deterring clients from following. The Broker Protocal, in which brokerage firms voluntarily agreed to a kind of mutual cease fire when it came to using the courts to impede advisors moving between firms, and set common ground rules on what client information advisors could take with them when they left, has largely been abandoned.
Ash said the Securities and Exchange Commission could amend a current regulation to make the protocol law to keep clients out of the crossfire when firms and advisors clash, but has failed so far to do so. "The SEC has the power to put the choice squarely in the hands of the investors they profess to protect, so actions like this could no longer be used to block or even undermine client freedom of choice. Until then, the decision here will simply be added to the list of those cited in future cases."
