Non-Solicit/Non-Compete, Corporate Raiding and Broker Protocol Matters

In 2004, after many years of costly arbitration and litigation relating to "corporate raiding" issues or disputes over the movement of brokers and customers from firm to firm, Merrill Lynch, Smith Barney and UBS created among themselves " The Protocol for Broker Recruiting," or " The Protocol." Now, more than 400 firms are members of The Protocol, which was intended to decrease the costs associated with legal action as brokers changed employers. Broker-dealer and RIA members of The Protocol and their employees are afforded some protection from the filing of claims in courts or before arbitration panels as they move themselves and their clients to new employers who are also Protocol members. However, The Protocol requires strict compliance with its terms and does not bar member firms from bringing good faith claims for corporate raiding.

Handling corporate raiding matters in Michigan, Florida and nationwide.

What Constitutes Corporate Raiding?

Unlike "churning," a cause of action found in many customer disputes with brokerage firms, corporate raiding is not so clearly defined. In practice before the courts and FINRA arbitration panels, corporate raiding is a concept intensively and aggressively litigated. Some legal practitioners view it as an independent cause of action while others see it as an aggravating factor enhancing damages in cases in which claimants would have to prove other more familiar causes of action such as tortious interference with contract, misappropriation of trade secrets or breach of fiduciary duty.

Legal practitioners dealing with corporate raiding issues appear split on whether it is a matter of sheer number of employees hired away, numbers plus what is considered "malice" or "predation," or numbers plus "malice, predation and improper means." All would likely agree that where the number of employees hired away is so significant as to inflict severe economic harm on the competitor's business, that "raiding" may be inferred, and factors of predation, or malice, if apparent to the adjudicator through the discovery, would translate into permanent injunctive relief and possible damages as well. Questions as to "head count versus production," "creeping raids" in which brokers are gradually hired away over extended periods of time, and "star producer" or "branch manager" involvement, to name a few, also play a role in these cases and outcomes for firms and brokers.

Many firms joining The Protocol consider its apparent protections worth foregoing opportunities to seek redress before FINRA panels or elsewhere. Others join it on a limited basis, only signing up a segment or division of their overall business. The issue for many signatories is whether the trade-off is worthwhile. Smaller broker-dealers often find that larger firms have a clear advantage in this arrangement. The smaller firms may feel that the larger firms, which are "first among equals" enjoy protections under The Protocol against lawsuits while the smaller firms lose personnel and customers while having little or sometimes no recourse. It is possible for larger firms that have signed The Protocol who take employees from smaller firms that have not signed to find themselves on the losing end of a David and Goliath scenario.

Should My Firm Join The Protocol?

The Michigan non-compete agreement defense attorneys at Hertz Schram PC, who have brought firms into The Protocol and who have handled numerous matters involving it, can advise you on the pros and cons of what can be a financially significant decision. While there are no fees to join, and withdrawal only requires 10 days' prior notice, membership does affect your rights. While good faith corporate raiding claims are not waived by The Protocol, membership can often give adjudicators, including FINRA arbitration panels, a different impression.

Hertz Schram PC attorneys also have extensive experience in helping brokerages, both signatories and non-members of The Protocol, protect their businesses through FINRA arbitration and in the court system in cases of corporate raiding. Our nationwide non-solicitation agreement defense attorneys have served firms and brokers on both sides of these conflicts, successfully representing claimants and respondents alike.

How Are Corporate Raiding Matters Handled?

Generally when a broker leaves his or her firm, the firm will send a cease-and-desist letter reminding the broker of obligations set forth in any non-solicitation agreement, usually found within the broker's employment contract. If the firm believes that the broker is not adhering to the terms of his or her agreement, it will seek a temporary restraining order (TRO) in either a federal or state court, per FINRA Rule 13804, which requires that the TRO be sought "in any court of competent jurisdiction." If granted by a judge, the TRO prohibits the broker from soliciting customers to join him or her at the new firm pending a permanent injunction, among other things. Usually within 10 to 15 days after a TRO is issued, FINRA assembles an arbitration panel to hear arguments from any interested parties for or against permanent injunctive relief. After the Rule 13804 permanent injunctive hearing decision, the arbitration panel schedules the case for a damages hearing, if necessary.

What Is a Broker Allowed to Take Under The Protocol?

Brokers may take client names, account names or "name plates," addresses, phone numbers and e-mail addresses with them.

What Is a Broker Not Allowed to Take Under The Protocol?

Brokers are not allowed to take client Social Security or account numbers, any information regarding firm customers who were not their clients, any holding pages, monthly statements, or other client or firm customer documents not listed above. It is also critical that brokers not pre-solicit accounts before they formally resign from their existing firm.

Other Issues to Consider in Non-Solicitation/Non-Compete Matters

Brokers either not adhering to their non-solicitation agreements or other components of their employment contracts, or who ignore their obligations as well as the terms and protections afforded to them by The Protocol run the risk not only of permanent injunction by a FINRA arbitration panel and possible award of damages, but also of Form U-5 entries, which are justifiably negative, and which may be difficult if not impossible to expunge.

Firms must consider how best to approach possible instances of raiding in protecting their business and customer relationships, balanced against the rights of brokers and/or other firms, whether or not they have signed The Protocol. Whether a firm is a signatory or not will affect its ability to pursue its rights against those that have signed. The attorneys at Hertz Schram PC can help you successfully navigate this increasingly complex area of the securities business.

The Hertz Schram PC Securities Team routinely counsels transferring registered representatives to advise them of the requirements of The Protocol. Such representation and advice can help to protect the individual registered representatives as well as the hiring firm from claims of Protocol violations. In addition, brokerage firms that retain the Hertz Schram PC Securities Team regularly refer prospective hires for guidance on this complex transition process.

Call for an Initial Consultation

Contact our office today to discuss your non-solicit/non-compete questions with one of our lawyers. You can reach our firm by phone at 248-494-4486 or via e-mail.