Control over client relationships has long been a battleground within the securities industry. Firms have increasingly sought to exercise control over any and all information regarding securities clients and their accounts. The utilization of restrictive employment agreements between firms and the investment professionals they employ has become so commonplace as to be almost universal throughout the industry. While many classify these agreements as simply “non-competes,” there are usually multiple restrictive provisions in the same employment agreement that can have different effects on a former employee’s ability to conduct future business. It is important for investment professionals to understand these different restrictions, and the potential effects each type of provision can have on their livelihoods.

“Non-Compete” Provisions

A non-competition provision restricts a former employee from the simple act of engaging in a similar business or activity as that of the former employer. For example, an agreement might state that a former employee agrees that he or she “may not engage in the sale of securities or financial products in a 100-mile radius from the former employee’s branch office for a period of three (3) years.” Almost all non-compete provisions feature both a geographic (spatial) restriction and a time (temporal) restriction.

A non-compete is a very broad prohibition on any activities that may be related to the business in which the former employee was engaged with the former employer. It is important to understand that it does not simply apply to any customers or prospective customers that the departing representative was servicing during his or her time with the employer. It intends to prevent the former employee from competing against the employer with any customers, either old or new, by engaging in the same or similar business activities as the employee did with the former employer.

Because a broadly drafted non-compete provision can have such an enormous impact on an individual’s livelihood and on healthy business competition, courts are generally hesitant to enforce non-compete provisions. That does not mean any non-compete provision will not “hold up” in a court or FINRA arbitration, however. Depending on the law in a particular state, a court may be permitted to “blue pencil” or revise a non-compete provision that the court considers to be overly restrictive. Going back to the previous example, the court may find that a 100-mile radius and a three (3) year time period impose too much of a burden on the former employee, and go too far in stifling fair business competition. So, the court may “blue pencil” the contract at issue so that the non-compete features only a 50-mile radius and a one year time period.

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Plan Ahead and Protect Your Interests

Many investment professionals do not fully comprehend the dramatic impact that a restrictive covenant can have on their books of business and their careers. They often assume that because things seem great at the time they are hired, their interests and the new firm’s interests will never diverge. Some firms believe that their employment agreements will always be enforceable, whatever their terms may be, and they do not properly consider the cost of actually enforcing the provisions. It is important that the investment professional and the firm each have their own counsel to advise them on issues involved, and to assist in the negotiation process. Using some foresight in drafting such agreements can result in less cost and frustration for both parties if (or when) the investment professional decides to move on.

Gaddy Geiger & Brown is a trial firm offering a unique blend of energy, strategy and courtroom experience. To contact to a Kansas City business dispute lawyer, Kansas City white collar criminal defense attorney, or Kansas city appeals attorney visit http://www.ggbtrial.com.

Enforcement of Restrictive Employment Provisions

In conjunction with provisions regarding competition, solicitation, and confidentiality, most restrictive employment agreements will include language regarding the enforcement of those provisions. Specifically, most agreements state that a representative agrees that, in the event the representative breaches the agreement, the former employer will have suffered “irreparable harm” and will be entitled to preliminary injunctive relief. Irreparable harm is a prerequisite for a court’s determination that the former employer is entitled to an injunction (or court order) against the former employee that prevents the employee from competing, soliciting clients or employees, and/or using any confidential information of the employer.

If a firm believes that a former representative may have violated one or more provisions of an employment agreement, it will often send what is known as a “cease and desist” letter demanding that the former employee immediately stop any activities prohibited by the agreement. Many times, either directly after sending such a letter or without even doing so, the firm will retain an attorney to seek a temporary restraining order in the appropriate local court.

A temporary restraining order (TRO) is an emergency remedy that an allegedly harmed party can seek to protect its interest and maintain the status quo. Due to the “emergency” nature of the requested legal relief, courts may (and usually do) issue TRO’s without hearing from the defending party (in this case the former employee). As indicated by its name, however, a TRO is not a permanent prohibition, and only remains in effect until such time as the court has an opportunity to hear from both parties regarding the next stage of the injunctive relief process, the preliminary injunction.

If the court grants a party’s request for preliminary injunctive relief, the injunction generally remains in effect through the remainder of the litigation, and it may be eliminated, altered, or extended into a permanent injunction. If the former firm is a FINRA member (i.e. a broker-dealer) and the former employee is an associated person (i.e. a registered representative) under FINRA Rules, then the parties are required to arbitrate their dispute through FINRA Dispute Resolution (arbitration). This means that the firm will have to file a concurrent arbitration claim with FINRA at the same time the firm files a complaint or petition in state or federal court.

FINRA Dispute Resolution is unable to hear claims for injunctive relief, so the parties must go before an appropriate local court to determine whether any injunction will be issued. After the preliminary injunction hearing, the dispute shifts from the local court to a FINRA arbitration panel formed regarding the arbitration claim. The FINRA arbitration panel will then have the opportunity to hear the remainder of the case, and award any monetary damages or permanent injunctive relief, if warranted.

Gaddy Geiger & Brown is a trial firm offering a unique blend of energy, strategy and courtroom experience. To contact to a Kansas City business dispute lawyer, Kansas City white collar criminal defense attorney, or Kansas city appeals attorney visit http://www.ggbtrial.com.

Confidential or Proprietary Information Provisions

Brokerage and advisory firms obtain and develop a large quantity of private and confidential information regarding their clients, products, compliance practices, and business methods. There is a great deal of regulation regarding the protection of client information, and firms have an interest in safeguarding certain information. To further that interest, they require their representatives to sign one or more documents acknowledging the confidentiality of certain information, and agreeing that the information is the property of the firm.

While the firm may be concerned about its responsibilities under Regulation S-P or the Gramm-Leach-Bliley Act, regulatory issues are not the firm’s only concern. A major motivation behind such clauses is to prevent a departing representative from taking information that may help them identify clients and the status of their accounts, their immediate investment needs, etc. when the representative leaves. Thus, the inclusion of such provisions is usually just as much for competitive reasons as it is to ensure compliance with information regulation.

Confidentiality provisions are also included in an effort to give certain information, such as client contact and account details, “trade secret” status for the firm. The overwhelming majority of states have adopted the Uniform Trade Secrets Act (or have a similar statute), which grants certain information special status as a “trade secret” if the information and circumstances surrounding its creation and safeguarding meet the statutory requirements. Assuming information does have trade secret status, then firms can include a claim for damages against a departing representative for “misappropriating” the information. This just means the former employee has taken the protected information without authorization and has used it for his or her own benefit.

Gaddy Geiger & Brown is a trial firm offering a unique blend of energy, strategy and courtroom experience. To contact to a Kansas City business dispute lawyer, Kansas City white collar criminal defense attorney, or Kansas city appeals attorney visit http://www.ggbtrial.com.

The key distinction between a non-competition provision and a non-solicitation provision is that a “non-solicit” attaches to specific customers or individuals. While there is also a time period during which the non-solicit is in effect, such a provision does not restrict an investment professional from continuing to engage in the same or similar business as his former employer. It simply keeps the representative from soliciting individuals in which the former firm claims a protectable interest.

Clients

Non-solicitation clauses are perhaps the most commonly contested provisions in an investment professional’s employment contract. Although the language in these clauses can vary, the intended effect of such a provision is to prohibit a departing representative from “soliciting” clients that he or she served while the representative was with the former firm. To be enforceable, there must be a specified time period during which the prohibition on solicitation will be in effect. These time periods are generally from six months to two years. The longer the time period, the less likely it will be that a court would uphold the provision.

Employees

In addition to non-solicitation clauses related to clients, many firms will also include a prohibition on the solicitation of firm employees by a departing representative. These are called “anti-raiding” provisions because they seek to prevent a former employee (or his new firm) from “raiding” the former firm’s other representatives or employees and recruiting them to join the new firm. Courts often recognize that a firm has an interest in protecting its ability to do future business by not having one departing employee effectively transfer over a significant portion of the firm’s employment roster to a competitor.

Gaddy Geiger & Brown is a trial firm offering a unique blend of energy, strategy and courtroom experience. To contact to a Kansas City business dispute lawyer, Kansas City white collar criminal defense attorney, or Kansas city appeals attorney visit http://www.ggbtrial.com.