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Enforcing Non-Solicitation Agreements Against Financial Professionals: A Court Finds Financial Professionals Have a Duty to Notify Clients About a Change of Employment

A recent decision in Edward D. Jones & Co., LP v. John Kerr (S.D.In. 19-cv-03810  Nov. 14, 2019), illustrates the unique challenges that broker-dealers may face when enforcing post-employment covenants that prohibit former registered representatives (“RRs”) from soliciting clients. Edward Jones sued Kerr, a former RR, to enforce an employment contract that required him to return confidential information upon termination and prohibited him from “directly or indirectly” soliciting any Edward Jones’ client for a period of one year.  Although Kerr did not challenge the validity of the confidentiality and non-solicitation provisions, the court denied Edward Jones’ request for a temporary restraining order (“TRO”) because it found that RRs who change firms have a duty to notify clients of material changes to their accounts, which includes changes of employment.  The Kerr opinion provides a useful primer for financial firms seeking to enforce post-employment restrictive covenants.

From 1998 – 2019, Kerr was employed by Edward Jones.  Kerr’s employment ended during an August 1, 2019 meeting at which Kerr “was permitted to resign.”  Shortly before the August 1, 2019 meeting, Kerr printed confidential client reports.  Kerr claimed he printed the reports to prepare for the meeting and destroyed them after the meeting, but Edward Jones contended that Kerr printed the reports because he knew he was about to be terminated and used the documents to solicit clients.  On August 2, 2019, Kerr began working at another firm and notified clients by telephone that he had changed firms.  Kerr admitted that he mailed informational packets concerning his new firm to clients who requested additional information.  Edward Jones also contacted clients by telephone and letter to advise them that Kerr left Edward Jones and their accounts were being reassigned.  Edward Jones alleged that Kerr asked unidentified clients to transfer their accounts to his new firm.  In contrast, Kerr claimed that he did not ask any clients to transfer assets to his new firm, and submitted affidavits from eight clients who corroborated his version of events.

As noted above, Kerr did not challenge any provision of his employment contract. Instead, he claimed that both FINRA Rule 2273 and his fiduciary duty as a certified financial planner required him to notify clients that he had changed firms. He also claimed that he did not use any Edward Jones’ documents to contact the clients. Rule 2273 does not require firms or RRs to alert clients of a change in employment, but rather requires disclosures at the time of the  first post-change communication.  Nonetheless, the court accepted Kerr’s arguments and refused to issue a TRO.  The court’s analysis turned largely on its analysis of what constitutes an impermissible ‘indirect solicitation.’

The court rejected Edward Jones’ argument that an indirect solicitation includes “any initiated, target contact” with clients and, instead, defined an indirect solicitation as contacting a customer “to maintain and establish further goodwill as a basis for future benefits.”  Kerr recognized that courts are divided over whether an announcement of a change of employment – without more – constitutes an indirect solicitation.  Some courts have found that a personal communication announcing a change of employment constitutes an indirect solicitation because the customer would assume “the broker wishes him to transfer his account.”  Other courts have refused to find such announcements are solicitations because it would be unreasonable for broker-dealers to prohibit RRs from advising clients that they have changed firms.  Kerr found that whether an announcement amounts to a solicitation “is highly contextual,” and turns on “the defendant-employee’s intent when contacting former clients.”

The court identified a series of facts and circumstances that are relevant to determining whether an announcement constitutes a solicitation.  The court emphasized that Kerr had not used misappropriated information to contact clients and that he only “inform[ed] his former clients of his new employment.”  In addition, Kerr’s announcement was consistent with Edward Jones’ guidelines for newly hired RR’s communications with clients, and thus, the court concluded that announcements are standard practice in the financial service industry. The court also noted that many of the clients were Kerr’s “family and friends before they were ever Edward Jones’ clients.”  Finally, the court credited Kerr’s claim that he contacted his former clients only to satisfy his “fiduciary duty” to inform clients concerning “material changes to their accounts, which includes a change of financial advisor.”   The court, therefore, concluded that the announcement was not a solicitation.

The court then concluded that Edward Jones would not suffer irreparable harm without an injunction, and observed it was not necessary to address the balancing of harms before denying injunctive relief.  Nonetheless, the court observed that there is “judicial reluctance to restrict financial communications with their clients” because of the relationship of personal trust between clients and their financial advisors.  Although the court recognized that contractual non-solicitation provisions are enforceable against former RRs, it suggested that courts are reluctant to enjoin communications that merely advise clients that RRs have changed firms.

The Kerr decision does not address a firm’s ability to seek monetary damages and clearly reflects the facts of the case.  However, its conclusion — that RRs are obligated to inform clients of a change of employment – indicates that firms must prove actual solicitations or other misconduct as a prerequisite to obtaining injunctive relief.  In light of the upcoming June 2020 effective date of Regulation BI, which, as reported here, obligates firms and RRs to ‘act in the best interest of customers,’ courts may find Kerr persuasive when evaluating requests to enforce non-solicitation agreements.

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About this Author

Janene Marasciullo, Epstein Becker Law Firm, New York, Labor and Employment, Litigation Attorney
Member

Janene Marasciullo is a Member of the Firm in the Employment, Labor & Workforce Management and Litigation & Business Disputes practices, in the New York office of Epstein Becker Green. Ms. Marasciullo has extensive first-chair experience litigating complex commercial, fraud, regulatory, and employment disputes, with an emphasis on disputes arising within the financial industry. In addition, she represents corporations and individuals during regulatory investigations and grand jury investigations...

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