Victor Petrescu, Partner, Levine Kellogg Lehman Schneider + Grossman, Miami

In 2004, a number of brokerage firms entered into an agreement that set standards for how they would treat brokers and financial advisers who left their old firms for competing firms.  The purpose of this agreement, known as the "protocol" or "broker protocol" was, in part, to provide departing brokers and their new employers with clear guidelines they could follow to avoid legal retaliation from the broker's former employer upon the broker's moving firms.  Recently, a number of firms—including large players such as Morgan Stanley, UBS and Citigroup—have left the protocol, resulting in increased litigation between brokerage firms when a departing broker leaves their old firm for a competitor.

Departing brokers who leave their former firms are subject to detailed noncompete and nonsolicitation agreements which often prohibit brokers from contacting former clients whom they serviced while at their former firm. The scope, enforceability, and applicability of these noncompete and nonsolicitation agreements can be confusing. The extent to which departing brokers can contact or communicate with former clients after departing their former firm is highly dependent on the wording of these agreements and a broker's breach of these agreements can subject their new employer to legal liability.

What can a prospective brokerage firm do to ensure it minimizes its liability exposure when hiring a broker from a competing firm?

The most important measures a prospective employer can take are preventative. Immediately upon agreeing to hire a broker, the employer should urge the broker to provide their former employer's employment agreement and familiarize themselves with the noncompete and nonsolicitation language included therein. That employment agreement will likely prohibit the departing broker from taking their former employer's "confidential information," a term which is often broadly defined to include all files and documents containing the contact information of the broker's former clients. In that case, the departing broker should be instructed not to take any property or materials belonging to their former employer when departing, including spreadsheets, lists, or similar documents containing client contact information the broker themselves may have created and utilized while working for their former employer.

A brokerage firm should instruct newly hired brokers to keep a contemporaneous log of communications the broker has with any clients they serviced while at their former firm. Oftentimes, the lines between a broker's social contact and professional contact with a former client can blur.  Brokers who are closely involved with their clients' financial planning often form longstanding personal relationships with clients. Accordingly, the brokerage firm should ensure their newly hired broker is clear on what they can and cannot say to former clients. Oftentimes, noncompete agreements place limits on initiating contact with former clients but may not limit a broker from responding to former clients' communications or fielding former clients' own questions regarding the broker's new employer and its financial products.

A brokerage firm and their newly hired broker should also be familiar with what falls within an employment agreement's definition of "solicitation." An employment agreement's bar on solicitation may not necessarily preclude the broker from contacting former clients to announce a change in employment. A number of courts addressing the legal issue of what does and does not constitute solicitation have recognized the public's interest in choosing their financial adviser cuts against a prohibitive reading of noncompete and nonsolicitation agreements, and have concluded that a broker's contacting a client to announce a change in employment does not necessarily constitute solicitation. Employers and their new hires should consult with an attorney who specializes in employment law to determine what options they have available to them.

If they do get sued, brokerage firms and their new hires should make sure they are litigating in the right forum. Often, a broker's former employer will file a complaint in state or federal court seeking injunctive relief preventing the newly hired broker from contacting former clients, but the complaint may also include damages claims against the broker or their new employer.  Usually, these damages claims will need to be arbitrated by the Financial Industry Regulatory Authority (FINRA) rather than litigated. Likewise, the former employer's filing of a FINRA arbitration claim is a prerequisite to the former employer's maintaining a legal action to seek temporary injunctive relief. A broker and their new employer should check that the former employer has complied with such necessary prerequisites for filing suit. Finally, to the extent a temporary restraining order or preliminary injunction pending arbitration is sought, the broker and their new employer should ensure the former employer offers sufficient evidence to meet the legal standard necessary to allow the court to issue such an order. Oftentimes, a former employer will rely on affidavit evidence that contains hearsay or that does not specifically identify the clients being solicited and may not be sufficient to meet the former employer's evidentiary burden. Again, employers should consult with an attorney who specializes in employment law to determine their best course of action.

Victor Petrescu is a partner with Levine Kellogg Lehman Schneider + Grossman in Miami. He focuses on complex commercial litigation.