A recent ruling of the Idaho Federal District Court is a sobering reminder that while the protections of the Protocol for Broker Recruiting mitigate some risks for transitioning brokers, there are still dark, deep and potentially dangerous waters when it comes to soliciting fellow employees to make the leap as well.
The Protocol provides relief from traditional non-solicitation provisions of employment agreements as to clients and provides for five data points that can be taken upon resignation to facilitate the solicitation of those clients. While the Protocol has been portrayed as a panacea for all that worries breakaway brokers – a veritable “get out of jail card,” it does have real limitations. Chief among them are that it does not provide relief from other types of contractual arrangements between the broker and their former firm and it does not limit a firm’s ability to make a “raiding” claim after a broker leaves even if the Protocol was properly followed.
“Raiding” typically refers to situations where a firm has successfully recruited employees from a competitor, but has overstepped the bounds of fair and lawful competition in some way. Unfortunately, there is no bright line test for when recruitment crosses the line to raiding. As such, even when the Protocol is carefully followed, raiding claims remain a risk, particularly where brokers make up more than half the revenue of their branch, as was the case with the Idaho team. It’s this lack of a specific definition that makes raiding a worrisome concept for potential breakaway brokers trying to measure their departure risks.
The recent action by MSSB (in Morgan Stanley Smith Barney, LLC (“MSSB”) v. Armon, Scharenberg and Gerber) may signal a trend of firms making increased use of raiding claims when a big team departs. Raiding, however, was never mentioned in the MSSB lawsuit. In fact, MSSB took the path of less resistance and did not take any action against the “raider,” Stifel Nicolaus & Co., the firm the brokers were joining. Instead, MSSB turned its sights on the brokers; claiming that: a) they took too much information and solicited clients prior to resigning in violation of the Protocol’s rules; and b) the branch manager solicited the departure of employees in violation of his own employment contract with MSSB. The Idaho Federal Judge denied much of the relief requested by MSSB, but issued an order to the brokers to return information not permitted for under the Protocol and a cease and desist as to the former branch manager, the only one of the three defendants who had expressly agreed not to solicit employees of MSSB.
This case is just another where breaches of the Protocol provide fertile ground for disputes, and contractual restrictions prohibiting solicitation of fellow colleagues remain an area to be enforced against departing brokers. But there are lessons to be learned here:
1.For all of its uncertainty, raiding is still rarely used by most wirehouses. Inconsistent interpretations on what constitutes raiding leave unpredictable outcomes.
2. Client data should be limited to the information that the Protocol specifically permits. By taking extraneous documents, brokers risk losing its protections.
3. The Protocol provides relief from restrictions on soliciting former clients. But promissory notes, restrictions on soliciting former employees / colleagues, training agreements and other contractual responsibilities remain enforceable.
So, this was really a Protocol enforcement and breach of contract case and does not signal a shift towards an increased prevalence of raiding claims. Taken along with the line of cases it follows, there remains a well-travelled path for brokers using the Broker Protocol for their departure to mitigate the risk along the way.