Broker Protocol: What Exactly is a Raiding Claim?

Brian J. Sommer 

By following the Protocol for Broker Recruiting (the "Protocol"), a departing financial advisor can reasonably expect to solicit their former clients without the threat of their former firm filing an injunction to stop the solicitations - provided, of course, that either the advisor's old firm, or their new firm, or both firms are Protocol signatories. However, contrary to what many think, compliance with the Protocol does not eliminate the threat of all legal action against the departing advisor because Protocol signatories have expressly reserved the right to pursue raiding claims. Consequently, advisors - and more likely a team of advisors - can be sued by their former firm regardless of their Protocol compliance.

What then is a raiding claim and under what circumstances does a financial advisor or a group/team of advisors need to worry about a raiding claim being brought against them?

First, raiding is not an independent, freestanding cause of action. Rather, for pleading purposes, a raiding claim must be brought as a breach of contract claim, a tortious interference with a contractual relationship claim, a breach of a fiduciary duty claim, and/or a theft of trade secrets claim. Next, raiding claims are unlikely when only one individual financial advisor is moving from one firm to another as the former firm's size allows it to absorb the loss of one advisor's book of business. On the other hand, as a general rule, a raiding lawsuit is much more likely when a whole group or team of producers is recruited to leave one firm by another firm as the impact to the former firm is greater and thus more devastating.

So what can advisors and the firms recruiting them do to manage the risk of a raiding lawsuit?

At the outset, advisors need to review their agreements with their current firm for non-solicitation language that bars them from (a) soliciting other employees to join with them in transferring to a competitor and/or (b) soliciting client accounts that were assigned to them by the firm. If such language exists in their agreements, it is advisable to have counsel analyze in order to determine whether it is legally enforceable and, if so, and, if possible, how to avoid triggering liability for violating such provisions.

Next, if the desire to change firms is even partially motivated by grievances about the current work environment, then it is worth considering discussing those grievances with current management in order to effect change. In the event that the grievances are discussed but the advisor's current firm does nothing to address them, having documented an attempt to raise and resolve any grievances will help support both a number of affirmative defenses against any raiding claim as well as certain counterclaims.

Finally, complete compliance with the Protocol is necessary. By making sure that all members of the departing team do not take any client information beyond what the Protocol allows, advisors can avoid certain kinds of claims being filed against them such as theft of trade secret, breach of duty of loyalty, and some kinds of breach of contract. Alternatively, Protocol compliance creates a compelling defense to such claims should they be filed by the former firm.

But more than these steps, and others that can be taken, it is absolutely critical for teams or groups of advisors planning to move together work with counsel to be proactive in order to avoid or at least minimize raiding lawsuits.

This material is for informational purposes only.  It is not and should not be solely relied on as legal advice in dealing with any specific situation.

The Broker Protocol is No Release from a Non-Compete Agreement

Brian J. Sommer

Strict adherence to the Broker Protocol is not a complete shield from a lawsuit. This is because signatories to the Broker Protocol retain the right to bring raiding claims. Raiding is not, however, one particular claim. Rather, it is an umbrella term encompassing a number of claims including claims for breaches of non-compete agreements.

Historically, Courts have weighed a number of factors when determining whether or not to enforce a non-compete agreement, one of them being whether or not the non-compete agreement is reasonably necessary to protect the employer's legitimate business interests. In particular, courts assess an employee's access to confidential and proprietary information. Because such information gives a company its competitive advantage, courts will consider how an employee's knowledge of company information, such as corporate strategy, new technologies, or customer lists, may negatively impact the employer's business. 



Other factors historically weighed by Courts include whether there was consideration for the non-compete either in the form of a new job, or for existing employees, some additional payment, such as a bonus or stock options, and/or a promotion, and whether the non-compete agreement is reasonable in terms of length and geography in light of the employee's position as well as the nature of the employer's business. For example, a court might consider an agreement that prohibits a lead product engineer from working for a competitor within a 100 mile radius of the employer's office for two years to be reasonable, but a clause that prevents a receptionist from working for any competitor nationwide for 10 years is likely to be determined to be too restrictive.



In addition to these factors, more recently Courts have begun to consider the employee's specific circumstances and, in particular, the negative impact of enforcement will have on them as part of the deliberations. For example, courts may be less inclined to enforce a non-compete on a highly specialized, sixty (60) year old who is unlikely to be able to start anew in another industry or on employees who are the sole means of income for their family and thus have neither the time nor the money to wait out the agreement. 



Thus, before departing, it is best practice for advisors to review their employment agreements for language settling for any restrictions on where, when, and under what circumstances, they can work for a competitors. If such language is in their agreement, advisors would be wise to consult with a lawyer about enforceability against their event options, if any, the advisor has.



Separately, employers of financial advisors need to be mindful that Courts will consider a departing advisor's circumstances when deciding whether or not to enforce a non-compete agreement.