In the weeks since allegations began to surface regarding the sexually predatory behavior of movie mogul Harvey Weinstein, sexual harassment allegations (sometimes admitted and sometimes disputed) against powerful, prominent men have been a daily feature of the headlines, involving Oscar-winning actors, sitting and would-be senators, talk show hosts, and numerous other high profile figures. Allegations against the both the current President of the United States and one of his predecessors, while not new, have been the subject of renewed focus.
On social media, the “#MeToo” campaign has featured numerous women coming forward with their experiences as victims of sexual harassment. While the effect of these developments is still evolving, clearly there have been changes in how sexual harassment is perceived and understood, particularly when the alleged perpetrator is not only powerful, but famous. That being said, for an employer assessing potential liability, has the legal landscape for sexual harassment and related claims really changed all that much?
The impacts of this explosion of high profile episodes is potentially far reaching, even for employers far outside the political, entertainment, and media arenas where so many of the recent cases have emerged. Public awareness of sexual harassment issues in general is certainly more pronounced. In many (but not all) situations, the public has treated the allegations as credible, even when raised years or decades after the fact. Not surprisingly, there have also been downsides to the recent uproar, including regrettable attempts to blame or attack victims who have come forward. In one bizarre episode in connection with an ongoing political campaign, a woman apparently attempted to plant false allegations of harassment in the Washington Post, precisely so that they could be shown as false, thus undermining the credibility of the Post and, by implication, of other women whose accusations had earlier been reported there.
But for employers, whether they are high profile media outlets or corner drug stores, sexual harassment involves legal duties and the risk of liability if those duties are not met. Those duties haven’t really changed. The law governing sexual harassment has been developed in state and federal courts for several decades. While the law continues to evolve in certain areas, the basic legal framework and key procedural requirements are well-established. When an employer is actually sued for sexual harassment, those rules, including mundane boring procedural requirements, can be the key to winning or losing the case. Two recent decisions illustrate the fact that the old rules still apply:
In Tudor v. SE. Okla. State Univ., in the United States District Court for the Western District of Oklahoma, the plaintiff’s allegations implicated some cutting edge issues, but the case was decided using fundamental precepts of employment discrimination law. The plaintiff, a college professor, contended that Southeastern Oklahoma State denied her tenure application and then fired her because of her transgender status (she was transitioning from male to female). She also claimed that the University maintained a hostile environment, and that she was retaliated against for raising concerns in the first place.
The University moved for summary judgment, but the court denied the motion. First, regarding a hostile environment claim, the issue was whether the plaintiff alleged a sufficient number of incidents, with sufficient severity, to establish “a work environment permeated with intimidation and ridicule.” In other words, was the environment bad enough to support a legal claim? The plaintiff relied not only on sporadic insults and comments, but also on the fact that every day over the course of a four-year period she had restrictions on which restroom she could use, how she could dress, and what make-up she could wear. She also noted that administrators persisted in using a male pronoun to refer to her even after she considered herself to be female. The court found that that was sufficiently pervasive to survive summary judgment and preserve her hostile environment claims for trial. The court also rejected a defense based on plaintiff’s alleged failure to take advantage of preventive and corrective opportunities at the University. The plaintiff successfully countered this argument by noting that at the time, the University did not have policies prohibiting discrimination on the basis of transgender status. Therefore, there was no effective internal redress available to her.
The court also denied summary judgment on the plaintiff’s claim that the tenure denial and subsequent termination were discriminatory. The court had decided in a previous ruling that transgender status is protected under Title VII. In evaluating the evidence of discrimination, the court applied the familiar three-part framework: (1) plaintiff must demonstrate a prima facie case; (2) the employer must provide evidence of a legitimate non-discriminatory reason for the employment action; and (3) plaintiff must provide evidence that the asserted legitimate reason is actually a pretext for discrimination. The primary dispute concerned evidence of pretext, which the plaintiff satisfied by showing substantial procedural irregularities in the tenure decision, including a refusal to state reasons for the denial of tenure and use of a backdated letter to elaborate on rationales for the tenure denial.
Finally, with respect to the retaliation claim, the court found sufficient facts to show protected conduct followed by an adverse employment action. The application of Title VII and other gender discrimination laws to transgender status is a new and disputed legal issue, but the framework used to analyze such claims is well-established, and the court applied it to determine that the case would go forward.
In another recent case, Durand v. District of Columbia Government, decided by the United States Court of Appeals for the District of Columbia Circuit, the employer prevailed, also by relying on the validity of long-established legal requirements for such claims. The plaintiff contended that he was being retaliated against for prior participation in a large sexual harassment lawsuit that had been decided some years earlier. In dismissing the retaliation and retaliatory harassment claims, the Court of Appeals relied on plaintiff’s procedural failures, including failure to file a proper administrative charge of discrimination with the EEOC and failure to proceed in a timely fashion. The case also failed in part because it was based on employer actions that were not materially adverse to plaintiff’s employment status. Finally, plaintiff failed to show severe or pervasive harassment, which would be necessary to support a retaliatory harassment claim.
Both of these recent decisions confirm that while public perception and understanding of sexual harassment may be experiencing a true revolution, in litigation both the employer and the employee must comply with largely well-established legal doctrines to determine who actually wins the case.
Question: We operate a financial services firm that employs account executives who execute investment trades on behalf of clients. One of our brokers recently resigned to move to a competitor firm. With his resignation letter, he included a list of clients he plans to solicit at his new firm. This list includes clients with whom the broker may have had some association, but it’s not clear he ever executed commission-generating trades for them. The broker signed a non-solicitation agreement with us when he started. Can we stop him from soliciting these clients at the new firm?
By Joel O’Malley and JoLynn Markison
Enforcement of restrictive covenants like non-compete, non-solicit, and non-disclosure agreements is highly dependent upon the industry in which the covenant is sought to be enforced. Nowhere is that more true than in the financial services industry. As a result of an agreement initially signed a dozen years ago by a handful of the largest financial firms and now having over 1,000 firm signatories, there exists an established methodology for a financial advisor or broker to depart a firm which, if followed, protects the broker and the new firm from litigation over the departure while protecting client privacy. The methodology is found in the Protocol for Broker Recruiting, which applies only to broker moves between Protocol signatories. (The Protocol applies to “registered representatives” – we’ll use the shorthand “broker” here.) Frequently, however, brokers and firms either mistakenly or deliberately disregard the Protocol, so financial firms must remain vigilant in protecting their valuable confidential information, client relationships, and goodwill. Thus, the first necessary piece of information to answer your question is whether you and the competitor are Protocol signatories.
The Protocol itself is rather simple. A broker transitioning between signatory firms may take only the following information: “client name, address, phone number, email address, and account title of the clients that they serviced while at the firm.” The broker is prohibited from taking any other information or documents. To gain protection under the Protocol, the broker must resign in writing, deliver the resignation to local branch management, and include with the resignation letter a copy of the client information that will be taken, including account numbers. The broker’s compliance with the Protocol need not be perfect – s/he need only exercise “good faith” and “substantially comply” with the requirements.
The Protocol also places obligations upon the broker after leaving the prior firm, and upon the new firm. The information taken by the broker may be used only for solicitation of the former clients by the broker, and only after the broker has actually joined the firm. In other words, the broker may not start soliciting clients to move to the new firm while the broker is still engaged with the old firm (but planning to move), nor may client information be shared at the new firm for solicitation by other brokers. The Protocol also contains requirements regarding the movement of broker teams or partnerships and governing trailing commissions.
Many brokers have executed agreements with firms containing terms prohibiting solicitation of customers or retention of customer lists. So long as the old and new firms are signatories to the Protocol and the broker substantially complies in good faith with its terms, the Protocol protects the broker from liability to the old firm for retaining the information identified in the Protocol or soliciting clients on behalf of the new firm. But if a broker or new firm violates the Protocol, the former firm may be in a good position to file suit and seek immediate injunctive relief barring the broker and the new firm from irreparably damaging the former firm’s business.
There are several points to consider when analyzing potential legal action when the Protocol is at play.
First, not all firms are Protocol members. Over 1,000 firms have joined the pact, including almost all of the major financial services companies, but many smaller brokerages are not. And those smaller brokerages frequently seek to poach successful brokers from more established signatory firms. If the new firm is not a Protocol signatory, then a broker taking client information, even under the Protocol’s methodology, could violate the broker’s non-compete or non-solicitation obligations and subject the broker and the new firm to liability. Firms should beware of the situation of a broker claiming she acted in “good faith” because she thought the new firm was a Protocol signatory. If the new firm misled the broker into that mistaken belief, liability may lie against the new firm for claims like tortious interference with contract or misappropriation of trade secrets.
Second, only “good faith” compliance with the Protocol provides protection. There continue to be examples when brokers purport to comply while secretly violating the Protocol, often by stealing confidential client or firm information beyond the information disclosed with the broker’s resignation letter (e.g., detailed client account history). This theft can occur in any number of ways – emailing a personal email account, copying information to thumb drives, or simply walking out the door with confidential hard copy documents. Firms should establish best practices for when brokers depart, including review of the broker’s email activity in the months preceding the resignation. If the firm suspects wrongdoing, further investigation may be warranted, such as forensically examining the broker’s computer for electronic evidence of wrongdoing, reviewing office copy machine electronic records, or even watching building surveillance tapes.
Third, and more specifically to your question, client information that permissibly may be taken covers only clients that were actually serviced by the broker at the former firm. This issue recently was litigated before a Connecticut federal court in Westport Resources Management v. DeLaura (June 23, 2016), with the broker arguing that client “service” included any efforts the firm made on behalf of the clients. In that case, the broker was employed by two related entities, and when he resigned both to move to a new firm, he included with his resignation letter clients of one entity even though the services he provided were through the other entity. The former entity sued under the broker’s non-solicit agreement. The court held that “services” under the Protocol meant “what clients pay registered representatives to do on their behalf” – in other words, something for which the broker normally would receive a commission. The court held that because the broker had not received any commissions from the entity with which the clients were associated, they were not clients that the broker serviced at that entity. Applied to your question, you may have a claim against your former broker since it sounds like he never performed work for certain clients he included with his resignation letter.
Fourth, solicitation of former clients is permissible only after the broker has joined the new firm. Brokers are often tempted to start priming the pump before they depart, either secretly or overtly (and increasingly through social media) telling clients of their plans to move firms and inviting the clients to follow. This sort of pre-move solicitation is explicitly prohibited under the Protocol, is typically forbidden under non-solicitation agreements, and should be investigated by firms in the same manner described above.
Fifth, the Protocol does not immunize corporate raiding, i.e., one firm targeting another firm to steal a group of employees. Raiding claims can be challenging to prove, and often rely on some evidence that the new firm used the former firm’s confidential information or trade secrets to aid in its improper recruitment, or that the new firm has undertaken a deliberate pattern of soliciting a competitor’s key employees with the purpose of damaging the competitor’s ability to compete. Firms may therefore have reason to be concerned when several brokers move to another firm, even when the competitor is a Protocol signatory.
Finally, whether the Protocol is implicated or not, firms must be mindful that legal claims will be governed by applicable state or federal laws. States take a variety of approaches to enforcement of non-compete, non-solicit, and non-disclosure agreements, and both state and federal law may apply to a trade secret misappropriation claim. In addition, agreements frequently contain clauses dictating where litigation may occur and what law applies. These issues should be fully investigated before a firm decides whether to bring suit against a former broker or competitor firm.