Category Archives: Post-Employment Restrictive Covenants

How Important are Irreparable Injury Provisions in Non-Compete Agreements?

Today’s workforce is more mobile than in past generations. Long gone are the days when an employee started and ended a career at the same company. Knowing how to protect your company’s confidential information when a trusted employee leaves can have a lasting impact on your ability to compete. So, what can you do when a former employee goes to work for a competitor? Is having an irreparable injury provision in your non-compete agreement enough to obtain a court order prohibiting that individual from working at his/her new job?

In Minnesota, courts want to see more than just words in a contract before they will grant injunctive relief against a former employee.

This week, the Supreme Court of Minnesota issued a decision in St. Jude Medical, Inc. v. Carter. The case arose after Heath Carter left his employer to work for a competitor. The employer filed suit against Mr. Carter and the competitor, alleging violations of Mr. Carter’s non-compete agreement. The employer did not seek money damages but asked the court for injunctive relief; specifically, an order enforcing the terms of the non-compete agreement and prohibiting Mr. Carter from working for a competitor in his then-current position. The case went to a jury, which ultimately found that Mr. Carter had breached his non-compete agreement. But the court refused to enter an injunction, finding that the employer failed to establish that it had been harmed.

The case made its way to the Supreme Court, where the question became what to do about specific language in the non-compete agreement that addressed the issue of whether and how the former employer was harmed. The language at issue is commonly included in many non-compete agreements:

In the event Employee breaches the covenants contained in this Agreement, Employee recognizes that irreparable injury will result . . . that [the Employer’s] remedy at law for damages will be inadequate, and that [the Employer] shall be entitled to an injunction to restrain the continuing breach by Employee.

At first glance, the provision appeared to resolve the issue of whether the employer suffered irreparable harm—Mr. Carter agreed that it had. But the Supreme Court disagreed. The court noted that “[a] private agreement is just that: private,” and concluded that such contractual language does not, by itself, entitle an employer to an injunction after proving the breach of a non-compete. The court emphasized that regardless of what the parties agree to, the burden will always fall on the employer to show that: (1) legal remedies (i.e., money damages) are inadequate; and (2) “great and irreparable injury” will result without an injunction. Because the employer did not offer proof of an irreparable injury, the court held that the employer was not entitled to an injunction.

So what now? Are provisions like those quoted above meaningless? Should employers scramble to re-write their non-compete agreements? The short answer is “probably not.”

Minnesota aligns with a number of states in which mere contractual language about irreparable harm is not enough to win injunctive relief. Nevertheless, these provisions are still worth including in non-compete agreements because courts can consider them as one of many factors that bear on whether an employer has suffered irreparable harm. Other factors will usually be more persuasive, often including evidence of some or all of the following:

  1. The departing employee took confidential information when he or she left (e.g., client lists, marketing plans, and pricing information).
  2. The departing employee disclosed confidential information to the competitor or put confidential information to use in the new job.
  3. The departing employee solicited business from former clients or customers and used confidential information to solicit such business.
  4. The former employer lost client or customer goodwill because of the departing employee’s breach of the non-compete agreement.

Ultimately, Carter serves as a useful reminder to employers on both sides of an employee’s job change. Former employers should carefully consider how they have been harmed by an employee’s departure (and what evidence they anticipate being able to present as proof of that harm). Hiring employers should understand and reinforce to their new employees the importance of complying with prior non-compete agreements. And for employers on both sides, consulting with experienced employment attorneys even before these types of cases go to litigation can be the key to a successful outcome.

A Matter of Protocol — Rules for Departing Brokers Trying to Solicit Former Clients

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?

Answer:

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.

Quirky Question # 276: Ex-Employees Gone Rogue

Question: Our company uses agreements to try to protect our confidential and proprietary information. One of our former sales employees recently left us to work for a competing company.  We have evidence he took with him our confidential information about our clients and is planning to use it to sell products to our clients for his new employer.  When we reminded him he could not use our confidential information, he said we couldn’t stop him because the information does not qualify as a “trade secret” under our state’s trade secrets laws.  We looked into the issue, and he’s probably right that this information is not necessarily a “trade secret”.  We’re worried there’s nothing we can do to stop him from using our information to steal our clients.  Help?

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Question #273: Crafting a Concrete Non-Compete

Question: Our company uses non-compete and non-solicit agreements that bar former employees from having contact with any client of our company after they leave. One former employee who recently left is now claiming the agreement is invalid because it is “overly broad” in that it bars him from soliciting not only those clients of ours he used to work with, but clients he never had any dealings with.  I can see his point, but at the same time, how are we supposed to know when he signs the agreement which of our clients he will end up working with?

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Question #272: Competing in California

Question: One of our company’s employees recently left to start a competing business. We think he started this process while he was still employed by us, and that he is probably using information he learned from us.  We’re in California, so I know we don’t have a non-compete agreement with him.  Do we have any other recourse?

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Quirky Question #262, An update on Wisconsin non-competes

Question:

We are a Wisconsin employer that recently lost a number of employees to a direct competitor in our region.  As a result, we are now in the process of having all of our employees sign non-compete agreements prohibiting them from working for a competitor for a limited period of time after leaving our company.  Assuming that the non-compete agreement is reasonable, we are wondering whether we need to provide any additional compensation to each employee, or if simply having them sign the agreement on the condition that if they do not sign, we will terminate their employment, is sufficient.  We remember that you mentioned that Wisconsin law was unsettled in this area and are wondering if there have been any recent updates that could help us in our decision.

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