Edward Jones And Former Stockbroker Battle Over Customer Solicitation

July 7, 2014

For some industry veterans, leaving a brokerage firm is often easier said than done. At times, the attempt to say bye-bye seems the living embodiment of the warning that you can run but you can't hide. No sooner are you out the door and set to service your accounts, then, whammo, your former employer beats a hasty retreat to a courthouse and slaps you and your new firm with a restraining order. Then, while you are reeling from that stunning development, you open your mail and find a FINRA Arbitration Statement of Claim.If the former employer moves quickly enough and the courts and FINRA are of like mind, you may find yourself handcuffed and unable to realize a penny from your book of business -- until such time as you cry "Uncle" and settle; or until such time as the FINRA arbitration has gone to verdict and a final award issued.  

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in March 2014, Claimant Edward D. Jones & Co., L.P. asserted causes of action including unfair competition and breaches of contract and fiduciary duty. The claims arose in connection with Respondent Lugar's alleged improper retention and use of the firm's information and materials while purportedly soliciting the firm's customer after his resignation. In the Matter of the FINRA Arbitration Between Edward D. Jones & Co., L.P., Claimant, vs. Danny W. Lugar, Respondent (FINRA Arbitration 14-00957, June 25, 2014).

After starting employment in January 2010 with Claimant Edward Jones, Respondent Lugar allegedly executed an Investment Representative Employment Agreement.  After maintaining that relationship for several years, Lugar voluntarily resigned on January 24, 2014.

Double Barreled

Claimant Edward Jones filed actions against Lugar alleging breaches of the Employment Agreement and other claims against in:

  • the Circuit Court for the County of Roanoke, Virginia, and
  • in a FINRA Arbitration proceeding.
On March 24, 2014, Edward Jones obtained a Temporary Restraining Order ("TRO") from the state court, which automatically dissolved in thirty days absent subsequent modification. In addition to seeking unspecified actual and/or punitive damages, costs, and fees, Edward Jones sought an order of permanent injunction immediately restraining and enjoining Lugar, indirectly or directly, alone or in concert with others (including any officer, agent, employee and/or representative of his new employer) from:

(a) contacting or attempting to contact, soliciting or attempting to solicit business from any client or customer whom Respondent served during his employment with Claimant, or any other customer or client of Claimant whose name became known to Respondent while in the employ of Claimant for a period of one (1) year;

(b) using, disclosing or transmitting for any purpose (including but not limited to solicitation of said clients), any information contained in the records of Claimant, including but not limited to the names, addresses, and financial information of said clients; and

(c) requiring Respondent to return to Claimant as promptly as possible all originals, copies or other reproductions, in any form whatsoever (including electronic), of any record of Claimant, and to purge or destroy any computerized record of Claimant that is within Respondent's possession, custody or control.

Respondent Lugar denied the allegations in the court and FINRA proceedings, and raised the affirmative defenses that he had been defamed by Claimant Edward Jones and the victim of his former employer's unfair competition.

The Ol' Curveball

Waging war on two fronts, Edward Jones had Lugar in a state court and a FINRA arbitration, and the former employer sought to implement Non-Solicitation and Non-Contact prohibitions. As the drama unfolds, we are at that point where the FINRA Arbitration Panel is considering whether the court's TRO should be continued as an ongoing injunction through the arbitration or until the arbitrators render a decision. Given how this dispute starts out, you get the sense that you better buckle your seatbelt because it looks like we're in for a bumpy ride.

Lo and behold, in April 2014 the arbitration settled!  

Will miracles never cease?

The Understanding

Pursuant to a Stipulated Settlement between the parties, the FINRA Arbitration Panel ordered the following:

1. From the date the Stipulated Award is entered through March 23, 2015, Respondent will refrain from soliciting any existing clients of Claimant whom Respondent serviced while employed by Claimant for the purpose of requesting that a client of Claimant transfer his/her account from Claimant to Respondent or Respondent's new employer. This restraint shall not apply to any relatives of Respondent, including relatives by marriage, extending to grandparents, parents, siblings, aunts, uncles, first cousins, nephews, nieces and grandchildren. The term  "soliciting" shall mean to initiate communications with a client of Claimant for the purpose of inviting, encouraging or requesting a client of Claimant to transfer his or her account from Claimant to Respondent or Respondent's new employer.

2. The term "soliciting" shall not include any of the following:

(i) communications directed to the general public, such as newspaper advertisements or signs, listings or postings on websites or social media sites, such as Facebook or Linkedln, which list Respondent, his current position and contact information with Respondent's new employer and his past experience as a financial advisor, so long as Claimant is not mentioned by name;

(ii) publications, such as pamphlets, brochures, or other materials (which list Respondent, his position and contact information with Respondent's new employer, and his past experience as a financial advisor, so long as Claimant is not mentioned by name) that are displayed in the branch of any bank or other companies affiliated with Respondent's new employer, or

(iii) contacts or communications in response to an inquiry or request from a client of Claimant about services provided by Respondent or Respondent's new employer and/or moving his/her account to Respondent or Respondent's new employer.

3. Nothing in this Stipulated Award shall apply to clients of Claimant who have already moved their accounts from Claimant to Respondent's new employer. Further, In the case of any client of Claimant who transfers his/her account to Respondent's new employer after the date of this Stipulated Award, nothing in this Stipulated Award will apply to such client after the date of the transfer of the account(s).

4. Nothing in this Stipulated Award shall prohibit Respondent and/or Respondent's new employer from receiving, accepting and/or processing any requests, including account transfer requests, from clients of Claimant who make such requests after the date of this Stipulated Award. Further, Claimant shall not interfere with a client's request to transfer his/her account to Respondent or Respondent's new employer where the account is not subject to any lien for monies owed by the client or other bona fide claim. . .

Bill Singer's Comment

The parties to this dispute crafted a Stipulated Award, and I urge all industry participants to carefully read the provisions.  Paragraph 1 of the Stipulated Award shows how a Non-Solicitation provision can be crafted in terms of temporal considerations (dates during which the provision is in force) as well as the scope of the restriction.  Here, the time frame runs from the date of entry of the Award and through the date certain of March 23, 2015, after which the prohibition vanishes. More notably, is the scope of the Non-Solicitation, which covers "any existing clients," which is far less extensive than including "names" that became known to a registered person or individuals on specified lists. Moreover, the registered person is limited not to merely "any" existing clients but to those serviced while employed by Claimant -- yet a further refinement and narrowing. A further refinement exempts those we terms "F&F," or friends and family.

In deeming what is and isn't solicitation, note that the initial emphasis in Paragraph 1 of the Stipulated Award is on initiating communications -- which would permit communications with clients who initiate communications with the registered person but not vice versa. The covered registered person could presumably initiate communications with a covered client provided that the purpose of said communication is not intended to foster the transfer of that client's account to the registered person's new firm.

I urge you to carefully consider the more expansive definition of "soliciting' as set forth in Paragraph 2 of the Stipulated Award. Note that it does not deem a public advertisement or online posting as constituting solicitation provided the content reflects what is commonly characterized as a "tombstone;" namely, name, title, and contact information but not disclosing the name of the former employer.

There's also a so-called "Jailhouse Break" provision, which acknowledges that those clients who already transferred from the old to the new employer's brokerage firm (but who might have been covered under a Stipulated Award) are exempt.  Why the term "Jailhouse Break?" A cynic might explain that this type of provision encourages departing registered folks to try and sign as many clients from the former firm as quickly as possible under the theory that once they break out of the former firm, they will likely be exempted under this type of settlement provision.

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