Court Allows Wells Fargo Stockbroker to Contact Former But Not Current Clients

September 10, 2019

At times, the relationship between the stockbroker and the company frays -- or someone cherry-picks the top producers with a better offer. When it comes time to movin' on, not every former employer is thrilled about the departure of every former employee. In today's blog we consider a recent split between employee and employer, and we see how the machinery ramps up during the ensuing lawsuit. A frequent question asked of industry lawyers is "What can my former firm do to me after I've left?" Today's featured case provides some answers. 

The Confidentiality Agreement

In September 2016, Carl Adkins and Katie Owens were hired by Fort Washington Investment Advisors, Inc. as, respectively, a Vice President and an Associate. Fort Washington Investment Advisors, Inc., Plaintiff, v. Carl Adkins, et al., Defendants (Order Granting in Part and Denying in Part Plaintiff's Motion for a Temporary Restraining Order, United States District Court for the Southern District of Ohio ("SDOH"), 19--CV-685) (the "SDOH Order")   Adkins and Owens's employment was subject to their execution of a Confidentiality Agreement, which, in pertinent part stated:

I understand that in the course of performing my job duties and responsibilities, I may be authorized to access and use proprietary, confidential, and/or trade secret information ("confidential information"). I acknowledge my responsibility to protect the privacy of confidential information. I agree that both during my employment and after my employment with Western & Southern Financial Group (WSFG) [parent company of Fort Washington] ends, I will not retain or use any confidential information. I further understand that WSFG has taken various steps to maintain the confidentiality and secrecy of this information, including use of password protected hardware and software, encryption, and other similar security tools. Additionally, this confidential information will be made available to me only on a need-to-know basis. 

Confidential information means any non-public information, including, but not limited to, business plans, product information and plans, business methods and processes, customer/potential client information (including contact information), producer information (including contact information), marketing plans and strategies, competitive analyses, financial information, and personal identification information, such as an individual's name, address, social security number, telephone number, and any other information about an individual's finances,  occupation, credit, character, habits or other personal characteristics.

At Page 2 of the SDOH Order

The Non-Solicitation Agreement (Adkins)

In addition to having executed the Confidentiality Agreement, Adkins signed a Non-Solicitation Agreement, which, stated, in pertinent part:

During the Employee's employment with Company [Fort Washington and affiliates] (the "Employment Period"), and for  twenty-four (24) months thereafter, Employee agrees not to engage, directly or indirectly, in any of the following conduct: . . . (c) solicit or direct business of any current Client of the Company, who are or were Clients during the Employment Period, or Prospective Clients, either for himself or for any other individual or entity or advise any person or entity with respect thereto. As used herein, "Client" means any client of the Company at any time during the Employment Period, and a "Prospective Client" means any prospective client that has met with a representative of the Company at any time during the Employment Period.

At Page 3 of the SDOH Order

Joining Wells Fargo

On August 2, 2019, Adkins and Owens left Fort Washington for Wells Fargo Clearing Services, LLC d/b/a Wells Fargo Advisors. As characterized by the Court:

[T]hereafter, with the help of Wells Fargo's employees, both of the Defendants contacted certain of their former clients to let them know about their change in employment.2 (Id. at ¶ 21; see also Doc. 7 at ¶ 5; Doc. 8 at ¶ 5; Doc. 9 at ¶¶ 2- 3). To date, at least three such clients have transferred their accounts from Fort Washington to Wells Fargo, and at least one such client has cited conversations with Defendants as the basis for its departure.3

= = = = =

Footnote 2: According to Defendants: "Upon joining Wells Fargo . . . , [Defendants] recalled from memory the names of certain clients with whom [they] had long-standing business and personal relationships. . . . [And Defendants] worked with Wells Fargo . . . employees, using publicly available sources of information[,] . . . to locate contact information for these people. [Defendants] then called them to announce that [they] had resigned from Fort Washington. [Defendants] did not solicit any business . . . . If the client asked, [Defendants] would disclose that [they] had joined Wells Fargo . . . . ." (Doc. 7 at ¶ 5; Doc. 8 at ¶ 5). 

Footnote 3: In the weeks leading up to her resignation, Ms. Owens accessed, printed, and/or deleted certain client files from Fort Washington's computer systems. (Doc. 1 at ¶ 24). Fort Washington housed the files on its "confidential client database" and/or "secured computer servers." (Id. at ¶¶ 25, 29). Some of the client files belonged to the three clients who have now transferred their accounts from Fort Washington to Wells Fargo. (See id. at ¶¶ 36-55).

At Pages 3 - 4 of the SDOH Order

Fort Washington Complaint / TRO Application

On August 20, 2019, Fort Washington filed a Complaint in SDOH alleging that the Defendants had used the firm's confidential information to solicit its clients, and, as such, had committed, inter alia, breach of contract, misappropriation of trade secrets, and computer fraud. Defendants denied the allegations. Thereafter, Fort Washington filed a Motion for a Temporary Restraining Order, which sought as follows:

4. Defendants, and anyone acting in concert with them, directly or indirectly, are hereby enjoined from violating the terms of the agreements and from violating Fort Washington's common law and statutory rights, including restraining and enjoining them from:

i. Further soliciting Plaintiff's clients as required by the Amended & Restated Non-Solicitation Agreement ("Non-Solicitation Agreement");

ii. Using any of Plaintiff's confidential information as defined by the Agreement to Protect Confidential Information ("Confidentiality Agreement") to solicit Fort Washington clients or for the benefit of any third party, including Defendants' current employer; and 

iii. Having any contact with any of Fort Washington's clients until such time as the Court can be determined exactly what confidential, trade secret information Defendants have misappropriated to ensure that no such misappropriated information can continue to be used for Defendants' benefit.

At Pages 4 - 5 of the SDOH Order

Four-Point TRO Test

Defendants objected solely to the terms of 4(iii) above, which was the sole issue before SDOH. In deliberating upon Plaintiff's motion for injunctive relief, the Court referenced four factors:

(1) whether the moving party has shown a strong likelihood of success on the merits; (2) whether the moving party will suffer irreparable harm if the injunction is not issued; (3) whether the issuance of the injunction would cause substantial harm to others; and (4) whether the public interest would be served by issuing the injunction. 

At Pages 6- 7 of the SDOH Order

Strong Likelihood of Success

The Court found that a reasonably strong argument had been presented indicating that Defendants had breached their Confidentiality Agreements, and had used confidential information in violation of said agreement. Prong 1 goes to Fort Washington.

Irreparable Harm

In considering whether Fort Washington would sustain "irreparable harm" in the absence of the requested TRO, the Court noted that:

Fort Washington has already lost three clients to Defendants as a result of the alleged impermissible use of confidential information, and Fort Washington certainly stands to lose more should the conduct continue. (Doc. 1 ¶¶ 36-56). Under such circumstances, Fort Washington will suffer irreparable harm, absent the issuance of an appropriate injunction. . . .

At Page 10 of the SDOH Order

Harm to Others

Having found in Port Washington's favor on the first two prongs of its test, the Court encountered more nuanced considerations when tackling the issue of "harm to others," as noted in part:

While the absence of any injunction would cause Fort Washington irreparable harm, the imposition of an overly-restrictive injunction would harm both Defendants and their clients. As written, the proposed temporary restraining order, which prohibits Defendants from communicating with Fort Washington's "clients," fails to distinguish between clients that Defendants contact and clients that contact Defendants (of their own free will). 10 (Doc. 2-2 at ¶ 4). As set out infra, an injunction, prohibiting Fort Washington's clients from contacting Defendants outright, would cause substantial harm to Defendants, third-parties, and the public alike.

At Pages 10 - 11 of the SDOH Order

Public Interest

Finally, when deliberating over the issue of the "public interest," the Court found as follows:

The proposed temporary restraining order would prohibit Defendants from having "any contact with any of Fort Washington's clients." (Doc. 2-2 at ¶ 4). As stated supra, this prohibition runs contrary to the public interest. Prohibiting any communications between Defendants and Fort Washington's clients-even those communications initiated by Fort Washington's clients (of their own free will)-would set a concerning precedent. It would chill the right of investors to choose their advisors-whenever such advisors took new jobs at new companies. The Court will not set so concerning a precedent here.

At Pages 11 - 12 of the SDOH Order

A 2:2 Tie -- And the tie-breaker

In the end, it's a 2:2 draw, with the Plaintiff and the Defendants each winning two of the four prongs in the Court's test. All of which presaged a balancing test, which was resolved as follows:

Upon balancing the factors relating to the propriety of granting an injunction, the Court concludes that Fort Washington is entitled to a limited form of injunctive relief. The Court agrees that Defendants should be prohibited from contacting Fort Washington's current clients. However, the Court does not agree: (1) that Defendants should be prohibited from contacting Fort Washington's former clients; or (2) that Fort Washington's current clients should be prohibited from contacting Defendants, so long as the contact is borne of the clients' free will, as opposed to Defendants' prompting/ solicitation. The Court concludes that this resolution appropriately balances the competing interests at stake in this case.

Page 12 of the SDOH Order

Bill Singer's Comment

I am always impressed by a well-order and lucid presentation of underlying facts and the rationale for a decision. SDOH's Order is a perfect example of such a process. 

Among the most common queries from stockbrokers is what a former employer can (or will ) do to them upon learning of their resignation. The fact pattern in Fort Washington is an excellent primer on that issue for any potential stockbroker Defendant. For starters, the former employer marched into federal court and filed a lawsuit and sought a restraining order. In response, former employees will likely need to retain a lawyer, write out checks for legal fees and costs. The looming issue is whether the former stockbroker can continue to migrate accounts from the former to the current firm -- and whether the former stockbroker can continue to pursue solicitation activities objectionable to the former firm (note that in Fort Washington there was no Non-Compete Agreement). 

The key preliminary battle often involves the desire of a former employer to prevent further or ongoing client contact by the former employee. When a former stockbroker seeks out my legal services for such a scenario, I am often regaled with an impassioned explanation about how hard he worked to cold call in order to develop a client -- and how unfair it is for the former broker-dealer to argue that the client is the firm's property. Similarly, former employers who hire me will frequently cite to their ongoing expenses in creating a "brand," marketing their products and services, and in providing their stockbrokers with support services designed to attract and retain clients. There are merits on both sides of the argument. I also note that there's more than enough hypocrisy to go around when it comes to these types of lawsuits. One can only imagine how many similar Complaints and motions for restraining orders that Wells Fargo (cast as the new employer in today's lawsuit) has filed on its own behalf when it stood in Fort Washington's shoes!Nonetheless, keep in mind that the SDOH Order is not dispositive of any of the substantive issues set out in the Complaint. We may be a long way from that goal. 

At this point, the Court has merely returned the combatants to their respective trenches after getting them to agree to some preliminary rules of engagement. The Defendants can't contact "current" clients of Fort Washington; however, the Defendants can contact "former" clients and any client who initiates contact to the Defendants without any prior solicitation by same.  Consider the more extensive excerpt below [Ed: footnotes omitted]:

1. Defendants, and anyone acting in concert with them, or at their direction, are hereby enjoined from violating the terms of Defendants' agreements with Fort Washington and from violating Fort Washington's common law and statutory rights, including restraining and enjoining them from: 

a. Soliciting Fort Washington's clients as prohibited by the Non-Solicitation Agreement;

b. Using any of Fort Washington's confidential information as defined by the Confidentiality Agreement to solicit Fort Washington clients or for the benefit of any third-party, including Defendants' current employer; and 

c. Contacting any of Fort Washington's current clients, with the exception of those of Fort Washington's current clients who contact Defendants and/or Wells Fargo of their own free will, without Defendants' direct or indirect prompting or solicitation. 

2. Defendants shall review any Fort Washington-related information that they retained after their resignation from the company. If Defendants discover that they have any Fort Washington-related information in their possession, custody, or control, that may constitute Fort Washington's confidential, trade secret, or proprietary information, they shall immediately notify the Court and Fort Washington in writing. 

3. In all other respects the TRO Motion (Doc. 2) is DENIED. 

4. Fort Washington shall immediately post a bond in the amount of $233,000, for the payment of such costs and damages as may be incurred by Defendants if they are found to have been wrongfully enjoined. 

5. The TRO shall expire upon 14 days after the entry of this Order and the posting of the bond, unless otherwise extended pursuant to Fed. R. Civ. P. 65(b)(2). 

Pages 12 - 13 of the SDOH Order

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