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FINRA Arbitrators Directly Nullify Indirect Non Solicitation Agreement
July 13, 2021
At the heart of many employment and post-employment disputes is the belief by an employee that his discharge was fomented by a mere pretext. At times, an employer may cite misconduct as a legitimate basis for termination; however, at times, the cited misconduct was so inconsequential that it raises questions as to what else may be prompting the termination. In a recent FINRA Arbitration, a former employee says that his termination was unreasonable and solely prompted by his employer's desire to reduce its salary expenses. Before the arbitrators was the issue of whether the former employer would be permitted to enforce a non-solicitation agreement.
Case In Point
In a FINRA Arbitration Statement of Claim filed in January 2021 and as amended, associated person Claimant Hook alleged that FINRA member firm Respondent Commerce Brokerage Services had
terminated him in an effort to reduce its salary expenses and then filed a Form U5, as part of registration records maintained by the Central Registration Depository ("CRD"), that is defamatory and malicious. Claimant further asserted that the "Non-Solicitation of Customers" paragraph in the parties' Non-Solicitation Agreement ("Agreement") is unenforceable.
In the Matter of the Arbitration Between Ryan M. Hook, Claimant, v. Commerce Brokerage Services, Inc., Respondent (FINRA Arbitration Award 21-00092)
https://www.finra.org/sites/default/files/aao_documents/21-00092.pdf
Respondent Commerce generally denied the allegations, asserted various affirmative defenses, and filed a claim seeking declaratory relief.
Injunctive and Declaratory Relief Requested
Claimant Hook sought an expungement of the Form U4, approximately $21,500 representing payment of his last paycheck, fees, costs, and the following additional relief:
2. Injunctive relief, in the form of a preliminary injunction lasting until such time as an award is rendered, prohibiting, enjoining, and restraining Respondent, directly or indirectly, and whether alone or in concert with others, from the following conduct:
A. Reporting, publicizing, or otherwise making false statements with respect to Claimant.B. Filling any reports with regulatory agencies regarding Claimant without providing fifteen (15) days' notice to Claimant prior to making such filing.C. Explaining in extensive detail its purported reasons for termination of Claimant, based on and in line with the Form U5 it filed.D. Making any disparaging or derogatory statements about Claimant, including with respect to any alleged noncompliance with industry rules or regulations by Claimant.E. Threatening, taking action, intimidating, or otherwise acting in any manner to indicate agreements, arrangements, or any other matter prohibits Claimant from accepting individuals as clients as a registered representative of another registered broker-dealer.F. Intimidating or otherwise acting in any manner to indicate agreements, arrangements, or any other matter prohibits Claimant from soliciting clients of any nature or kind and in any manner.
3. Declaratory relief stating that the "Non-Solicitation of Customers" paragraph in the Agreement, is void, unenforceable, and of no force or effect.
Additionally, in his Amended Statement of Claim, Claimant Hook sought the following injunctive relief:
1. A determination that public policy considerations, to protect the investing public under federal and state securities laws and to allow subsequent employment under R.S. Mo. § 431.202.5, overcome the conclusively presumed reasonableness of R.S. Mo. § 431.202.2, and a permanent injunction, prohibiting, enjoining, and restraining Respondent, directly or indirectly, whether alone or in concert with others, its affiliates, employees, agents, representatives, and anyone acting on its behalf or to its benefit, from enforcing or attempting to enforce the Agreement; or, alternatively,2. A determination that public policy considerations, to protect the investing public under federal and state securities laws and to allow subsequent employment, do not overcome the conclusively presumed reasonableness of R.S. Mo. § 431.202.2, and a permanent injunction, prohibiting, enjoining, and restraining Respondent, directly or indirectly, whether alone or in concert with others, its affiliates, employees, agents, representatives, and anyone acting on its behalf or to its benefit, from enforcing or attempting to enforce the Agreement for a period of one year, except as follows:
i. Direct solicitation by Claimant in the form of communications to the clients that Claimant provided financial advice, for a period of one year from November 30, 2020, such clients being identified in writing to Claimant by Respondent ("Listed Clients").ii. For purposes of this relief, solicitation does not include:
a. Responding to client-initiated calls, texts, emails, or any other type of Listed Client initiated communications and accepting them as clients; andb. Any type of advertising, communicating, or otherwise conveying information to or with the general public; and
3. A permanent injunction, prohibiting, enjoining, and restraining Respondent, directly or indirectly, whether alone or in concert with others, its affiliates, employees, agents, representatives, and anyone acting on its behalf or to its benefit, from making disparaging, derogatory, or defamatory statements about Claimant, including that Petitioner was terminated for money laundering or in any manner acting to "launder money," unless required under law.
February 2021 Order
On February 16, 2021, the FINRA Arbitration Panel issued an Order on Request for Permanent Injunction, which the FINRA Arbitration Award characterizes as follows:
Claimant's motion for a permanent injunction is granted in part. Specifically, Respondent is permanently enjoined from enforcing the part of the [Agreement] that purports to prohibit Claimant from soliciting, diverting or taking away "the business or patronage of any of the clients, customers or accounts of [Respondent] as of the date of the termination of [Claimant's] employment[.]" Furthermore, Respondent is enjoined from enforcing the provision of the [Agreement] that purportedly prevents Claimant from "indirectly" soliciting clients, customers or accounts. Under Missouri law, those portions of the [Agreement] are too broad and are[,] therefore[,] unreasonable and unenforceable. See Whelan Security Co. v. Kennebrew, 379 S.W.3d 835, 844-45 (Mo. 2012).In all other respects Claimant's motion for a permanent injunction is denied.Besides the injunction described above, Claimant's motion for a permanent injunction against enforcement of the [Agreement] is denied. Specifically, the portion of the [Agreement] prohibiting Claimant from directly soliciting, diverting or taking away "any clients, customers or accounts that (i) he/she was assigned at any time during the course of employment at [Respondent]; (ii) that he/she called on or solicited during the course of employment at [Respondent]; or (iii) that he/she serviced or assisted others in servicing during the course of employment at [Respondent]" remains enforceable.Claimant's request for an injunction against defamatory statements by Respondent's officers, employees, and agents is denied.
Award
The FINRA Arbitration Panel denied Claimant Hook's claims for compensatory damages. The Panel found Respondent liable for and ordered it to pay to Claimant $2,500 as reimbursement for the Injunctive Relief Surcharge.
The Panel declined to alter the "Reason for Termination" on Claimant's Form U5 but ordered that the "Termination Explanation" be replaced with:
Ryan M. Hook's termination was unreasonable, and the Firm's internal investigation was problematic. Mr. Hook breached internal bank policy with the deposit to his personal account of two cash transactions exceeding the Currency Transaction Reporting requirements by a de minimis amount.
An excellent FINRA Arbitration Award, which sets out the content and context of the dispute. As the fact pattern plays out, Claimant Hook engaged in two cash transactions via deposit into his personal bank account; regardless, the arbitrators found that although Claimant's conduct breached the bank's policies, the violation was "by a de minimis amount." Accordingly, the FINRA Arbitration Panel found that Respondent's termination of Claimant was "unreasonable."
Key among the Panel's actions was the issuance of an Order partially granting Claimant's motion for a permanent injunction by finding that the Agreement's provision designed to "indirectly" prevent Claimant's solicitation of clients, customers, or accounts was overly broad and, thus, unreasonable and unenforceable. After all, just what exactly is meant by a prohibition against "indirect" solicitation -- and if there are a few, concrete examples of this conduct, then why not set them out under the proscribed conduct?