December 13, 2021
A recent FINRA Arbitration Award seems out of step with the tenor of the times. A key provision of an employment agreement is overly broad, but we're then asked to consider if that unenforceable provision could still be breached. The problems with the Award and its underlying rationale become all the more attenuated because we're dealing with confidentiality/non-solicit provisions that hamper a former employee's ability to continue in a given profession or to relocate in pursuit of employment.
Case in Point
In a FINRA Arbitration Statement of Claim filed in March 2020, FINRA member firm Claimant CBIZ Financial Solutions, Inc. asserted that associated person Respondent Schannep had breached a Confidentiality and Non-Solicitation Agreement dated November 1, 2006. In the Matter of the Arbitration Between CBIZ Financial Solutions, Inc., Claimant, vs. Timothy Michael Schannep, Respondent (FINRA Arbitration Award 20-01049)
Comps, Costs, and Fees
In addition to seeking costs and fees, Claimant CBIZ also sought compensatory damages for the following as set forth in part in the FINRA Arbitration Award:
1. The Panel finds in favor of Claimant on its claim against Respondent regarding his
solicitation of Claimant's broker-dealer clients and awards Claimant compensatory
damages in an amount to be determined at arbitration;
2. The Panel finds in favor of Claimant on its claim against Respondent regarding his
soliciting, conducting business with, and/or accepting money from Claimant's Registered
Investment Advisors clients and awards Claimant compensatory damages in an amount to
be determined at arbitration;
3. The Panel finds in favor of Claimant on its claim against Respondent regarding his
solicitation and hiring of Claimant's employees in violation of his Agreement; . . .
At the hearing, Claimant specified its compensatory damages as $1,012,350.95.
The FINRA Arbitration Panel found Respondent Schannep liable to and ordered him to pay to Claimant CBIZ $1 in compensatory damages and $125,027.20 in attorneys' fees. In reaching that Award, the arbitrators explain under the heading "FINDINGS":
The Panel awarded $1.00 as nominal compensatory damages to Claimant for breaches of the Agreement, regarding the return of confidential information and the hiring away of employees. Although the Panel found that Respondent breached the non-solicitation provisions of the Agreement, it concluded that those provisions were overly broad and chose not to revise or reform them.
Additionally, the Panel assessed $10,125 in hearing session fees solely against Respondent Schannep.
Bill Singer's Comment
I like a good joke as much as the next guy, and for the nearly quarter-of-a-century that I have been posting my musings online, I concede that many of my blogs are peppered with sarcasm, cynical asides, and half-assed attempts at humor. So, like I said, I appreciate a good joke, and today's featured FINRA Arbitration Award sort of comes off as a joke, albeit a failed attempt at humor. On the other hand, if the arbitrators weren't trying to be funny, at least they succeeded with that goal.
At the heart of CBIZ v. Schannep is "the sole cause of action," namely, that Respondent Schannep had breached the "Confidentiality and Non-Solicitation Agreement, dated November 1, 2006 . . ." In furtherance of its breach allegations, CBIZ asserted that Schannep wrongfully:
- solicited the firm's broker-dealer clients;
- solicited the firm's investment advisory clients;
- did business with and accepted money from the firm's advisory clients; and
- solicited and hired some of the firm's employees.
The FINRA Arbitration Panel awarded $1, which was characterized as "nominal compensatory damages," for Schannep's purported "breaches of the Agreement, regarding the return of confidential information and the hiring away of employees." Apparently, the Panel rendered no Award for any alleged solicitations by Schannep because the contractual non-solicitation provisions at issue were "overly broad."
Why a nominal compensatory damages Award rather than none? Whatever your reasons as arbitrators, at least share some of your logic given the important intra-industry issues involved. On top of that, if after an evidentiary hearing, three arbitrators concluded that the non-solicitation provisions of the Agreement were overly broad, why the hell did the Panel deem an overly-broad contract to be enforceable? All of which matters, really matters, because despite that cutesy $1 in damages, the Panel also saddled Schannep with over $125,000 in CBIZ's attorneys' fees and over $10,000 in hearing fees. Last I checked, $125,000 ain't chicken feed.
Online FINRA BrokerCheck records as of December 13, 2021, disclose that Schannep was first registered in 1995, and that by May 2010, he was registered with four CBIZ firms starting in 2005 and ending in March 2020. Consequently, in addition to having what BrokerCheck characterizes as "26 years of experience," Schannep was affiliated with various CBIZ entities for some 15 years, and, notably, the Agreement at issue was dated 2006. Not stated anywhere in the FINRA Award was the exact date of Schannep's termination of employment and whether that was via a resignation or firing. Moreover, Schannep appears to have left CBIZ in March 2020 (the Award fails to disclose that tidbit - I had to look it up on BrokerCheck), which, in case anyone forgot, that datge was in the middle of the ongoing, horrific Covid crisis.
For godsakes, Schannep put in a fairly lengthy 15 year run at one CBIZ firm or another. You'd sorta think that given Schannep's long tenure and the raging pandemic that CBIZ might have just wished its former employee all the best and not go after him hammer and tong. Then again, I do allow for the fact that there may be more to CBIZ's case and that Schannep may not be as victimized as the Award makes out -- but don't blame me for engaging in a guessing game when that's what I've been forced to do given the lack of a fact pattern and substantive rationale in the published Award.
https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy/ In part, the Executive Order states in part that: emphasis added]:
A fair, open, and competitive marketplace has long been a cornerstone of the American economy, while excessive market concentration threatens basic economic liberties, democratic accountability, and the welfare of workers, farmers, small businesses, startups, and consumers.
The American promise of a broad and sustained prosperity depends on an open and competitive economy. For workers, a competitive marketplace creates more high-quality jobs and the economic freedom to switch jobs or negotiate a higher wage. For small businesses and farmers, it creates more choices among suppliers and major buyers, leading to more take-home income, which they can reinvest in their enterprises. For entrepreneurs, it provides space to experiment, innovate, and pursue the new ideas that have for centuries powered the American economy and improved our quality of life. And for consumers, it means more choices, better service, and lower prices.
Robust competition is critical to preserving America's role as the world's leading economy.
Yet over the last several decades, as industries have consolidated, competition has weakened in too many markets, denying Americans the benefits of an open economy and widening racial, income, and wealth inequality. Federal Government inaction has contributed to these problems, with workers, farmers, small businesses, and consumers paying the price.
Consolidation has increased the power of corporate employers, making it harder for workers to bargain for higher wages and better work conditions. Powerful companies require workers to sign non-compete agreements that restrict their ability to change jobs. And, while many occupational licenses are critical to increasing wages for workers and especially workers of color, some overly restrictive occupational licensing requirements can impede workers' ability to find jobs and to move between States.
The problem of economic consolidation now spans these sectors and many others, endangering our ability to rebuild and emerge from the coronavirus disease 2019 (COVID-19) pandemic with a vibrant, innovative, and growing economy. Meanwhile, the United States faces new challenges to its economic standing in the world, including unfair competitive pressures from foreign monopolies and firms that are state-owned or state-sponsored, or whose market power is directly supported by foreign governments.
We must act now to reverse these dangerous trends, which constrain the growth and dynamism of our economy, impair the creation of high-quality jobs, and threaten America's economic standing in the world.
This order affirms that it is the policy of my Administration to enforce the antitrust laws to combat the excessive concentration of industry, the abuses of market power, and the harmful effects of monopoly and monopsony - especially as these issues arise in labor markets, agricultural markets, Internet platform industries, healthcare markets (including insurance, hospital, and prescription drug markets), repair markets, and United States markets directly affected by foreign cartel activity. . . .
Yes, the Executive Order above is a political document, and, as such, you are free to choose whether you support its premises and goals. Regardless of the Order's policy positions, it does capture the tenor of the times; namely, that robust competition is critical to preserving America's role as the world's leading economy and, further that overly restrictive occupational licensing requirements can impede workers' ability to find jobs and to move. All of which is exacerbated by the Covid pandemic.
In my opinion, if a key provision of a contract is overly broad (the Panel's findings, not mine) then that provision is likely NOT enforceable; and if it's not enforceable, then it's not proper to talk about an unenforceable provision being breached. And those concerns become all the more attenuated when confronting non-compete/non-solicit provisions that hamper a former employee's ability to continue in a given profession or to relocate in pursuit of employment.
I acknowledge that the Panel distinguished between its non-award of monetary damages for the "overly broad" provisions of the 2006 Agreement and its "nominal" award of $1 in compensatory damages for breaches "regarding the return of confidential information and the hiring away of employees." Notwithstanding the arbitrators slicing and dicing of overly broad and nominal in their Award, they did award to Claimant CBIZ over $125,000 in attorneys' fee and assessed over $10,000 in hearings fees against Respondent Schannep. After being encouraged to laugh off a $1 award versus a request for over $1 million in damages, you're then asked by this Panel to swallow the awarding of six-figures in attorneys' fees and five-figures in hearing fees. Essentially, Schannep is ordered to reimburse CBIZ for paying its lawyers for prosecuting a case against him despite the fact that three independent FINRA arbitrators concluded that key breach of contract allegations were based upon provisions that "were overly broad," and that whatever damage may have resulted from the breach of other contract provisions warranted nothing more than $1 in monetary sanctions.