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BrokeAndBroker.com Blog publisher Bill Singer Esq. is no fan of non-solicit/non-compete provisions. Sure, there could be . . . there are . . . compelling fact patterns when a departed employee may have really gone over the edge and deserves to have the crap sued out of him. On the other hand, given that Wall Street is the purported bastion of free enterprise and Capitalism, it's a tad cynical to exalt the benefits of free markets and competition but, you know, then go sue folks for practicing what you preach. Bill often counsels employer-brokerage-firms to handle departing employees with class and grace. Wish 'em well. Let 'em know how much you valued their contribution and how much you regret the departure. Shake hands. Send a bottle of champagne or something when they open their new shop. Let 'em know that if things don't work out, you would always welcome an opportunity to renew the professional relationship in the future. Not a lot of brokerage firms follow Bill's advice. A more popular option is the scorch-the-earth-and-send-'em-a-message gambit. Sometimes it works. Sometimes not. Read about a recent federal case involving Edelman Financial Engines, LLC.
Makin' It a Federal Case
According to FINRA's online BrokerCheck database as of June 27, 2022, Scott Butera was first registered in 1997. From 2016 to October 2018, he was registered with FINRA member firm EF Legacy Securities, LLC.; and, he was employed during that same period by Edelman Financial Service -- and from November 2018 to May 2022, he was employed by Financial Engines Advisors, L.L.C. According to BrokerCheck, Butera's industry record is spotless. Notwithstanding his unblemished record, Butera's former employer sued him: Edelman Financial Engines, LLC, v. Scott Butera (Opinion, United States District Court for the District of Maryland ("DMD"), 22-CV-1388 / June 16, 2022)
In response to Butera's resignation, Plaintiff Edelman asserted claims for violations of the Defend Trade Secrets Act, Breach of Contract (two counts), Maryland Uniform Trade Secrets Act, Breach of Fiduciary Duty of Confidentiality, and Unfair Competition. In addition, Plaintiff filed a Motion for Temporary Restraining Order and Preliminary Injunction (the "TRO Motion").
The Restrictive Covenant
As to what caused the hostilities to flare up between Edelman Financial Engines and Butera, this is how the DMD Opinion sets up that prelude:
Plaintiff alleges that since resigning, Mr. Butera has
solicited and accepted business from Edelman clients in violation
of the Restrictive Covenant. (ECF No. 1, at ¶ 57). Plaintiff's
counsel alleged at the hearing that Mr. Butera had 237 clients
while working for Edelman. Thomas Dunker, an Edelman officer,
attested in a declaration that, prior to Mr. Butera's resignation,
Defendant had a book of business of more than 370 client accounts.
(ECF No. 4-2, at ¶50). Mr. Dunker attests in his supplemental
declaration that Mr. Butera has contacted at least eight
individuals and at least eight couples who are or were Edelman
clients. (ECF No. 17-1, at ¶5-20). Mr. Dunker further attests
that, as of June 12, Mr. Butera has accepted business from a total
of 33 client accounts. (ECF No. 17-1, at ¶ 26). The financial
loss to Edelman has been inconsistently alleged as $36 million in
its complaint, (ECF No. 1, at ¶64), and $31 million in the
declaration of Mr. Dunker, (ECF No. 4-2, at ¶45). In any event,
the alleged "outflow of assets under management" is in the tens of
millions of dollars.
Mr. Butera, in an affidavit, denies soliciting any of his
former clients. (ECF No. 13-1, at ¶10, 14). Rather, he states
that he merely announced his new affiliation. (ECF No. 13-1, at
¶10). Mr. Butera states that his announcement simply advised the
clients he contacted that he had left Edelman, joined a new firm,
and provided his new contact information. Mr. Butera says that he
only provided account transfer information to clients who wished
to continue doing their business with him. (ECF No. 13-1, at ¶12).
Mr. Butera also denies removing or retaining any client lists or
other client data from Edelman. (ECF No. 13-1, at ¶7)
at Pages 6 -7 of the DMD Opinion
SIDE BAR: By way of recap:
Butera's book of biz covered 237 or over 370 clients and, oh my!, he may have contacted at least eight individuals and eight couples; and, thereafter, he may have opened 33 client accounts at his new shop (which was affiliated with LPL Financial LLC). And, wow, Plaintiff Edelman allegedly lost $36 million . . . or $31 million . . . or tens of millions of dollars. And Butera may have improperly solicited his former Edelman clients or not, or he may have retained client data or not. What we know for certain is that Edelman is unhappy and the firm is going after Butera in federal court. Will DMD grant the former employer's TRO Motion? Keep reading.
Ya Got Any Evidence -- as in "any?"
In undertaking its analysis of the underlying facts cited in Plaintiff's TRO Motion, DMD begins to scrutinize the proprietary nature of the client data in dispute. Clearly, the Court was not impressed with Plaintiff's arguments:
Edelman has no evidence that Mr. Butera took anything in
tangible or digital form from Edelman when he left. Rather,
Edelman merely alleges that Mr. Butera must have taken (and
utilized) its trade secrets, because that is the only way he could
have solicited his former clients. (ECF. No. 4-2, at ¶51). Mr.
Butera attests that he did not remove or retain any client lists
or other client data from Edelman, but instead that some of his
clients are family members and friends, or that their contact
information is available through publicly available sources. (ECF
No. 13-1, at ¶7, 8). Counsel acknowledged at the hearing that
"It" (presumably LPL) asked him to write a list of clients from
memory when he began work for LPL and then to use publicly
available sources to locate contact information. It is axiomatic
that publicly available information is "generally known," and thus
not a trade secret. Edelman contends, specifically, that the
identity of a client carries with it the trade secret information
that the person has net worth that merits having a financial
While it may be that Edelman can establish trade secret status
for certain client information, it has neither yet done so clearly,
nor shown that Mr. Butera misappropriated it. Moreover, to the
extent that Mr. Butera disclosed trade secret information (the
names of his Edelman clients) to his new employer, the harm is
at Page 9 of the DMD Opinion
SIDE BAR: Hello again . . . it's me again -- your devilishly handsome, omniscient narrator. Let's see if we can highlight the Court's lovely bit of back-handed slaps and derision so deftly embedded in the above Page-9 quote
Hey, Edelman, this is the judge speaking; listen, when you come to court, particularly into my chambers, we're sort of beyond the point where you keep "alleging" this and that. It's now put up or shut up time, and, as I see it, well, you know what, I don't see it. For starters, spell it out for me: What the hell are you specifically saying that Butera took. No . . . no . . . no, just stop it! I don't care what you suspect or think he took. I don't care that it's your conclusion that he "must have taken" trade secrets. Listen to my questions, one last time: What did he take, when did he take it, and how is that allegedly purloined information a trade secret? Ummm . . . no, don't tell me that you'll show the proof to me next week. This is here. This is now. It's your TRO Motion that before me. I'm not seeing or hearing anything that I deem proof.
Not Every Communication is a Solicitation
Having disposed of the trade-secret aspect of the TRO Motion, DMD then moves on to Edelman's breach of contract claim, which is centered around Butera's alleged violation of the Restrictive Covenant involving solicitation and the acceptance of client business. In parsing through Plaintiff's assertions about Butera's alleged improper solicitation of clients, DMD focuses on the all-important distinction between potential improper solicitation and mere communication:
Although Plaintiff has clearly shown that Mr. Butera emailed
and called some of his Edelman clients in the days immediately
after he resigned, and that some of them have transferred their
accounts, it has failed to make a clear showing that it is likely
to succeed on the merits of its claim that Mr. Butera breached the
Restrictive Covenant by soliciting clients. Edelman takes the
position that any communication initiated or participated in by
Mr. Butera that doesn't include the statement that he can't take
their business is solicitation. It is far from clear that it is
correct in that interpretation, or that Mr. Butera did more than
merely announce his transition to a new company. Moreover, as
with the trade secrets claim, it is unclear whether the activity
is ongoing. Mr. Butera transitioned to LPL on May 12, and the
Dunker declaration of June 12 details contacts up to May 26, 2022,
but not beyond.
at Page 15 of the DMD Opinion
Troubling, Extremely Broad Interpretation
Next, DMD addresses the accepting-business prong of Plaintiff's TRO Motion. In disposing of this argument, the Court begins by citing the pertinent provision of the Restrictive Covenant:
[A]ccept[ing] any business of the same or
similar nature to the Business of the
Partnership with or from any Client or
Potential Client whom Participant has
solicited (directly or indirectly) or with
whom Participant has worked, communicated or
dealt on behalf of the Partnership group, or
any other Client that received services from
any office, branch or principal work location
at which Participant was based[.]
(ECF No. 4-4, at 15). Edelman is seeking to enforce its broad
clause, stating at the hearing that it would provide Mr. Butera a
list (even though it contains trade secrets) of those clients who
received services at his former work location even if not from Mr.
Butera. It is premature to resolve these very complex issues-the
parties differ decidedly on their interpretations of the
provision, with Edelman espousing a troubling, extremely broad
interpretation. It has failed to make a clear showing of
likelihood of success.
at Page 17 of the DMD Opinion
Finally, DMD makes quick work of Plaintiff's arguments raising breach of fiduciary duty of confidentiality and unfair competition. In a somewhat dismissive fashion, the Court deems the allegations somewhat derivative of others raised and finds that Plaintiff has not demonstrated a "likelihood of success" on its claims.
No TRO . . . Now, Let's Talk About Expedited Discovery
According. DMD offers this resolution:
Accordingly, Edelman has failed to establish entitlement to
temporary injunctive relief. It has moved for some expedited
discovery in advance of a hearing on its motion for a preliminary
injunction. Counsel are directed to confer with regard to a
schedule. If agreement is reached, simply advise the court, and
chambers will offer suitable dates for a hearing. If agreement
cannot be reached, counsel are to submit letters outlining their
respective positions and the court will convene a recorded
telephone conference to set a schedule.
at Page 19 of the DMD Opinion
Bill Singer's Comment
Compliments to DMD Judge Deborah K. Chasanow for a spot-on perfect Opinion -- truly a wonderfully drafted and crafted piece of work!
As BrokeAndBroker.com Blog readers know, I am no fan of non-solicit/non-compete provisions. Sure, there could be . . . there are . . . compelling fact patterns when a departed employee may have really gone over the edge and deserves to have the crap sued out of him. On the other hand, given that Wall Street is the purported bastion of free enterprise and Capitalism, it's a tad cynical to exalt the benefits of free markets and competition but, you know, then go sue folks for practicing what you preach.
I often counsel employer-brokerage-firms to handle departing employees with class and grace. Wish 'em well. Let 'em know how much you valued their contribution and how much you regret the departure. Shake hands. Send a bottle of champagne or something when they open their new shop. Let 'em know that if things don't work out, you would always welcome an opportunity to renew the professional relationship in the future. Why do I urge such a magnanimous response? Simple: Our industry can get real small at times -- in fact, if you look at the dwindling numbers of brokerage firms, that's seems an irreversible trend. From my perspective, firms who cultivate a scorch-the-earth reputation when it comes to sending so-called messages to former employees harm themselves in many ways:
First, veteran producers are often deterred from joining such an inhospitable shop out of fear that if things don't pan out, they too will get jammed up like so many before them.
Second, current employees may fear that efforts to negotiate a better deal will prompt their employer to take pre-emptive retaliatory measures -- which means that the brokerage firm never gets an opportunity to retain top talent.
Third, when customers get caught between feuding former employers and employees, those accounts often tend to pack up and take their business elsewhere.
Fourth, as long as the former employer has a winning litigation record, the fear of God remains extant; however, lose one case and Oz the Great and Powerful becomes a little, old man behind a flimsy curtain.
In 2019, BrokeAndBroker.com reported about a FINRA Arbitration filed by Edelman Financial Services against Cary Street Partners Investment Advisory and Raymond James Reibel II. "Edelman Financial Services Loses Non-Solicit Non-Disparagement Case" (BrokeAndBroker.com Blog / March 22, 2019) https://www.brokeandbroker.com/4496/edelman-financial-finra/ In its case against its former employee Reibel and his new employer Cary Street Partners, Edelman Financial sought $2,200,000.00 in compensatory damages and $1,003,214.00 in attorneys' fees and costs. The FINRA Arbitration Panel denied Claimant Edelman Financial Services, LLC's claims; and, worse, the arbitrators found Claimant Edelman Financial Services liable and ordered it to pay to Respondents Cary Street Partners and Reibel $160,000 in compensatory damages plus interest.
Take that brick of Cary Street/Reibel and add the brick of Butera, and, gee, Edelman Financial is on the way to building a wall of a reputation that the firm is just not all that adept at winning lawsuits. Which means that the blood-curdling "message" isn't getting delivered. Which means that the industry may see a little, old man behind a flimsy curtain. That's not a good visual. Not at all. It may be that Edelman will prevail at trial; after all, what's at issue in today's blog is not the substantive trail but the preliminary motion practice. Plaintiffs can lose a TRO Motion but still wind up prevailing at trial. As such, Edelman could still win millions in damages against Butera. On the other hand, round one clearly goes to Butera.