As an employment dispute makes its way through federal court, we witness the early stages of motion practice and the parties' efforts to define what is (and isn't) improper solicitation of clients -- and whether Defendants breached their purported fiduciary duty to their employers.
WSFS Financial Corporation, and Wilmington Savings Fund Society, FSB d/b/a WSFS Bank, Plaintiffs, v. Richard K. Cobb, Jrr., and Christopher Campbell, Defendants (Memorandum, United States District Court For The Eastern District Of Pennsylvania ("EDPA"), 22-CV-815)
As set forth in the "Background" of the EDPA Memorandum:
The instant case arises from an employment dispute raising claims of breach of contract, violation of Pennsylvania Wage Payment and Collection Law, and tortious conduct under Pennsylvania common law. The matter now comes before this court on cross-motions for summary judgement.
Plaintiffs WSFS Financial Corporation (“WSFS Financial”) and Wilmington Savings Fund Society, FSB d/b/a WSFS Bank (“WSFS Bank”) (collectively, “WSFS” or “Plaintiff”) are the corporate successor by merger of The Bryn Mawr Trust Company (“BMT”). The Defendants are Richard K. Cobb, Jr, WSFS’s former Senior Vice President of Wealth Management (“Cobb”) and F. Christopher Campbell, WSFS’s former Vice President of Wealth Management (“Campbell”) (collectively, “Defendants”).
At the heart of the lawsuit are Defendant Campbell's and Defendant Cobb's Non-Disclosure and Non-Solicitation Agreements with BMT that state in part:
2. Non-Disclosure. Except in connection with the performance of Employee’s duties in the course of his employment, Employee agrees that Employee will not, either directly or indirectly, for competitive or other purposes, disclose, cause to be disclosed, use or cause to be used, any Confidential Information of Employer or Affiliates or their clients, either during Employee’s employment or at any time thereafter . . .
3. Non-Interference. . . . Employee shall not disrupt, damage, impair or interfere with the business of Employer or Affiliates in any manner, including without limitation, inducing any employee to leave the employ of Employer or Affiliates or inducing any client or business referral source to sever its relationship with Employer or Affiliates. . .
4. Non-Solicitation. … Employee shall not, directly or indirectly, accept any business from, or solicit, induce, or attempt to induce, any person or entity who has been a client or business referral source of Employer…
at Pages 2 - 3 of the EDPA Memorandum
As to what set things in motion, on March 10, 2021, WSFS and BMT announced the merger of the latter into the former effective January 1, 2022; and as part of the process, BMT's broker-dealer relationship would be transferred from Cresap, Inc. to Commonwealth Financial Network. Apparently, Defendants did not want to make the transfer to Commonwealth and repeatedly voiced their concerns. In early January 2023, Financial Advisor John Ulrich, Client Relations Manager Tara Cedatol, Client Service Associate Jessica Wilf, Defendant Campbell, and Defendant Cobb resigned from WSFS, and they remained with Cresap.
Solicitation or Announcement?
As is often the case when producers depart their firms under somewhat antagonistic circumstances, allegations are lobbed that the former employees engaged in inappropriate solicitation of clients and other allegedly improper conduct. In today's case, EDPA quickly latched on to Plaintiff's claims that Defendants had violated their Non-Solicitation Agreement:
b) Solicitation of AMG Clients
Next, Plaintiffs allege that Defendants solicitated WSFS clients in violation of their restrictive covenants when they sent the January 4, 2022, email to their clients.
The Financial Industry Regulatory Authority (“FINRA”) standards of professional conduct allow for announcements of changes in employment and prevent interference with a customer's request to transfer his or her account. See FINRA Rule 2140 (generally prohibiting interference with the transfer of customer accounts). Courts interpreting the undefined term "solicitation" in a restrictive covenant have found that an announcement of a change of employment is not actionable solicitation. See Pharmerica Corp. V. Sturgeon, 2018 U.S. Dist. LEXIS 43236 (W.D. Pa 2018) (holding an employee did not violate the non-solicitation provision of a restrictive covenant where he sent an email which “did not invite or solicit the clients/customers to move their business away from [Employer] and to [Competitor]” or “disclose any confidential information or trade secrets of [Employer].”)
The email sent by Defendants to their clients was not a solicitation as a matter of law. Rather, it was merely notice of a change in their employment status. The email did not disclose any confidential information and nothing in the email can be read as an invitation to the clients to move their business. In fact, no client did move their business or alter their accounts in any way.
Even if the email contained language which could be read as a solicitation, the claim would still fail as a matter of law. It is undisputed that the clients serviced by the AMG held contracts directly with Cresap. WSFS argues that referral and fee structure created a relationship with the clients that made them jointly owned by WSFS and Cresap. However, the terms of the BSA plainly required BMT and Cresap to maintain separate relationships with their respective clients. AMG clients received wealth management services from AMG wealth financial advisors according to agreements held with Cresap. While some of those individuals also received banking services according to agreements held with WSFS, those agreements were distinct, and the relationship separate pursuant to the terms of the BSA. Plaintiff has not identified any behavior by Defendants which could constitute inducing WSFS clients to end their banking relationship with WSFS. In effect, Plaintiff argues that Defendants refused to solicit Cresap clients away from Cresap in favor of Commonwealth, a competitor with whom WSFS had a preexisting relationship.
In short, Defendants did not solicit WSFS clients in violation of their Non-Solicitation Agreements as a matter of law.
at Page 8 of the EDPA Memorandum
Oh my! What a lovely, succinct, and smack-dab-on-point summary of what should and should not be deemed "solicitation." A mere "notice of change" of one's employment status does not rise to the level of a solicitation, and, absent more, does not disclose any confidential information. On top of the Court's wisdom, it's hard not to smile at this clever bit of "in your face" jurisprudence:
[P]laintiff has not identified any behavior by Defendants which could constitute inducing WSFS clients to end their banking relationship with WSFS. In effect, Plaintiff argues that Defendants refused to solicit Cresap clients away from Cresap in favor of Commonwealth, a competitor with whom WSFS had a preexisting relationship.
at Page 8 of the EDPA Memorandum
Breach of Fiduciary Duty?
An equally impressive bit of judicial analysis was presented in EDPA's consideration of whether an employee breaches a fiduciary duty when terminating employment and, thereafter, pursuing plans to compete with a former employer:
“[E]mployees at will do not breach a fiduciary duty to the employer by making preparations to compete upon termination of employment provided the employee does not use the confidential information of his employer, solicit the customers of his employer, or otherwise engage in conduct directly damaging his employer during the period of employment.” Oestreich v. Environ. Inks & Coatings Corp., 1990 WL 210599, at *6 (E.D.Pa. Dec. 17, 1990). “Thus, before the close of his employment, an employee may purchase a rival business and, upon the termination of the agency, immediately compete with his former employer. He may not, however, ‘solicit customers for such rival business before the end of his employment nor can he properly do other similar acts in direct competition with the employer's.’” Synthes, Inc., F. Supp. 3d at 667 (quoting Restatement (Second) Agency § 393, cmt. e (1958)). See also Spring Steels, Inc. v. Molloy, 162 A.2d 370, 375 (Pa. 1960) (“Even before the termination of agency, [the employee] is entitled to make arrangements to compete, except that he cannot properly use confidential information peculiar to his employer's business and acquired therein.”). Judge Rufe explained this rule more succinctly:
Pennsylvania law permits an agent or employee to “make arrangements to compete,” but prohibits him from using “confidential information peculiar to his employer's business and acquired therein.” Within this framework, an employee may properly inform customers of his current employer that he is leaving the employer to work elsewhere in the field, or to start his own competing business. In contrast, an employee who, while still working for her employer, makes improper use of her employer's trade secrets or confidential information, usurps a business opportunity from the employer, or, in preparing to work for a rival business, solicits customers for such rival business, may be liable for a breach of the duty of loyalty.
Bro–Tech Corp. v. Thermax, Inc., 651 F.Supp.2d 378, 414 (E.D.Pa. 2009) (footnotes omitted).
at Pages 9 - 1- of the EDPA Memorandum
In response to the various motions by Defendants, EDPA ordered the following: