Protorae Law
Mike Holm | LeClairRyan | UBP Team

Unfair Business Practices



This blog focuses on unfair business and trade practices such as business conspiracy, breach of fiduciary duty, misappropriation of trade secrets and other proprietary information, fraud, tortious interference with contracts and other unfair business practices that are not neatly defined. Since we are located in Tysons Corner, Virginia, many of the cases discussed will come from Virginia, Maryland and the District of Columbia courts. We hope the reader finds this blog instructive.




  • James (Jim) B. Kinsel
    Jim Kinsel is a trial attorney who focuses on business litigation and unfair business practice claims, including business conspiracies, trade secret misappropriation, fiduciary duty breaches and other business torts.



  • W. Michael (Mike) Holm
    Mike Holm is a senior trial lawyer who has represented numerous business entities in bet-the-company and other unfair business practices cases.




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Monday, May 3, 2010

The Protocol: The Financial Services Industry Potentially Changes the Common Law By Contract

This blog has discussed the concepts of employee fiduciary duties, proprietary and trade secret information and corporate raids in many contexts. But what if an entire industry or major players within that industry negotiate a method for handling: (1) how employees leave their employers; (2) what types of information they can take with them; and (3) whether “corporate raids” are acceptable? Are such agreements enforceable between the parties to such an agreement? And what about companies in that industry that are not parties to the agreement?

That scenario presented itself to my firm several weeks ago in a litigation matter when a large financial services company filed a law suit, claiming that our clients, two of the plaintiff’s former financial advisors and their newly formed company, misappropriated the plaintiff company’s trade secrets. The plaintiff also asserted that the former employees violated their fiduciary duties owed to the plaintiff company. What is important is not the result of this particular case—we as blog authors do not talk about our specific cases anyway—but the financial services industry’s attempt to shift the common and statutory law by contract.

The shift is designed by the over thirty financial services companies that are signatories to the “Protocol for Broker Recruiting”. The Protocol provides that: “If departing [brokers] and the new firm follow this Protocol, neither the departing [advisor] nor the firm that he or she joins would have any monetary or other liability to the firm that the [advisor] left by reason of the [advisor] taking the information identified below or the solicitation of the clients serviced by the [advisor] at his or her prior firm, provided, however, that this Protocol does not bar or otherwise affect the ability of the prior firm to bring an action against the new firm for “raiding.” The signatories to this Protocol agree to implement and adhere to it in good faith.”

The Protocol then describes what a departing advisor may copy when the advisor changes jobs: “[w]hen [advisors] move from one firm to another and both firms are signatories to this Protocol they may take only the following account information, client name, address, phone number, email address, and account title of the clients that they serviced while at the firm (“the Client Information”) and are prohibited from taking any of her documents or shall include a copy of the Client Information that the [advisor] is taking with him or her.”

The Protocol does not demand perfection from departing advisors. Rather, it offers advisors a safe harbor, provided that they operated in good faith and “substantially complied with the requirement that only Client Information related to clients he or she serviced while at the firm be taken by him or her.”

The Protocol’s impact upon trade secret law is potentially significant because companies will often claim that client account information constitutes trade secrets. But many courts consider the “crucial characteristic of a trade secret [to be] secrecy . . . .” Microstrategy Inc. v. Li, 268 Va. 249, 262 (Va. 2004) (internal citations omitted). Thus, if companies agree that the certain account information may be copied by a departing advisor—provided that the Protocol is followed and the departing advisor goes to another Protocol signatory firm—it becomes difficult to later contend that the account information constitutes a trade secret if either of the prerequisites are not followed.

Similar questions may be raised regarding how the Protocol may affect an advisor’s common law fiduciary duties to the advisors employer or other unfair business practices tort claims.

There is also the question of how much impact being a signatory of the Protocol should have on a court’s decision. The Protocol only requires a party to be a signatory to receive the benefits when recruiting an advisor. Of course, it also subjects itself to the added risk of allowing departing advisors to take more information than might otherwise be allowed. But, a small company might elect to become a signatory immediately before recruiting advisors to shield their efforts from liability, without facing a practical threat of losing its own advisers. And there is no restriction limiting when a company can sign the Protocol or how long a company must remain a signatory. This is the system that the signatories elected, however, so a court might not have much sympathy to a complaining signatory company in that circumstance.

Some courts have used the Protocol as a reason not to grant an injunction, holding that when a financial services company “permits its financial advisors to leave for 38 other financial institutions and solicit their former clients with Client Information they took from [the company], it cannot credibly contend that the harm that will result if . . . [defendants are] allowed to do the same at a 39th firm is so substantial and so irreparable. . .” as to require an injunction. Smith Barney Div. of Citigroup Global Markets, Inc. v. Griffin, 23 Mass. L. Rep. 457; 2008 WL 325269 at *5 (Mass. Super. 2008). The court further held that “[b]y setting up such a procedure for departing brokers to take client lists, [the financial services firm] tacitly accepts that such an occurrence does not cause irreparable harm.’” Id.; quoting Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Brennan, et al., 2007 U.S. Dist. LEXIS 34501 at *7 (N.D. Ohio 2007) (finding that in the case where client contact information is transferred to non-Protocol firms, mere agreement to the Protocol constitutes tacit acceptance that transfers of client contact information do not cause irreparable harm).

It will be interesting to see whether and how courts in the Washington DC area treat the Protocol when faced with one of the myriad issues associated with competing companies, departing employees and the removal of otherwise confidential information.