THE BROKER PROTOCOL
Will the Broker Protocol (the “Protocol”) will be enforced if it conflicts with certain restrictive covenants in a partnership agreement and/or an employment agreement?
Our cursory review found that where both firms are signatories to the Protocol, litigation has been focused on employees that are registered representatives. We did not find decisions applying the terms of the Protocol to departing business owners or partners trying to take their business elsewhere.
We propose including language in a partnership agreement expressly stating that the partners agree that they understand the Protocol to apply to employees only and that the Protocol terms do not trump any non-compete and non-solicitation provisions in the partnership agreement.
Limited Protection of Protocol
The Protocol, by its express terms, provides a safe harbor: (i) only after an employee that is a registered representative (the “Representative”) leaves one firm that is signatory to the Protocol and; (ii) joins a new firm, which also is a signatory to the Protocol. Even assuming two signatory firms are involved, however, the Protocol provides only limited protection to the Representative and the law surrounding the Protocol is fact specific and somewhat unsettled.
Even where both firms are party to the Protocol, a Representative remains subject to contractual and common law restrictions while employed by the firm he is leaving. Contractual restrictions may be imposed in a number of documents, especially the Representative’s employment agreement.
One of the most important contractual restrictions on the terms of the Protocol is the notice requirement (or non-solicitation provision), commonly referred to as the “garden leave” period. During garden leave, the departing Representative remains an employee of his firm even though he has given notice of his resignation and he is not “working” for the firm. The Representative owes at least a common law, and likely also an express contractual, duty of undivided loyalty during this period. Among other things, the duty of undivided loyalty precludes soliciting clients to switch firms and taking client information before the garden leave expires. These restrictions impede the Representative’s ability to switch firms seamlessly, and they exist independently of the Protocol.
Even after the expiration of garden leave, a Representative may remain subject to contractual duties not to solicit and/or compete, which can extend for many months’ post-employment. The Protocol provides a safe haven for solicitation once employment at the new firm begins, but that protection is afforded only if the Representative follows the Protocol’s rules, namely: the Representative (i) does not begin to solicit his clients before resigning; (ii) takes certain limited client information to his new firm and; (iii) leaves behind a list of the information he has taken. Failure to follow the Protocol to the letter has been grounds for many wrongful solicitation suits.
Even where both firms are signatories to the Protocol, firms have still sued a departing Representative. Enforcement of the Protocol seems to be fact specific and this body of law is evolving to address situations that may not fall under the initial parameters of the Protocol envisioned by its creators.
Generally speaking, where both firms are a signatory to the Protocol, courts look favorably on those departing Representatives who act in good faith and who have followed the Protocol rules.
Where one firm is a signatory and the other firm is not, the decisions go both ways. Courts have allowed a non-signatory firm to sue a departing Representative if he has violated his non-solicitation agreement. Conversely, courts have declined to enjoin a departing Representative from soliciting his clients when leaving a signatory firm to go to a non-signatory firm. In this situation, where the court will not enjoin the departing Representative, the departing Representative and the non-signatory hiring firm may still be liable for damages to the former firm in FINRA arbitration. This is because the Protocol, by its own terms, applies only to those firms who sign it.
Our preliminary research regarding whether the Protocol can be used by a departing business owner or partner of a firm to take business and clients and start a new firm or join another firm has shown the litigation to focus on employees and registered representatives. When considering hiring a Representative who intends to bring clients, the Representative should engage counsel to advise him on the proper way to exit his old firm and make him aware of contractual and common law obligations he may have to the former firm. As concerns the retention of clients upon the departure of an owner/partner of a firm, we suggest adding language to a partnership agreement expressly stating that the Protocol safe haven does not protect a partner wanting to leave the firm with clients.
Written By: Alexandra Lyras