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Non-Competes
From the May 1998 issue of Registered Representative magazine Your customers may have learned about the widespread use of non-competition agreements through front page stories in Forbes and The Wall Street Journal. The existence of post-employment restraints, however, is all too familiar to retail brokers. Any broker considering a change in employment should consider all of the following points before submitting his or her resignation. Know the rules before the game begins. Most non-compete clauses with a former employer are buried within training or employment agreements. The worst time to learn what you have agreed to is the day your former employer serves you with a temporary restraining order (TRO) barring you from contacting your customers. Get and retain copies of any agreements pertaining to your employment and review provisions governing post- employment conduct. Know your enemy. As you develop a business plan for use at a new venue, it is as important to know how your old boss deals with competition from its former employees. Some firms (A.G. Edwards and Tucker Anthony come to mind) don’t impose any post-employment restraints on registered personnel. Others—most notoriously, Merrill Lynch—regularly seek relief against former brokers they view as a competitive threats. If you don’t know what your firm has done to other brokers after their departure, try to find out.Don‘t go out on your own without a trusty guide. You may have hired legal counsel to assist you in forming a new business entity, leasing office space and satisfying regulatory requirements. Make sure you also have an attorney on-line familiar with both the law governing post- employment restraints and securities arbitration practice. Some states—including California—refuse to enforce non-competition agreements under any circumstances. Judges in other jurisdictions are becoming increasingly reluctant to enter injunctions enforcing non-competition agreements that keep customers from freely choosing a personal service provider. One perk senior producers moving from firm to firm often obtain is the retention of experienced counsel to defend against non-competition agreements. Consider providing yourself with the same protection—even at your own expense. Take one last look before you leap. Retaining too much information about customers you expect to transfer over may provide valuable ammunition to your former firm. Even if a non-competition agreement is unenforceable, courts or arbitrators may insist you honor agreements restricting your right to retain “confidential” customer information (such as Social Security and account numbers and detailed portfolio information) after the end of your employment. Most lawyers advise clients subject to a confidentiality agreement not to take any company documents (holding pages, commission runs identifying customers and transactions, your office Rolodex®. and comparable computer files) when they quit. Whether you may maintain and use a “personal” customer list at home also is open to question. even when all your customers’ “confidential” names and numbers can be found in the telephone book. Preparing and distributing account transfer forms before a customer has given your new firm account opening information ma be seen as an improper use of information you obtained from your former employer. The best defense is a good offense. NASD Rule 10335 permits member firms to seek an “emergency” temporary restraining order from a local court simultaneously with the filing of an arbitration claim. Courts may enter such relief before the broker has an opportunity to demonstrate relief is unnecessary, and may extend the relief in the form of a preliminary injunction even after the broker gets an opportunity to respond. Unfortunately, 30 to 60 days may pass between the entry of a court order barring you from contacting your customers and the full arbitration hearing. The rules, however, do not leave a broker defenseless. Rule 10335 applies to brokers, too. You could seek an expedited resolution over the enforceability of a non- compete and “confidentiality” agreements. Bear in mind. however, that a pre-emptive strike can backfire. since firms can counterclaim to enforce the agreement. which may lead to the entry of an enforceable injunction and damage award against the broker.Brokers move every day without a problem. But firms can and do interfere with reps’ ability to contact customers. It’s best to be prepared. Reprinted with permission of Registered Representative magazine Copyright ©2000-01 Edward R. Wiest, P.C. This Page
Was Last Modified on
04 December 2002
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