FINRA Lawyer Blog
In Fidelity Brokerage Services LLC v. Morgan Stanley Smith Barney LLC and Brian Wilder(FINRA Arbitration No. 11-03937), a FINRA arbitration panel found against respondents and annexed a 25 page Arbitrators’ Report to the Award which excoriated respondents for misappropriation of trade secrets (Fidelity’s customer list) among other violations. The Award stands out for various reasons, including the punitive damages awarded against Morgan Stanley and the sizable attorneys’ fees awarded to Fidelity. Most interesting, however, is the Arbitrators’ Report itself, which carefully applied the facts to the law and is a must-read for any broker who may be considering jumping ship from a firm which is not a signatory to the Protocol for Broker Recruiting.
Facts of the Case
The underlying facts are straightforward. The rep had an employment agreement with Fidelity which contained non-solicitation and confidentiality clauses. The confidentiality clause stated that customer lists and contact information were deemed to be trade secrets by Fidelity. Prior to leaving Fidelity, the rep met with counsel and created a list of customer contact information purportedly in conformity with the Protocol for Broker Recruiting even though Fidelity is not a signatory to the Protocol. Upon leaving Fidelity, the rep began calling his former customers to inform them of his new employment and sent ACAT forms to a sub-set of his former customers.
Fidelity promptly ran off to court and received a Temporary Restraining Order protecting against further solicitation by the rep. Despite the fact that only 7 brokerage accounts transferred from Fidelity to Morgan Stanley, a contentious arbitration ensued which included 34 hearing sessions before the arbitration panel.
The Award is instructive because it clearly addresses (a) the legal protections which brokerage firms may waive by joining the Protocol for Broker Recruiting; (b) whether a customer list is in fact a trade secret; and (c) ways in which reps can notify their former customers of new employment without running afoul of the law.
Recap of the Protocol for Broker Recruiting
The Protocol for Broker Recruiting is an agreement among broker-dealers to refrain from enforcing non-compete agreements against brokers who move between signatory firms. The caveat, however, is that the transitioning rep must strictly follow the procedures set forth in the Protocol to enjoy its protections. The procedures are the following: (1) Prior to resigning, the rep should prepare two lists: the first containing his customers’ names, addresses, telephone numbers, email addresses and account types; the second containing all the information in the first, plus client account numbers. (2) The rep must submit a written resignation letter to someone in management. (3) Along with the resignation letter, the rep must provide the customer list containing the account numbers to someone in management. Assuming the three-steps are followed, the rep can take the list without account numbers to their new firm and use it to solicit customers to transfer their accounts.
Protections Waived by Joining the Protocol
The arbitrators noted that Fidelity’s customer list qualified as a “trade secret” under Massachusetts law. However, had Fidelity joined the Protocol it would not enjoy “trade secret” protections for its customer list because it would willingly release same to the departing rep. The arbitrators went on to explain why some firms, like Morgan Stanley, opt to join the Protocol, while other firms, like Fidelity, choose not to. Fidelity, on the hand, spends substantial sums of money on direct client acquisition through advertising and then provides its brokers with a book of business to service. Thus, the “good will” inures to the benefit of Fidelity, not the broker. By contrast, wire-houses like Morgan Stanley expect its brokers to develop a book of business on their own and sometimes at the broker’s own expense. Thus, the “good will” inures to the benefit of the broker, not the firm. The arbitrators went on to note that Massachusetts courts have long held that “goodwill” is a legitimate business interest which may be enforced by non-solicitation clauses like the one within the reps employment agreement.
Announcement vs. Solicitation
Notwithstanding the non-solicitation agreement, the arbitrators noted that some states (like Massachusetts and California) permit a departing rep to “announce” their new employment to their former customers. The arbitrators found a permissible “announcement” to be sending a written “wedding style” announcement card and nothing more. In contradistinction, the arbitrators found the reps conduct to be a “solicitation” because (a) the rep failed to “announce” in writing, instead doing so by telephone; (b) the rep made repeated telephone calls to his former customers; (c) the rep asked certain customers to hide his solicitation from Fidelity; and (d) sending ACAT forms to certain clients constituted solicitation in and of itself.
Kudos to the arbitrators for drafting such a thoughtful and well-reasoned Award.