Recent Decisions of Interest (No. 5)

FINRA and the Protocol for Broker Recruiting

We have not seen many cases addressing the Protocol for Broker Recruiting, which has been adopted by many firms in the financial services industry. One of the cases actually discussing the Protocol is Ameriprise Financial Svcs., Inc. v. Koenig, 2012 U.S. Dist. LEXIS 13864 (D. N.J. Feb. 6, 2012). The court summarizes the intent of the Protocol by stating that registered representatives who are leaving one firm to join another should keep two lists.

The first should identify basic profile information: name, address, phone number, e-mail address, and account title. That is the representative's list to keep. The second should contain account numbers, plus all data on the first list. That is for the firm. When a representative takes information beyond this basic profile data, as Koenig apparently did, then he or she is potentially liable for misappropriating trade secret data or breaching contractual covenants. Finally, despite this potential breach, the Protocol still will permit a representative to service his or her old clients - as long as he or she does not use "excess information."

Attorneys' Fees and a Discharge in Bankruptcy

An increasing number of non-compete issues end up in bankruptcy court. In re Al-Suleiman, 461 B.R. 893 (M.D. Fla. 2011), dealt with one sure to arise and interest employers who prevail in litigation and obtain monetary relief. The court held that an award of attorneys' fees in underlying non-compete litigation was dischargeable in bankruptcy. In so holding, the court rejected the creditor's argument that the debt arose out of the defendant's "larceny" of a patient list. It also held that the debt did not arise out of a willful and malicious injury to the creditor's business. Though the record is not totally clear, the court in the underlying litigation did not make any findings that would support the theory of nondischargeability.

Forfeiture for Competition Clauses

Finally, a decision out of Texas. Usually, cases involving the link between equity incentive awards and competition covenants produce interesting results. This one is no different. The case is Drennen v. Exxon Mobil Corp., 2012 Tex. App. LEXIS 1161 (Ct. App. Feb. 14, 2012), and it deals with a so-called bad boy provision tied to an award of restricted shares. Essentially, the plaintiff - Drennen - received a number of incentive award units through his long employment at Exxon Mobil, but the program which administered the awards provided that the same could be canceled if Drennen (or any plan participant) engaged in "detrimental activity." This, of course, could include competition with Exxon Mobil during or after employment.

Drennen left Exxon Mobil in late 2006. He informed the Company a few months later he would be joining Hess Corporation, which engaged in the exploration, production, and sale of crude oil and natural gas. He received notice that it was likely Exxon Mobil would cancel his incentive units due to the competitive nature of his work. When it followed through, Drennen sued for declaratory relief. He lost, but the Court of Appeals reversed.

The court found that the provisions concerning forfeiture were unenforceable under Texas law. This is one of the rare cases we see in which a choice-of-law clause is outcome-determinative. Though the plan was governed by New York law, the Texas court refused to enforce that choice-of-law clause, finding it contravened a public policy expressed in Texas law. Simply put, New York honors the so-called employee choice doctrine, which generally enforces forfeiture-for-competition clauses. The idea is that an employee can refrain from competing by accepting the benefits, or preserve his right to work in the industry by forfeiting them. Texas, however, holds that such clauses are not enforceable unless they meet the reasonableness criteria.

Here, the terms of the incentive program did not contain any parameters describing what competitive activity would not result in cancellation. Instead, the cancellation provision was unbounded - it was not limited in time - which created a fundamental enforcement problem under Texas law. The choice-of-law discussion ultimately focused on the close connection between Texas and each of the parties. The court ultimately rejected Exxon Mobil's plea to have New York law apply so as to create uniformity. Though this rationale is commonly accepted, Exxon Mobil's own plan undercut the argument: the plan allowed for the application of other laws to accommodate local laws of foreign nationals.