The White House Opines on Non-Competes

October 13th, 2016

In May 2016, the White House released the report “Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses,”[1] discussing the growing prevalence of non-compete agreements in employee contracts, their potential misuse by employers and the negative effects it may have on the economy.  The report is meant to provide a “starting place for further investigation of the problematic usage of one institutional factor that has the potential to hold back wages–non-compete agreements.”

The report connotes a change in attitude towards non-competes.  Certainly, the report acknowledges, non-compete agreements or “non-competes” in limited circumstances may be socially beneficial, encouraging innovation, protecting trade secrets and incentivizing employers to invest in its employees.  However, as the misuse of non-competes has expanded and research increased, the social detriment has become a pronounced concern, undermining the potential social benefits of non-competes.  For example, while the “main economically and societally beneficial uses of non-competes are to protect trade secrets…fewer than half of workers who have non-competes report possessing trade secrets.”

Over time, the use of non-competes has increased.  “Research suggests that 18 percent, or 30 million, American workers are currently covered by non-compete agreement.”  And the number of employees being sued for breach of non-compete agreements has increased 61% from 2002 to 2013.  Non-competes, commonly thought to be used selectively for high-wage employees with advanced training and “trade secrets,” have increasingly, and, the report suggests, inappropriately, been used for low-skilled and low-wage workers who are unlikely to posses any trade secrets.  “Approximately 15 percent of workers without a college degree are currently subject to non-compete agreements, and 14 percent of individuals earning less than $40,000 are subject to them.”  In a highly publicized example of the misuse of non-competes, a national sandwich chain required its employees to sign a non-compete, restricting their ability to work at other fast-food restaurants.

Furthermore, the report found that 37% of workers are asked to sign non-competes after having already accepted a job offer.  Meaning, that they are often not negotiated and the employee may lack awareness of the agreement’s implications.  Additionally, employers often write overly broad non-competes that are at least in part, if not entirely, unenforceable, instead relying on workers lack of knowledge about its implications and legal enforceability.   For example, in California, while the legislature has made non-competes generally unenforceable, workers are still asked to enter into non-competes at a rate slightly higher than the national average, creating a chilling effect on worker behavior.

Non-compete agreements also have a negative effect on the economy by restricting workers mobility and constraining wage growth.  Workers bargaining power is reduced as a result of non-competes and “analysis suggests that states with higher levels of non-compete enforcement see lower wages in general, and that wage disparities between high and low enforcements states actually grow as workers age.”  Additionally, non-competes reduces labor market dynamism, reducing workers ability to switch jobs within their industry, resulting in reduced compensation, atrophy of skills, and estrangement from professional networks.  Furthermore, in some states non-competes are enforceable even where the worker is fired without cause, thus preventing the ability of a worker to continue working in their occupation even when fired without cause, such as layoffs.

Several states have introduced or passed bills aimed at curtailing and restricting the use of non-competes.  For example, Hawaii and New Mexico have banned the use of non-competes in specific sectors.  Whereas, Oregon and Utah have limited the duration of non-competes.  Other states, like New Jersey, Maryland, Washington and Idaho have proposed bills that would render non-competes unenforceable for workers eligible for workers compensation or non “key employees” who are unlikely to have inside knowledge or trade secrets.

The report concludes by noting that non-compete agreements can be socially and economically beneficial in some cases, however, non-competes can cause negative effects on workers, consumers, and the economy generally.  Acknowledging there is more work to be done on the topic, “The Administration will identify key areas where implementation and enforcement of non-competes may present issues, examine promising practices in states, and identify the best approaches for policy reform.”

[1] https://www.whitehouse.gov/sites/default/files/non-competes_report_final2.pdf

An Illustrative Tale From Down on the Farm

October 24th, 2014

The expression “you cannot make a silk purse out of a sow’s ear,” apparently applies to restrictive covenants as well. The court’s decision in Genex Corp., v. Contreras, et al., 2014 BL 279888 (2:13-cv-3008, E.D.W, Oct. 3, 2014), although specific to Washington and Wisconsin, is of some note because of the court’s reluctance to enforce restrictive covenants applicable to line-level, at-will, employees both because at-will employment may lack sufficient consideration for enforcement of the promise and because they are inherently “unreasonable.”

The case involved a team of “Breeding Program Specialists” (BPS) who serviced dairy farmers in the Sunnyside area of the State of Washington. The job of the BPS, which will make us city folk a bit uneasy, was to determine when a farmer’s dairy cows would go into heat and then to artificially inseminate the cows using “arm service,” which involves physically inseminating the cows using Genex semen. (Yes, your mental image is correct).

The defendants, Jorge Contreras, Danile Senn, and Erasmo Verduzco, were all former employees of Genex Cooperative, Inc., (“Genex”). Each, signed restrictive covenants as a condition of their employment. Displeased with their compensation and working conditions, they signed identical letters of resignation in December of 2012 and jumped ship to a competitor, CRV USA (“CRV”). Nearly all of the farmers in Sunnyside followed the defendants to CRV. Thus, the day after their resignation from Genex, all three defendants were back at work, servicing the same farms they did as Genex employees, but now they were using CRV product—allegedly in violation of the terms of their non-compete and non-solicitation agreements.

Genex sued and eventually moved for summary judgment. Applying the Restatement 2d of Contracts, the court found the test to determine the validity of restrictive covenants is reasonableness, the elements of which are: (i) whether the restraint is needed for protection of plaintiff’s business or goodwill; (ii) whether the restraint is reasonable and needed to secure such business and goodwill; and (iii) whether the degree of injury to the public as a result of the loss of the services and skill of the employee warrants non-enforcement of the covenant.

While the court took issue with, and refused to enforce, all three agreements because they were overly-broad and not reasonable, its discussion about Contreras’ agreement is the most interesting. First, the court found that Contreras was a low-level, at-will, agricultural worker, who could neither speak nor write English. Second, it questioned whether Contreras’ status as a lessor skilled, at-will, employee meant that his restrictive covenant lacked consideration. In dicta that will send a chill down the neck of employers, the Court stated, or depending on how you read it, held:

Whether non-compete agreements can ever be enforceable against at-will employees, without providing specific consideration such as a promise for future employment or training, is an open question in Washington…Indeed, the Supreme Court of Washington has ‘never held that continued employment alone is sufficient consideration to uphold a non-compete agreement….’ At-will employment is merely ‘continued employment’ and does not promise an employee future employment, an analytically distinct form of consideration.…Thus, for consideration purposes, an at-will employee signing a restrictive covenant at the time he is first hired is indistinguishable from a contract employee signing restrictive covenant after beginning his employment. (emphasis added)

Because non-competes preclude employees from seeking new employment in their chosen profession in a given area, the court stated, in what can be fairly categorized as a general rule, that “Restrictive covenants against employees who may be terminated for any reason-including the employer’s withdrawal from the region-are unreasonable.” Given Contreras’ circumstances, the court held that his agreement was unenforceable as a matter of law.

The opinion is not the clearest. Read one way, the court seems to be holding that absent specific, additional consideration, an at-will employee cannot be bound by a restrictive covenant. And, that regardless of whether there is adequate consideration, employers will face a tough road in the Eastern District of Washington if they want to enforce a non-compete against an at-will employee given that they are inherently “unreasonable.” Read a different way, the opinion is merely discussing, in-dicta, whether an at-will employee can or should be bound by a non-compete if there is no additional consideration. Even then, if an initial offer of employment is not consideration, the question arises as to what would constitute adequate consideration. It is hard to fathom why payment of $500 or $1000 upon hiring would overcome the court’s bias against at-will employee non-compete agreements. Either way, the opinion seems to be among the farthest reaching in its efforts to limit enforcement of non-competes for line, at-will employees simply because of their employment status, without regard to a review of circumstances or the need to protect trade secrets or business opportunities.

International Enforcement of Restrictive Covenants

September 23rd, 2014

This is the first in a series of articles on the international enforcement of restrictive covenants.  As and the world becomes flatter and marketplaces become global in scale, employers are faced with the daunting challenge of protecting their interests on an international level. Perhaps the most fundamental and crucial interest an employer must protect is the safety of their confidential information and trade secrets.  To prevent their disclosure by employees, employers often rely on employment agreements that contain restrictive covenants. These can consist of non-compete, non-poaching, and non-solicitation clauses among others.  Some of these restrictions protect an employer’s interests while inhibiting an employee’s  freedom to seek alternative employment with competitor of their former employor or to solicit work from the clients of their former employer

American companies are very familiar with the challenges involved in enforcing a non-compete clause nationwide. State law varies dramatically from state to state, ranging from extremely employee friendly states such as California, to more employer friendly states including New York. These challenges increase exponentially as a company turns from a national organization into an international one. For the purposes of this discussion, we will focus on an increasingly familiar scenario; a New York organization seeking to restrain an employee’s relocation to the United Kingdom.

Choosing the Forum

The first hurdle that an employer must overcome when attempting to enforce an international non-compete clause is determining which court is the appropriate forum to bring suit. A New York company would almost certainly prefer the friendlier laws and economic simplicity of a New York court, but European laws create crippling difficulties in attaining this goal.  Jurisdiction and the enforcement of judgments in civil and commercial matters in the UK is determined by Section 5 of Council Regulation (EC) 44/2001. Article 20(1) of this regulation mandates that “[a]n employer may bring proceedings only in the courts the Member State in which the employee is domiciled.” Unfortunately for employers, British courts have held that this Article will supersede choice of jurisdiction clauses in employment contracts. Samengo-Turner v. J & H Marsh & McLennan (Services) Ltd, [2007] EWCA (Civ.) 723 (Eng.). As such, a foreign corporation will be forced to litigate wherever the breaching party is domiciled, regardless of the provisions of their contract.

End Run

Companies have attempted to circumvent the Regulation by severing their restrictive covenants from the original employment contracts. By separating the two, companies claim that these contracts now fall outside of the employer/employee relationship that is required in order to apply the provisions of Article 20 of the Regulation. This argument was ultimately struck down by the High Court of Justice in Samengo-Turner v. J & H Marsh & McLennan (Services) Ltd, [2007] EWCA (Civ.) 723 (Eng.).

In SamengoTurner, employer Marsh & McLennan Services Limited and employee Julian Samengo-Turner entered into a restrictive covenant agreement in Maryland containing a New York choice-of-jurisdiction clause. The contract itself was not conditional on employment; instead, Samengo-Turner was to receive bonus stock awards in exchange for his signing of a non-solicitation, confidentiality, and non-disclosure agreement. The court held that though the contract was physically separate from a contract of employment, for the purposes of Section 5 analysis, the contract could not be viewed as severable. The court reasoned that though the two contracts are distinct, “[o]ne cannot ascertain the terms upon which they were employed without looking at both the original contracts and the [non-compete agreement].” Samengo-Turner­ sets the tone for how difficult it is to enforce a restrictive covenant internationally.

Which Law

Once the parties have established themselves in a court in the jurisdiction of the employee’s domicile, the next substantial challenge an employer faces is applying favorable law. Choice of law provisions in UK courts are governed by Regulation (EC) No 593/200 on the Law Applicable to Contractual Obligations (otherwise known as the Rome I Regulation). Article 21 states that “[t]he application of a provision of the law of any country specified by this Regulation may be refused only if such application is manifestly incompatible with the public policy (ordre public) of the forum.” British courts have held that the doctrine of restraint of trade is considered public policy in the UK, and as such, if a contract violates the UK laws on non-competes, a UK court will not enforce the contract. In other words, for a contract to be enforceable in the UK, it must be considered enforceable under both the governing laws of the contract as well as trade laws in the United Kingdom.

This issue was discussed at length in Duarte v The Black and Decker Corporation & Anor, [2007] EWHC (Civ.) 2720 (QB). Alexander Duarte was employed by the international Black and Decker Corporation. Duarte worked his way up the ranks at Black and Decker before leaving to work for Ryobi Technologies (UK), one of several competitors of Black and Decker included on a list of restricted employers in Mr. Duarte’s contract. Black and Decker quickly brought suit. Ultimately the court determined that Duarte’s employment contract with Black and Decker violated Maryland and UK laws on restraint of trade, and thus was declared unenforceable.

Duarte, applying the principles of Rome I (then known as the Rome Convention), makes clear that a New York employer attempting to enforce a restrictive covenant in the UK must be careful to tailor the agreement in such a way that it will be considered enforceable under both New York and UK law. A covenant in restraint of trade in England will only be upheld if the agreement is reasonable in the interests of the contracting parties as well as the interests of the public. Office Angels Ltd v. Rainer Thomas & O’Connor, [1991] IRLR 214 (Eng.).  Meaning, that these agreements will only be upheld when the employee “might obtain such personal knowledge of and influence of the customers of his employer, or such an acquaintance with his employer’s trade secrets as would enable him, if competition were allowed, to take advantage of his employer’s trade connection or utilize information confidentially obtained.” Office Angels, IRLR 214quoting Herbert Morris Ltd v. Saxelby,[1916] AC 688at 709.

Put differently, a covenant not to compete will only be enforced when the employer can show that the employee has control over the company’s trade secrets. It is not enough that an employee’s skills will aid a competitor; there must be a risk of or actual misappropriation. “The employer’s claim for protection must be based upon the identification of some advantage or asset inherent in the business which can properly be regarded as, in a general sense, his property, and which it would be unjust to allow the employee to appropriate for his own purposes, even though he, the employee, may have contributed to its creation.” Stenhouse Ltd v. Phillips, [1974]AC 391 at 400.

Moreover, as under New York law,  it is essential that the employer prove that the restrictions are no greater than reasonably necessary for the protection of their business. In Duarte, the court held that the restrictions placed on Duarte were too severe since several of the companies included on the restricted employers list were not considered a threat to Black and Decker’s confidential information. Like many jurisdictions in the U.S.,  Britain has a blue-pencil law that allows for unenforceable provisions to be removed without invalidating the entire agreement when: (1) the unenforceable provision is capable of being removed without the necessity of adding to or modifying the wording of what remains; (2) the remaining terms continue to be supported by adequate consideration and; (3) the removal of the unenforceable provision does not change the character of the contract that it becomes ‘not the sort of contract the parties entered into at all.’ Sadler v. Imperial Life Assurance of Canada Ltd., [1988] IRLR 388. From this, one might attempt to argue that any company on a restricted employer list should just be removed if found unenforceable.  In Duarte, however, the court held that removing any of the corporate groups included on the restricted employer list would have changed the character of the agreement and thus violated the court’s blue-lining provisions.

Careful Drafting, With an Eye Towards the International is Key.

It is clear that when drafting a non-compete agreement, an employer need be careful of many considerations. Though choice of jurisdiction clauses will often be disregarded, an employer must carefully choose their choice of law, noting that UK law will still take precedence. However, given that Britsh law and New York law is not dramatically different, employers should be able to draft restrictive covenants that withstand scrutiny on both continents.  There, like here,  employers must be cautious not to restrain trade outside of that which will protect their confidential information, and they must carefully balance their own legitimate interests with those of their employee. Should an employer wish to add an additional layer of protection, they must attempt to craft the agreement in such a way that any unenforceable provision could be found independent from other provisions while still maintaining adequate consideration, something, of course, we can help you with.  While the challenges have maintaining confidential information become more complex as the workforce becomes mobile and multi-continent, , maintaining a firm grasp on international law will help parties on both sides navigate these dangerous waters.

Computer Fraud and Abuse Act- Part 2

March 3rd, 2014

Federal circuits around the country are also split on whether to interpret the CFAA narrowly or broadly. A recent decision in the United States District Court for the Eastern District of Pennsylvania weighed in on the significant split of authority among the federal circuit courts concerning the interpretation of the CFAA. Dresser-Rand Co. v. Jones, No. 10-2013, 2013 WL 3810859 (E.D. Pa. July 23, 2013). In Dresser-Rand, the United States District Court for the Eastern District of Pennsylvania adopted the narrow interpretation of the CFAA and ruled that departing managers from a company did not access company computers “without authorization,” nor “exceed authorized access,” in violation of the CFAA when they downloaded thousands of company documents to external storage devices from their work laptops, since they had unrestricted access to such documents. In coming to its decision, the court weighed in on the split in federal circuits concerning the interpretation of the CFAA. The court noted that the “broad” and “narrow” labels have been helpfully divided into three categories: agency-based authorization, code-based authorization, and contract-based authorization.

Under the broader,

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agency-based analysis, “if an employee has access to information on a work computer to perform his or her job, the employee may exceed his or her access misusing the information on the computer, either by severing the agency relationship through disloyal activity, or by violating employer policies and/or confidentiality agreements.” Id. at 5. In one such case the Seventh Circuit held that defendant’s authorization to access his work laptop terminated when, having already engaged in misconduct by resigning in violation of his employment contract, “he resolved to destroy files that incriminated himself and other files that were also the property of his employer, in violation of the duty of loyalty that agency law imposes on an employee.” Id. at 420-421.

The Dresser-Rand court also discussed the Fourth and Ninth adoption of the narrow view based on the reasoning that the plain language of the statute, dictionary definition of “authorization.” Id. at *6; see, e.g. WEC Carolina Energy Solutions LLC v. Miller; 687 F.3d 199 (4th Cir. 2012); U.S. v. Nosal, 676 F.3d 854 (9th Cir. 2012). The court cites recent Fourth and Ninth Circuit cases noting that they have interpreted “without authorization” and “exceeds authorized access” literally and narrowly, finding that “an employee is authorized to access a computer when his employer approves or sanctions his admission to that computer.

An employee is without authorization when he gains admission to a computer without approval, and an employee exceeds authorized access when he has approval to access a computer, but uses his access to obtain or alter information that falls outside the bounds of his approved access. These definitions do not extend to improper use of information validly accessed.” Id. (quotes omitted). Thus, even if an employee has misappropriated company information, he cannot be held liable if he had permission to access his employer’s computer and his employer’s computer system and files.

The Dresser-Rand court found the Fourth and Ninth circuits more persuasive, citing the Ninth Circuit’s disapproval of the Seventh, Fifth, and Eleventh Circuits’ failure to consider the consequences of a broad interpretation of the CFAA. Based on their review of the opposing federal circuit authorities, the Dresser-Rand court, unlike some of the court’s in New York, concluded the statute simply does not support a broad interpretation of “authorization” based on employer use policies. Id. at *8.

Despite the clear split among the circuit courts and the implications of a potentially broad application of the CFAA to all employees who use a computer, neither the United States Supreme Court nor Congress has addressed these issues. In fact, the Supreme Court recently dismissed a petition for writ of certiori seeking review of a Fourth Circuit case, cited by Dresser-Rand, applying the narrow interpretation of the CFAA. WEC Carolina Energy Solutions LLC v. Miller, 133 S. Ct. 831 (2013). Until the Supreme Court weighs in on the Circuit split, we will continue to see conflicting interpretations of the CFAA from courts across the country.

Advice for Registered Representatives: Six Lessons from Cases Implicating the Protocol for Broker Recruiting

August 3rd, 2013

The Protocol for Broker Recruiting governs the employment transitions of registered representatives of financial firms, broker-dealers, and wire-houses. Signed with the stated goal of ensuring client privacy while enabling client freedom of choice, the Protocol allows a departing representative to take certain limited client information to his or her new firm. The departing representative can then immediately solicit past clients so long as both the former and hiring firm are signatories to the Protocol, the departing representative does not begin to solicit his or her clients before resigning, and the departing representative leaves behind a list of the information he or she has taken.

Because the Protocol, to which over 900 entities are signatories, trumps non-solicitation covenants, it has enabled smooth transitions for registered representatives while substantially reducing litigation. However, lawsuits between a former firm and its departing employee and/or its hiring firm may implicate the Protocol. Questions might arise about whether the employee or its new firm has breached the Protocol and about whether the Protocol should apply at all. Here are six lessons we’ve learned from those cases.

1. Courts look favorably on those departing employees who act in good faith.

When a Protocol-signatory firm wants to enjoin a departing employee who has left for another signatory firm from retaining information about or soliciting former clients, a court will ask whether it is likely that the departing employee breached the Protocol. Those employees who have acted in good faith are likely to be able to continue to solicit their former clients while those who have clearly exceeded the scope of the Protocol are likely to be enjoined by the court.

In one case, the representatives took a list of mutual fund ticker symbols, the names of three hedge funds and the aggregate amount of assets that their clients had invested in each one. Credit Suisse Securities (USA) LLC v. Lee, No. 11 Civ. 08566(RJH), 2011 WL 6153108 at *5 (S.D.N.Y. Dec. 9, 2011). But this did not violate the Protocol because the defendants only took a vague set of information that did not reveal any single client’s personal information, and because the limited scope of the information would not put the defendants at “any distinct competitive advantage.” Id. at *5. Also, even though there was a file containing client information on a defendant’s personal computer, the defendant acted in good faith by deleting the file upon discovering it. Id.

Courts will not tolerate those who act in bad faith or violate the letter or spirit of the Protocol. One departing employee emailed to his personal email address clients’ financial plans and other confidential information when he resigned. He sent many of those emails “in the course of three minutes, on a Friday night, approximately one week before he attempted to resign.” The court decided his actions suggested he took confidential client information and then tried to use the Protocol to avoid the terms of his other restrictive covenants. His actions went “against the terms and spirit of the Protocol.” American Financial Services, Inc. v. Koenig, Civil Action No. 11-6140-NLH-JS, 2012 WL 379940 (D.N.J. Feb 6, 2012).

2. Do not take the information regarding or attempt to solicit clients that you did not personally acquire, develop, or bring to the firm.

Courts are more likely to allow a departing broker to contact and solicit those clients that that broker earned when working at the former firm as opposed to those clients that the broker acquired via a coworker or the firm’s goodwill. For example, a financial advisor who left a team with whom he had worked and signed a restrictive covenant could not solicit any clients other team members had acquired. UBS Financial Services, Inc. v. Christenson, Civil No. 13-1081 (MJD/JSM), 2013 WL 2145703 at *4 (D. Minn. May 15, 2013). However, the advisor was still allowed to reach out to the disputed clients to inform them of his departure because “there is a difference between soliciting and contacting.” Id at *5.

3. Courts have refused to recognize the Protocol as an “industry standard”

Since the Protocol is a contract, it cannot bind a nonparty. Therefore, non-signatories can sue departing representatives who violate non-solicitation agreements. See Hilliard v. Clark, No. 1:07-cv-911, 2007 WL 2589956 at *8 (W.D. Mich. Aug. 31, 2007).

4. Firms that have signed the Protocol may fail to obtain a preliminary injunction even when the employee has transitioned to a non-Protocol firm.

Signatory firms have struggled to show that a departing employee who complies with the Protocol creates an extreme risk of irreparable harm, even when that employee has gone to a non-signatory firm. The Protocol demonstrates that financial firms implicitly accept that “brokers will leave and take client lists with them.” Merril Lynch, Pierce, Fenner & Smith, Inc. v. Brennan, No.1:07CV475, 2007 WL 632904 at *3 (N.D. Ohio, Feb. 23, 2007). Because the former firm will be in the same position as if the departing advisor had moved to another Protocol firm it will surely survive the transition. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Baxter, No. 1:09CV45DAK, 2009 WL 960773, at *6 (D. Utah Apr. 8, 2009).

Also, a non-solicitation agreement can have a potentially devastating effect on a departing employee. Individual advisors often spend their whole careers building a client base. An injunction “barring them with any contact with their clients would effectively cripple their careers.” Id at *7.

However, it may be inequitable to allow parties that have not signed to incur the benefits of the Protocol—an incoming financial advisor being allowed to solicit his clients from his former firm—without incurring the risks of a departing financial advisor taking her clients with her. There is, in essence, no reciprocity when one signatory and one non-signatory are involved in the dispute. See Wachovia Securities, L.L.C. v. Stanton, 571 F. Supp.2d 1014, 1040 (N.D. Iowa 2008).

Though a court will not always grant a preliminary injunction when an employee leaves a Protocol firm for a non-Protocol firm, the departing advisor and the hiring firm will still likely be liable for damages to the former firm in FINRA arbitration. After all, the Protocol only governs an employee’s transitions between two signatories.

5. Compliance with the Protocol does not imply total immunity.

Courts are quick to stress that even when they do not find that it is likely a departing employee who has breached the Protocol, the Protocol only replaces non-solicitation agreements. A departing representative “could invoke the protections of the Protocol to avoid liability to his prior firm arising out of his solicitation of his former firm’s clients but nonetheless remain liable to his former employer for other wrongful conduct” such as breaching a covenant not to raid coworkers. Lee, 2011 WL 6153108 at *3.

6. Courts respect and enforce the goals of the Protocol.

The Protocol aims to further clients’ privacy interests and maximize their choices in connection with the movement of their representatives between firms. Courts consistently refer to these goals in determining whether or how to apply the Protocol in a given case.

Courts will not look fondly upon those departing brokers who take more information than permitted. The disclosure of confidential information, such as a client’s credit card and social security numbers not only violates client privacy, it also harms a firm who may lose the trust they had built with that client. As the one court explained, “[t]he fact that the Protocol does not permit disclosure of such information suggests that it is to remain highly protected.” Koenig, 2012 WL 379940 at *7.

The best way to maximize client choice is to give both the departing broker and the broker’s original firm an equal chance to solicit and win the client’s business. When both parties are on equal footing, the client can make the most informed choice possible. But if a “financial advisor one day simply disappears without warning” and cannot inform her clients of her departure because of restrictive covenants, a client’s range of choices becomes more restricted. Smith Barney Div. of Citigroup Global Markets Inc. v. Griffin, CIV.A. 08-0022-BLS1, 2008 WL 325269 at *3 (Mass. Super. Jan 23, 2008).

Thus, both employers and brokers should always make sure that their actions benefit the client first and foremost. They should not take actions that violate a client’s privacy or prevent clients from making informed decisions regarding their representation.

Employer vs. Employee: Who Owns the LinkedIn Account?

August 2nd, 2013

LinkedIn has long been considered “Facebook for the workplace” and while it is common knowledge that your Facebook page is not really private, your LinkedIn page may not really be yours. Recent court decisions have started to cast doubt about whether you own your LinkedIn account and contacts or whether your employer may have a better claim to it than the person whose name and profile picture appear at the top of the page.

LinkedIn was founded in 2003, but courts and legislatures alike have been slow to develop rules for the use of LinkedIn or other social media platforms to manage proprietary contact and client data in the professional setting. It is a common complaint by employers that their employees are stealing critical network contacts and consequently business through LinkedIn. Some of these employers have not been shy about litigating to settle the issue.

In 2008, the United Kingdom was the first to address the issue of LinkedIn contact ownership. In Hays v. Ions, the court found that an employer could require the disclosure of all of a former employee’s LinkedIn contacts from his private LinkedIn account. Because there was reason to believe Ions had used LinkedIn as a means of transcribing the company’s internal database of clients so as to be able to access it when he started his own competing firm, the court ordered the disclosure of all of Ions’ LinkedIn contacts. The obvious implication being that it was possible for the contacts to actually be proprietary information belonging to Hays, not Ions who owned the account.

In the Eastern District of New York, Sasqua Group v. Courtney addressed the same issue in 2010 but came to a very different conclusion. Here, a former employee had begun a rival firm using many of the contacts she had developed while at Sasqua. The court held that Sasqua’s client database list was not a trade secret and therefore did not “belong” to Sasqua. The rulings are facially contradictory, but the key factors relied on by the judges shine some light on how an employee or employer can protect herself. In Hays there is clear evidence of wrongdoing by Ions, e.g. collecting contact names and transferring them to LinkedIn, contacting clients to solicit business for the new firm while working at Hays, etc., such that it was easy to trace the genesis of Ions’ new clients to Hays’ database. In Sasqua the judge seemed particularly convinced by a demonstration from Courtney where she replicated part of the client list using a combination of Google, LinkedIn, and Bloomberg searches. This indicated both that there was likely no direct theft of the contacts, and that such contacts did not constitute proprietary information.

Finally, and most recently, the Eastern District of Pennsylvania ruled this Spring on a similar issue involving LinkedIn. Eagle v. Morgan was a case where an employee was terminated, and, because the employer had access to the password of the LinkedIn account, the employer changed the password and locked-out Eagle, and then proceeded to change the picture and name on the account to the new CEO while leaving some of Eagle’s honors and awards intact. In that case the contacts themselves were not held to be trade secrets because an extensive list of the company’s clients was available on their website.

More interestingly, the case raised the question of who actually owned the account. The account had been made using Eagle’s company email address and had been used specifically, although not exclusively, for company business. Eagle had even gone so far as to give the password to employees who in turn helped her manage the account. Nonetheless, Eagle was able to sustain claims that her employer used her name without authorization, invaded her privacy, and misappropriated her identity.
The court emphasized that there was no social media policy in place that established who owned the account, strongly implying that such a policy would have made a crucial difference. If an Employer considers a LinkedIn account as an extension of the company’s contacts and property, it is imperative that they establish a policy that outlines their access to the Employee’s LinkedIn account, contacts, and that such an account be relinquished to the Employer upon separation of employment.

Correspondingly, Employees should be acutely aware of any such policy and cautious about how they use their LinkedIn account, because a misstep could cost them their LinkedIn account and the critical business contacts associated with it.