Bass, Berry & Sims attorney Chris Lazarini provided insight on the importance of following the Protocol for Broker Recruiting when brokers change firms. Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SLC, please visit the SLC website to sign up for the newsletter.
JPMorgan Chase Bank, N.A. & J. P. Morgan Securities, LLC vs. Wirtanen, No. 15-11929 (E.D. Mich., 6/3/15)
A failure to follow the Protocol for Broker Recruiting when it is available as a safe haven to a broker changing firms will almost assuredly lead to injunctive relief, and possibly monetary damages, should the losing firm elect to take action against its former broker.
This preliminary injunctive action involves two brokers leaving one Protocol firm, J.P. Morgan Securities, and joining another, Morgan Stanley Smith Barney. Here, however, the brokers did not follow the Protocol. Instead, as asserted in their affidavits, the brokers used client cell phone numbers stored in their own cell phones and publicly available information to "announce" to clients that they had moved to Morgan Stanley. J.P. Morgan alleged that the brokers misappropriated confidential and proprietary information and breached their one-year non-solicitation agreements and asked the Court to enjoin the brokers from soliciting customers pending FINRA arbitration.
The Court agrees that it should consider the merits of J.P. Morgan's request for injunctive relief, even though the merits of J.P. Morgan's raiding claim will be decided in arbitration, and conducts a traditional four-part Rule 65 analysis to do so. First, the Court finds that, under New York law, J.P. Morgan has an interest in preventing former employees from exploiting client relationships created and maintained at the firm's expense. The Court also finds that J.P. Morgan will likely succeed on the merits of its breach of contract claim because the confidentiality provisions of the agreements required the brokers to immediately return all client information derived from any firm source, including information stored on personal cell phones. Second, the Court finds that, absent injunctive relief, J.P. Morgan will suffer immediate and irreparable harm through loss of goodwill and fair competition. The harm to others and public interest factors do not weigh in favor of either party but, given the weight of the first two factors for J.P. Morgan, the Court enjoins the brokers and all those acting in concert from soliciting J.P. Morgan clients, orders the return of all customer information and directs the parties to proceed to arbitration.
The result was all too predictable, and serves as a reminder of the importance of advising brokers changing firms how the Protocol works and the manner in which to conduct their departures even if the Protocol does not apply.