Source: https://www.sdcba.org/index.cfm?pg=BusinessandCorporate201710
Timestamp: 2019-04-21 06:32:27+00:00

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It is a scenario we encounter often. A financial advisor approaches our firm in a panic. While in the midst of transitioning their client accounts to a new firm — a significant undertaking on its own — they are sued for alleged misappropriation of trade secrets. Worse still, a court may have issued a restraining order or preliminary injunction banning any further communications with their clients, who likely have no idea where their trusted financial advisor went or how to reach them. The transitioning advisor is now facing a complicated legal battle while their business and livelihood hangs in the balance.
When financial advisors move from one firm to another, there are many legal issues that should be considered. Chief among them is determining the type of client information advisors are permitted to take upon leaving their prior firm — assuming they are permitted to take any information at all. Equally important is evaluating when and how financial advisors may use that information to announce their new affiliation or solicit clients. Despite many attempts to clarify and unify the rules governing an advisor’s use of client information during a transition — both by courts and financial firms — this remains a volatile area of the law and, in many cases, the legal battle rages on.
Trade secret protections are somewhat at odds with the laws of California and other states prohibiting “unreasonable restraints” on the practice of a lawful profession, trade or business. See, e.g., Cal. Bus. and Prof. Code §16600, et seq. As a result, the DTSA has safeguards in place to prevent conflicts with those laws. For one, any injunctive relief under DTSA must comply with California’s “strong public policy against noncompetition agreements.” 18 U.S.C. § 1836(b)(3)(A)(i)(II); Advanced Bionics Corp. v. Medtronic, Inc., 29 Cal. 4th 697, 706 (2002). California’s prohibition against noncompetition agreements, codified in Business and Professions Code section 16600, protects a person’s right to engage in their lawful profession. Departing employees generally are free to compete against their former employers as long as they do not violate trade secret laws or engage in conduct tantamount to unfair competition. See, e.g., Henry Schein, Inc. v. Cook, No. 16-CV-03166-JST, 2016 WL 3418537 (N.D. Cal. June 22, 2016) (balancing trade secret protections with section 16600 in ruling on a preliminary injunction).
The interplay between trade secret laws and California’s prohibition on non-compete agreements frequently creates a legal “gray area” which has led to conflicting legal precedent. Compare Dowell v. Biosense Webster, Inc., 179 Cal. App. 4th 564, 578 (2009), with Wanke, Indus., Commercial, Residential, Inc. v. Superior Court, 309 Cal. App. 4th 1151, 1176–80 (2012). One of the seminal cases addressing the conflict between trade secret protections and non-compete laws is the The Retirement Group v. Galante. In Galante, the court reasoned that while non-compete agreements are generally invalid in California, an employer may nevertheless seek to enjoin former employees from using the employer’s trade secrets to solicit clients as long as the employee’s actions were independently wrongful. Retirement Grp. v. Galante, 176 Cal. App. 4th 1226, 1238 (2009). The case turned on whether the former employees misappropriated trade secret information, as defined by CUTSA — a showing that the departing advisors merely breached a contractual non-compete provision was not enough. At least in California, an employer cannot rely on an illegal non-compete clause to prevent a prior employee from soliciting clients of the departing firm.
In the financial services industry, customer lists containing unique client information that is not readily accessible to competitors or other third parties — such as those which identify clients with particular needs or characteristics — are more likely to be (but not always) considered trade secrets. It is also important to consider how the employer stores client information, whether any third parties had access to it and whether other industry competitors have access to the same or similar data from another source.
Courts recognize the strong public policy favoring an investor’s right to choose their financial advisor and that “clients are free to come and go among . . . a myriad of [ ] financial advisors.” Smith Barney v. Burrow, 558 F. Supp. 2d 1066, 1082 (E.D. Cal. 2008); see also FINRA Rule 2140 (prohibiting FINRA member firms from interfering with a customer’s request to ransfer his or her account in connection with the change in employment of the customer’s registered representative). And when considering requests for injunctive relief in this area, courts are instructed to avoid infringing on the investor’s right to take their business wherever they choose. See StrikePoint Trading, LLC v. Sabolyk, 2009 WL 10659684, at *6 (C.D. Cal. Aug. 18, 2009). Injunctions and orders that infringe on a clients’ right to “seek out new advisors of their choosing, especially if they wish to take business to [the advisor] because the clients prefer [the advisor’s] services,” are improper. StrikePoint Trading, LLC, 2009 WL 10659684, at *6. Indeed, “the public interest is better served with open competition in the securities field and access to advisors of clients' choice.” Barney v. Burrow, 558 F. Supp. 2d 1066, 1084 (E.D. Cal. 2008).
Under California law, even when client contact information constitutes a trade secret, departing advisors may still be able to use certain client contact information to “announce” their new affiliation. While an individual may violate CUTSA by using a former employer’s confidential client list to solicit clients, CUTSA generally does not forbid an individual from announcingtheir change of employment, even to clients whose identities may constitute trade secrets. Reeves v. Hanlon, 33 Cal.4th 1140, 1156 (2004). This is, however, a fact specific determination, and it is critically important to consult with experienced counsel to assess the potential risks involved.
Confusion remains as to what constitutes an “announcement” versus a potentially prohibited “solicitation.” Bare bones “announcements” may actually be held to constitute solicitations if they petition, invite or otherwise encourage customers to call or contact the person for information about their new firm or otherwise touts the new firm as being superior or offering better services than the prior firm. If an announcement asks former firm clients to continue to do business with the advisor at their new firm, moreover, it will generally be considered a solicitation. UBS Financial Svcs. Inc., v. Fiore, No. 17-CV-993-VAB, 2017 WL 3167321, at *14, (D. Conn. July 24, 2017).
The mere fact that a firm is a signatory to the Protocol can also factor into a Court’s determination of whether client contact information constitutes a trade secret. As the Court articulated in Smith Barney v. Burrow, “Smith Barney cannot have it both ways — it cannot declare this information to be confidential and, at the same time, permit the information freely to be taken to 38 other financial institutions by departing advisors.” Smith Barney v. Burrow, 558 F. Supp. 2d 1066, 1080 (E.D. Cal. 2008). “Given the Protocol, plaintiff is hard pressed to convince this Court that the information regarding clients whom defendants served qualify as plaintiff’s confidential trade secrets.” Id. at 1081. Courts are similarly hesitant to find that a client list constitutes the employer’s trade secret when the individual advisor has built their clientele through their own efforts and referrals.

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