Mass Law Blog

Smith Barney/Citigroup: Darn, Foiled Again!

by | Mar 11, 2008

Albert Einstein once said that “the definition of insanity is doing the same thing over and over again and expecting different results.”

By this measure, Smith Barney has a problem.

In a recent case decided by Judge Gants in the Suffolk Business Litigation Session, Smith Barney sought a preliminary injunction against Michelle Griffin, who had held several positions with Smith Barney, culminating in “financial advisor.” When Ms. Griffin began at Smith Barney (then Shearson Lehman) in 1994, she had signed an agreement in which she promised not to solicit Smith Barney clients for six months after leaving. In fact, just before and after resigning to join N.Y. Life, she solicited many of her clients, attracting Smith Barney’s ire.

However, Judge Gants teed up the the case with the following comments:

This Court has heard many of these kinds of cases. The pattern is similar in all cases. A stock broker, or person seeking to become a stock broker, joins a brokerage house, signs a non-solicitation agreement and also agrees to keep certain information confidential. After a period of time, the broker, often solicited by a competing brokerage, decides to leave his employing-brokerage for the competition down the street. Without prior warning, the broker resigns at the end of the day on Friday and is up and running at his new employer by Monday morning. These brokers move around with astounding frequency, and the whole industry knows it….What follows is a race to the Court by the jilted brokerage seeking injunctive relief, all in anticipation of industry-mandated arbitration before the NASD.

After this wind-up, you don’t need a weatherman to know which way the wind is blowing. Judge Gants denied the motion on a variety of grounds:

First, the agreements unfairly punish the clients of the departing advisor/broker.

Second, hypocrisy was a factor. While the financial firms suing employees claim to be “shocked, shocked” (quoting Police Captain Louis Renault in the movie, Casablanca) that another financial service company would show so little respect for the sanctity of their contract with a former employee, they are themselves enaged in precisely the same “shocking” conduct:

As this Court observed in its July 12, 2004, order, since the establishment on October 2, 2000, of the Business Litigation Session of the Superior Court, previously to this case, this Court had addressed 29 cases by brokerage firms against individual brokers leaving, abruptly, to join another brokerage firm. In each instance the plaintiff firm sought injunctive relief. In those 29 cases, 21 have been brought by three major brokerage firms: Morgan Stanley DW, Inc., the plaintiff here; UBS PaineWebber , UBS, and Salomon Smith Barney (“SSB”). These three major brokerage firms have been the plaintiffs in seven cases each. In that same aggregation of 29 cases, MSDW and UBS have been the brokerage firm to which the defendant broker has defected in six cases each, and SSB has been that firm in five cases. Whatever happened to the “maxim of equity with the dignity of antiquity … that one who seeks equity must do equity?

Third, the non-solicitation agreements that the financial firms seek to enforce were presented to their new employees at the time of hire, without separate consideration:

the non-solicitation agreements enforced in most of these financial services preliminary injunctions were presented, as here, to the financial advisor when she first commenced employment with the company, without separate consideration beyond continued employment (or perhaps training), and without any choice apart from termination. Consequently, they are routinely signed without significant thought, in large part because the employee has no meaningful alternative. Since all (or virtually all) financial services companies require similar agreements, a refusal to sign such an agreement would effectively bar the employee from employment in the financial services industry. As such, these agreements stand in sharp contrast to comparable agreements involving the sale of a business, where the seller is receiving significant additional consideration for the agreement not to compete or to solicit, and has a meaningful alternative of rejecting such a restrictive covenant (albeit in return for a lower sales price).

This comment by Judge Gants is significant, since it has long been “black-letter” law in Massachusetts that separate consideration (apart from the initial hire or even continued employement, where the employer asks the employee to sign the agreement after employment has commenced) is not necessary for enforcement of a non-solicitation or noncompete agreement.

Fourth, the “goodwill” in these cases (goodwill being the legal term for “the relationship with the customer) is intertwined; it may belong to the employee, to the employer, or to both. If the goodwill belongs to the employee (who did the sales work to develop the customers), the employee should not be prevented from taking those relationships to her new job.

Fifth, although the confidential nature of the customer identities may be an alternative ground for enforcing a nonsolicitation or noncompete agreement, it is questionable whether the identities of the customers in this context can truly be considered confidential.

Motion for preliminary injunction denied. Perhaps after this decision Morgan Stanley, Salamon Smith Barney and UBS Paine Webber will reflect on Einstein’s comment quoted above, and the “Massachusetts broker noncompete wars” will finally come to an end.

A link to the full case is here.