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EMPLOYMENT AGREEMENTS AND RESTRICTIVE COVENANTS

PART III: NASTY LETTERS, THREATS, AND LOOMING LITIGATION

Supposing that intentionally or accidentally, you breach your employment agreement. What happens? Well, you'll probably get a few nasty letters. Some may initially come from management, but the emerging trend is to use either in-house or outside attorneys. That's supposed to quickly get your attention and scare you. By the time the proverbial clock strikes 12, you will either reach a settlement or the former employer will start some form of legal action. 

The Letter

A common hardball approach today is to send The Letter as a warning shot, i.e., the firm isn't necessarily aware that you have done anything wrong but just in case you have or just in case you're thinking of trying something . . . a little fear goes a long way. Other times the former employer has learned that you have breached your agreement and is notifying you of its intentions to litigate.

This word-processor litigation can get real silly. I know of a client who actually left a BD and went to another company. The company he went to did not hire him in a retail, production capacity. More to the point, the reason he left firm A to go to firm B was because he was sick of production, wanted to leave retail, and was interested in securing a non-producing management position. This client didn't take any documents. He didn't solicit any former, current or future clients.

Nonetheless, shortly after leaving his major wirehouse employer, he received The Letter at home demanding that he immediately return any and all originals and copies of records and documents he obtained during his employment. He was also warned not to disclose the information contained in said records and documents to his new employer nor use the information for his or his employer's own use. Finally, he was admonished not to solicit his former employer's customers or clients in any way.Additionally, "in the event that you may have already engaged in some or all of the above prohibited conduct" he was warned to cease and desist and to return whatever was in his possession, retrieve what he had disclosed, and cease further prohibited solicitation (or acceptance of wrongfully solicited accounts).

Ominous Legalese

So, put yourself in my client's position. He didn't take anything, didn't violate any agreement, and didn't intend to. Quite possibly, the suffocating and heavy-handed approach of outside counsel was indicative of the conditions at the former employer . . . thus explaining why he left. Nonetheless, the former employer's attorney warns him against what he's allegedly done (or hasn't done) and what he allegedly intends to do (or never planned on). He then reads in pretty ominous legalese that this warning is made because his conduct is

  • Prohibited by the terms of his employment and other firm agreement;
  • Constitutes a conversion of the BD's trade secrets, property, and confidential information;
  • Constitutes a breach of his fiduciary duty to the BD and the customers he served; and
  • Constitutes unfair competition.

Wow!!! That's putting the fear of God in you heathens. Is this overkill? Maybe, maybe not. If you have violated your employment agreement, then you have appropriately been put on notice; if you haven't, then the whole thing is pretty offensive and smacks of a fishing expedition. Now hold on to your hats because it gets even bumpier. Our colleague, whose only crime appears to be that he decided to leave his job for greener pastures, is further advised that the BD"hereby requests that you immediately admit or deny in writing each of the following facts." Those sought admissions or denials fell within six general topics; namely that he:

  1. signed the attached copy of the employment agreement;
  2. removed originals or copies of records;
  3. solicited, contacted, or communicated with, or intend to, customers;
  4. was given by his new employer an up-front interest free forgivable loan, an increased commission payout, a guaranteed salary,and/or other compensation in excess of, or different from that he received from his former employer;
  5. obtained an agreement from his new employer to provide him with legal counsel; and
  6. was promised by his new employer indemnification against the consequences of any misconduct.

The former employee is then urged to immediately contact the former employer's attorney if he "den[ies] any of the facts." The outside attorney then suggests thatYour denial of these facts by sworn affidavit may very well obviate the necessity of litigation. However, the absence of any denial could result in [BD] seeking to enforce the consent to a temporary restraining order and preliminary injunction contained in your employment agreement . . . as well as the post-employment restrictions to which you agreed.

FPRACTICE POINTER:
Now let's get some things clear from the git-go. Always resist the urge to do whatever a hostile attorney's letter demands. First, seek your own legal counsel. Most importantly, whenever you are urged to contact a hostile lawyer "immediately," resist the panic and first seek your own legal counsel.
You don't have any legal obligation to answer any question unless it's pursuant to legal compulsion, i.e., subpoena. court order, SRO formal demand, etc. For all its impressive bluster, the above-referenced letter is merely that, a letter. Now I don't tend to mince words, so let me be very plain: only a foolwould immediately contact the former employer's attorney to respond to the demands for the admissions or denials sought above without prior legal consultation.

Why do they want the six-point admission/denial?

We've all heard the joke about the three biggest lies: I'm here from the government to help you, the check is in the mail, and (no, I'm not going to list the third vulgarity, please insert the dirty line of your choice [this offer void where prohibited]).Well, you might just as well add the "request" for admissions and denials described above to the list as the fourth biggest lie, if you believe that the outside attorney is genuinely interested in your well-being and is onlyconcerned about obviating the necessity of litigation.

In my opinion, the major reason behind getting you to respond is to build a stronger case against you and to lay the groundwork for the prompt issuance of either a temporary restraining order or injunction. Worse, it may be a calculated effort to get you to make admissions against your own interest before you have the benefit of your own attorney. Keep in mind that according to most bar associations' ethics requirements, lawyers are not permitted to "counsel" or "advise" adverse parties.  In fact, they are pointedly required to decline such an opportunity, remind you that they are representing an adversary, and advise you to seek independent counsel.  Let's quickly consider some of the effects of admitting or denying the relevant facts.

  1. signed the attached copy of the employment agreement.
  2. You could inadvertently admit that the document is merely an "agreement" when your lawyer might argue that it was a "contract." You could inadvertently admit that you understood the agreement and had an opportunity to independently review it when your particular circumstances may have been to the contrary. Your former employer may have lost the original, forwarded a blank form, and is asking you to agree that this was the "type" of document you signed.

  3. removed originals or copies of records;
  4. You may inadvertently admit that the "records" you removed were the firm's, rather than what your own lawyer might argue are your records. An admission could also constitute the commission of a criminal act with serious consequences. You have a Fifth Amendment right against self-incrimination, which conveniently is not noted in the letter.

  5. solicited, contacted, or communicated with, or intend to, customers;
  6. Sure, go ahead and give them the names of the accounts you "contacted, or communicated with". . . that way your former employer can make a point to contact them and trash your name or urge them to reconsider. Also, you have every right to "contact" or "communicate" with clients, it's the effort at solicitation that is at issue. So, this request cleverly lumps together a whole batch of conduct.

  7. was given by his new employer an up-front interest free forgivable loan, an increased commission payout, a guaranteed salary,and/or other compensation in excess of, or different from that he received from his former employer;
  8. Your former employer wants to know how much money you're making. This information is strategically valuable. If you're largely on commission, a restraint on your business during litigation may be devastating and force a quicker settlement. If you're on guaranteed salary, you may be able to hold out. Further, the existence of a betterdeal will be used in court to demonstrate that your motivation for breaching your employment agreement for more money. The existence of an up-front loan will be used to support the contention that you were paid in consideration of a prior commission trail, and, as such, must have intended to steal clients from your former firm rather than build a new book.

  9. obtained an agreement from his new employer to provide him with legal counsel
  10. This one's a no-brainer. The former employer wants to know if you will personally be on the hook for legal fees. If "yes," the significant court and arbitration costs may bleed you into a quick settlement. Additionally, it may be indicative of an expectation of trouble and used to demonstrate awareness that the hiring entailed likely breaches of the employment agreement.

  11. was promised by his new employer indemnification against the consequences of any misconduct.
    As noted above, this provides insight into your ability to withstand the financial costs of litigation and the "knew or should have known" state of mind of you and your new employer.
Courts do not normally grant restraining orders or injunctions absent some reasonable demonstration that an individual has done something wrong. Further, our jurisprudence does not require you to prove the case against you. Consequently, your former BD must demonstrate to a judge that you breached your agreement or there is a reasonable cause for such a belief. I can assure you that judges take a dim view of having innocent citizens hauled before them by plaintiffs whose sole case is that we want him to admit that he hasn't done anything wrong.

Now, having pulled our dusters back and displayed our shiny six-guns to the villain in the black hat at the other end of the street, let's think about the position we're in. If you haven't done anything wrong and don't intend to, it may make sense to have an attorney contact the letter writer and resolve the potential problem. Your lawyer may even suggest that you prepare an affidavit and be done with it. On the other hand, if your new employer has agreed to indemnify you in the event of any lawsuits arising from the transfer of your registration, then speak with their attorney and act accordingly. As with all old Westerns, don't make any sudden moves, don't reach for you gun if you don't intend to use it, and don't turn your back on the bad guy.

Coming up next: What will the TRO or injunction involve?

I am in the process of assembling an online library of employment agreements and restrictive covenants. Please send me copies of such documents (feel free to delete your name if you so desire). Additionally, if you have been served with letters of complaint or pleadings, please include those. I will then assemble a free online library so that RRs may consult the agreements and better understand the differences among employers and within a given firm.

Send to: bsinger@singerfru.com





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