LOOKING OUT FOR U™ BY SHERYL ANNE ZUCKERMAN, ESQ.  BILL SINGER, ESQ. Vol. 1, no. 8 August 15, 2001     In the last episode, the attorneys had given there all, each side arguing the compelling reasons why the TRO should or should not stand. Now it’s time to hear what Justice Vanta Befair thinks of this case…  Judge Vanta Befair:  First, I would like to thank all counsel for your professional, courteous and cogent advocacy of your respective clients’ positions. But now down to business. I have carefully reviewed all of your submissions and listened to your oral arguments. My findings are as follows: Clearly Ms. Repp signed an Association Agreement with BeeDee.  And the Agreement does provide that if she leaves the firm for any reason, she may not solicit, or even contact, any BeeDee customer.  Nor may she recruit BeeDee employees.  Notwithstanding the highly questionable legal viability of such restrictive covenants, the question remains ‘Did Regina Repp violate the terms of the Agreement or any applicable rule, regulation or standard of practice?’  The answer is clearly “No.”  She merely advised her clients that she had switched firms. Such does not constitute solicitation. And there is no evidence before me that Ms. Repp contacted any customers other than her own, or that she made any pejorative comments about BeeDee or any of its associates or took any action to harm BeeDee in any way.   And I do not believe that the names and phone numbers of clients kept in Ms. Repp’s personal agenda constitute the conversion, theft or misappropriation of proprietary property here.  Ms. Repp could have just as readily used the phone book to obtain this information. BeeDee chose to summarily discharge Ms. Repp, one of the firm’s biggest producers. The firm had to expect to lose business once she was gone.  Whether only a few of the accounts Ms. Repp worked on leave BeeDee—or all of them leave remains to be seen.  But a customer does have the right to invest his money wherever he so desires. That is not a decision for BeeDee—or indeed even for this court to make. And I am certainly not going to uphold a contract that will put Ms. Repp out of business.  She has a right to earn a living. As for recruiting BeeDee employees, or “raiding” the firm, I hardly think that two persons in a firm of more than one hundred constitutes “raiding.”  This is not a situation where Ms. Repp essentially turned an entire BeeDee branch office into a branch of New BD.  And I am convinced by counsel that Ms. Repp has had a longstanding relationship with these colleagues and further, that she did not act in violation of the Association Agreement in telling them about her new job. She clearly did not “recruit” them.  Moreover, the terms of the Association Agreements used by BeeDee do not alter the “employment at will” status of BeeDee’s associates. They may leave as they please.  Finally, I am not convinced by BeeDee’s counsel that there is no adequate remedy at law should BeeDee prevail at arbitration. Surely customer transactions generate commissions for which a dollar amount can be affixed. In any event, I believe that this is an issue for the arbitrators to decide. However, the parties are free to settle this matter on their own—a choice that in my experience is most beneficial to all concerned. That unsolicited and unenforceable advice from the bench notwithstanding, Ms. Repp may service any customer that she serviced while at BeeDee as well as any other unsolicited BeeDee customer who contacts Ms. Repp. And any BeeDee employee may leave to go to New BD or any other place of business that they choose. After all, this is still America boys and girls—at least it was the last time I checked my atlas.  Ms. Repp may not however, actively solicit any other BeeDee account or recruit BeeDee employees.  The TRO is so modified. A written Order will follow. Good day ladies and gentlemen.” Justice Befair rendered what is known as a decision “from the bench.”  But such is not always the case.  Because of the nature of the motion and the immediate injunctive relief requested, decisions on preliminary injunctions do not generally take months to decide—something that occurs all too frequently in litigation motion practice.  However, it could take several days or as much as a couple of weeks for the judge to issue a decision and Order.  And even in Regina’s case, the written Order may not be ready for some time. However, since the judge did make her decision at the hearing of the motion, it became effective immediately.  Had Justice Befair not done this, the TRO as it was initially issued would have remained in effect until the judge’s Order was entered. .  Justice Vanta Befair’s decision was fairly typical under the circumstances. But brokers should not be lulled into a false sense of security!  If for instance, Regina had solicited other accounts from BeeDee before leaving the firm, or if she had recruited away half the brokers at her BeeDee branch (most of whom she had not known prior to her tenure there), comprising a substantial portion of the branch’s revenue, then the judge may well have granted BeeDee’s request for a preliminary injunction. Notwithstanding the Association Agreement, such conduct would clearly have violated well-established securities industry standards against raiding and unfair competition.  In the days following the judge’s decision, Regina’s attorney and BeeDee’s attorney spoke frequently and ultimately did settle the case. The parties agreed that Regina would continue to service any of her own accounts. She would not solicit any other BeeDee accounts or recruit BeeDee employees. And if any other current BeeDee customers contacted her, Regina agreed to obtain prior permission from a principal at BeeDee before taking on the account. BeeDee dropped its claims against all parties.  BeeDee also issued Regina a clean U-5 indicating simply, “voluntary termination of employment.”  The cost and further disruption of arbitration was avoided and all parties walked away satisfied.  Regina and her friends started working at New BD the following Monday where they have (thus far) been happy and successful.  Indeed, almost all cases like this do settle before going to arbitration. In fact, a recent search of public NASD arbitration turned up only about 15 or 16 awards addressing the issues presented here—and that covers the last five years!   But what of those case that do “go to the mat?”  Well, clearly there is a dearth of decisions by which to judge but one point is clear. As always, arbitration awards are case and fact specific.  Where the Panel finds a viable employment contract that was breached, it may enjoin the broker from soliciting a specific category of clients for a finite period of time—generally far shorter than that contained in the employment contract.  If a broker clearly “raided” a firm of its brokers/traders and their accounts, acting like a wrecking ball on her former branch office, then an Arbitration Panel may award substantial compensatory damages to her former firm. If, on the other hand, the Panel finds that no agreement was breached, and no breach of industry standards against raiding and unfair competition took place, then the Panel might go so far as to dismiss the firm’s claims and award monetary damages to the broker to compensate her for lost earnings.   So why does almost everyone settle?  Very good question! Beyond the uncertainty of placing one’s fate in the hands of strangers (the Arbitration panel), there are other, more practical considerations.  In our case, from Regina’s perspective as the broker, these practical considerations became clear very quickly.  Every day that Regina could not service her clients left her a day poorer (sans commissions). And every day that her clients were either not serviced by Regina—or possibly not serviced at all back at BeeDee, increased the likelihood that one or more customers would go to a third firm.  Think about it. As a customer, would you want to get caught in the middle of some employment dispute between your broker and her firm with little or no service to you in the interim? I certainly wouldn’t! Not to mention the even greater risk of losing clients for this reason in a volatile market.   Then there are the legal fees that mount quite rapidly. If you are paying your attorney to defend you and are not earning income, well…do the math. It isn’t pretty. (Rather like being on a desert highway with a leaking tank and no gas station in sight.)  And why would the brokerage firm like BeeDee want to settle? Well, brokerage firms that include restrictive covenants generally do so to help prevent a broker from raiding a branch of a substantial portion of the business—both accounts and employees.  Such conduct could shut down a branch of the firm and, in the case of smaller broker-dealers, put the firm out of business.  Beyond that, restrictive covenants that are as far reaching as BeeDee’s however, are often designed more to keep brokers “in line” and when a broker leaves, the firm can make an example of her as a warning to others not to deplete the firm’s resources.   But if customers want to move their accounts to stay with their broker, and they are not permitted to do so, they almost certainly will leave the firm anyway!  And such action against one broker, while sending a message to other brokers not to try to bleed the firm when they leave, may well send another, not so productive message as well.  That is, if you leave us and actually take your accounts so that you can earn a living elsewhere, we will sue you—not the best moral booster. And rest assured that the message will get out on the street that this is not a nice firm to work for. And again, litigating the case would not be cheap.  Litigation never is.   Therefore, each side weighing the pros and cons of arbitration versus settlement, most parties will choose settlement, usually by “splitting the baby,” with each party getting some, but not all of what they wanted.  So what did Regina learn at the end of the day?  Prudence and caution in one’s actions before, during and after leaving a job are the ounce of prevention that may far out way ten pounds of cure.  Which leads to our tip list:  Do your homework!  Before you start a new job, research the firm and, if possible, its principals, through the NASDR and SEC websites, your colleagues in the business, the “word on the street,” and the Internet.  You may even get the chance to speak with the firm’s current employees.  Ask for a “walk through” of the firm to see their operation.  Ask questions of the firm. This is no time to be shy. READ!  Read everything the firm puts in front of you, especially if it is a document you are asked to sign.  Take your time. If the firm tells you that it is just standard fare and not to worry—you should worry. A reputable firm will have nothing to hide.  A reputable firm will also allow you time to take the materials home to review and consult with counsel if need be.  If they rush you into signing papers without the chance to review them, you probably don’t want to work there.  And if they shove a pile of papers at you, especially an employment agreement, after you’ve started to work there, you may want to turn around and leave. Negotiate.  If the firm does want you to sign some sort of employment agreement with restrictive covenants like those that Regina encountered, now is the time to negotiate the terms, just as you would your compensation. Negotiate again. If you are already at a firm, with or without a contract, and you choose to leave, negotiate the terms of your departure—and get it in writing (reviewed by counsel of course).  Even if you are fired, there still may be an opportunity to negotiate—especially if it will affect your all-important U-5!