Financial Advisor Knewt Freeman couldn’t believe it when the Sheriff walked in. He, his new firm and two of his best friends that had come with him, were restrained without notice from soliciting the clients they had served for years. Worse, they and their new firm, ABC Independent, had been sued for $10 million dollars. Knewt’s career was dead!
Just moments before things had been going so smoothly. Knewt had resigned last Friday and spent the weekend contacting his clients and helping them move to ABC Independent. Better still, Knewt, whose production had been 29% of his branch at Old Bank, had convinced his two best friends, Jan and Jane, to move over. They knew that this might hurt their old branch because they accounted for over 45% of the production of the branch, but that was the business risk that Old Bank took when it underpaid them. They all slept well during their transition, because they had complied with the Protocol, and both Old Bank and ABC are Protocol members. They were safe and off to a great start. How then could Old Bank be suing them for $10 million and a restraining order? The Complaint said something about “Raiding.” They thought they’d better call a lawyer. They talked about it amongst themselves. Jan and Jane knew a lawyer that defended Raiding Cases. Knewt knew a lawyer that prosecuted Raiding Cases.
They decided that they would give the lawyer that prosecuted Raiding Cases a call first. He told them that it was well recognized in the securities industry that hiring away an excessive percentage of brokers from a competing firm, or taking an excessive amount of production from a particular branch office constitutes a raid. “Raiding,” and efforts to raid the offices of a competitor firm that are designed to injure the competitive firm, have long been condemned by the courts and by FINRA arbitration panels. As early as 1917, the US Supreme Court recognized raiding as illegal unfair competition. See, E.G., Hichman, Cole, and Koch Co. vs. Mitchell, 245 US 229, 259 (1917). He told them about a series of cases in which there were large awards against financial advisors and their companies, such as Piper Jaffray & Company, Inc. v. Stifel Nicolaus & Company, Inc., et al., FINRA Dispute Resolution No. 08-02601 (awarding claimant $500,000 after respondent raided an entire group within claimant's High Yield and Structured Products Division); Mesirow Financial. Inc., et al. v. Strategic Wealth Planners. LLC, et al., FINRA Dispute Resolution No.08-01652 (awarding claimant $ 1,873,000.00 in damages); Citigroup Global Markets. Inc. v. Wachovia Securities. LLC, et al., FINRA Dispute Resolution No. 07-01400 (awarding claimant over $2,000,000.00 in damages): Wells Fargo Advisors. LLC v. Raymond. James & Associates, Inc., et al., FINRA Dispute Resolution No. 07-03166 (awarding claimant $10,500,000.00 in damages); John G. Kinnard and Co., Inc. v. Dain Bosworth. Inc., NASD Arb. No. 98-00854 (awarding claimant $16,000,000.00 in damages); Miller Johnson Steichen Kinnard, Inc. v. Northland Securities. Inc. et al., NASD Arb. No. 02-06736 (awarding claimant $10,000,000.00 in damages). See, e.g.. Prudential Securities Inc v. James Scott Hotham. et al. NASD No. 00-00254 (Feb. 2, 2000) (enjoining further hiring by competitor firm where several financial advisors – accounting for 30% of the branch office's production - had been previously hired away by the same competitor firm. He explained that raiding has three principle elements:
Severe economic impact, demonstrated by the hiring away of an excessive number of registered representatives or an excessive amount of production;
Malice or predation; and/or
Use of improper means.
He told them that the legal source of raiding law in the securities industry is attributed to FINRA Rule 2010 which states: “A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.” He advised that FINRA Rule 2010 prohibits FINRA-member firms from stealing, among other things, employees and or customers of their competitor FINRA-member firms. This advice scared Knewt, Jan and Jane to the bone.
Almost in tears, they called the lawyer that usually defended Raiding Cases. He had an entirely different point of view. He said, “Raiding is not a legitimate legal claim.” He assured them that the law recognizes that competitors are free to recruit and hire each other’s employees without liability. As one court explained:
The competitor is…free, for his own competitive advantage, to obtain the future benefits for himself by causing the termination [of an individual’s employment with another competitor]. Thus, he may offer better contract terms, as by offering an employee of the plaintiff more money to work for him…, and he may make use of persuasion or other suitable means, all without liability.
SliceX, Inc. v. Aeroflex Colo. Springs, Inc., 2006 U.S. Dist. LEXIS 40331, 2006 WL 1699694, at *3 Likewise, “[i]n the absence of a contract for a definite term, an employee may quit whenever he desires” and “[t]his is not changed because several employees might decide to exercise their rights at the same time.” Crane Co. v. Dahle, 576 P.2d 870, 872-73 (Utah 1978). The courts have also noted that "[i]n the rough and tumble of the marketplace, competitors inevitably damage one another in the struggle for personal advantage ," and "[t]he law offers no remedy for those damages-even if intentional-because they are an inevitable byproduct of competition ." Leigh Furniture & Carpet Co. v. Isom, 657 P.2d 293, 307 (Utah 1982).
Similarly, courts across the country have rejected the idea that one business can be held liable merely for hiring the at-will employees of a competitor. See, for example, In re Maxxim Med. Group, Inc., 434 B.R. 660, 688 (M.D. Fla. 2010) (hiring at-will employees from a competitor, "standing alone, cannot be the basis for a claim for relief '); Wachovia Sec., LLC v. Gates, No. 3:08-CV-226, 200 WL 1803612, at *2 (E.D. Va. Apr. 21, 2008) (``Nor have the plaintiffs shown that [the hiring firm] has engaged in any wrongful activity: it is entitled to attract, or attempt to attract, its competitors' employees and customers"); The Finish Line, Inc. v. Foot Locker, Inc., No. 1:04CV877RLYWTL, 2006 WL 146633, at *9 (S.D. Ind. Jan. 18, 2006) (rejecting unfair competition claim based on "employee raiding" where defendant recruited a competitor's at-will employees to further its own business); and Storage Tech. Corp. v. Cisco Sys., Inq., No. Civ. 00-2253, 2003 WL 22231544, at *.3 (D. Minn. Sept. 25, 2003) (refusing to recognize a cause of action for "corporate raiding").
FINRA Panels have also repeatedly rejected "raiding" claims in cases based merely on hiring ''too many" employees. For example, in Baird, Patrick & Co, Inc. v. Maxcor Fin, Inc., et al., NASD Case No. 03-07235, the Panel rejected a “raiding” claim and explained: “We also reject the contention that [respondent] was barred by the some industry standard or policy statement not to hire a group of employees whose production constituted at least 30% or 35% of the department of a rival firm." Id. at 4). See also Merrill lynch, Pierce, Fenner & Smith Inc. v. RBC Dain Rauscher Inc., et al., NASD Case No. 06-00696 (finding that respondent was not liable for "raiding," malicious hiring, or other wrongful behavior by hiring the entire office of a competitor, including the branch manager, as employees were intent on leaving also awarding attorney's fees and forum costs to respondents) and Advest Inc. v. RBC Dain Rauscher, Inc., et al., NASD Case No. 06-01479 (denying raiding claim based on hiring of every employee in claimant's office and 100% of office production).
The second lawyer told them that Old Bank will also be unable to identify a single rule or pronouncement from FINRA, the SEC, or any other regulator that in any way limits the amount of employees one broker-dealer can hire from another. Indeed, any such limits would violate federal antitrust laws, which prohibit competitors from agreeing to limit hiring from each other. In fact, when the Security Industry Association attempted to impose a code prohibiting "raiding" in the 1970s, that effort was abandoned after it was pointed out that the code would violate the antitrust laws. See Michael McAllister, "Raiding " Redux - The Need for Visible Markers And A Proposal for Providing Them, at 2 (PLI 2000) (noting that SIA's proposed Code could have been "perceived as evidence of an [illegal] 'anti-switching' agreement among the member firms, and it was sensible to withdraw it") see also U.S. Justice Dep't Competitive Impact Statement, U.S. v. Adobe Sys., Inc., et al., No. 1:10-cv-01629, at 3 (D.D.C. Sept. 24, 2010) (explaining that agreements among competitors not to recruit each other's employees were "facially anticompetitive," and violated section 1 of the Sherman Act, because they "diminished competition to the detriment of the affected employees.”)
WHAT YOU NEED TO KNOW
Knewt, Jan, and Jane were now completely confused and no wonder, they had received two diametrically opposed, but legally correct, opinions concerning the very existence of a claim for Raiding. The trouble for the transitioning financial advisor caught in a raiding scenario is that one side can argue one way and the other side can argue another. The stakes are existential. So what should Newt, Jan and Jane have done to avoid this horrible risk? The Protocol is the source of the problem. It carves out a perilous exception: “This (P)rotocol does not bar or otherwise affect the ability of the prior firm to bring an action against the new firm for ‘raiding.’” Raiding is not defined in the Protocol and the law concerning the legality of raiding is not helpful to the transitioning financial advisor.
Therefore, the transitioning advisor must look to industry practices and guidelines to determine whether she is in danger of being part of a “raid” and therefore not able to avail herself of the protections of the Protocol for Broker Recruiting. The following questions should be asked:
Is the transitioning financial advisor responsible for more than 29% of the production of her branch, separately or in combination with other transitioning financial advisors?
Is the branch manager of the transition financial advisor’s office leaving in concert with the transitioning financial advisor?
Is more than one financial advisor from the same branch transitioning to the new employer within 6 months of each other?
Does the new employer of the financial advisor have a defense fund for Raiding cases that covers the transitioning financial advisor?
Has the financial advisor’s new employer targeted advisers of the transitioning financial advisor’s current employer?
Does the old employer have a history of prosecuting its financial advisors for moving?
If the answer to one or more of these questions is “yes,” the financial advisor needs to consult with:
His or her independent transition consultant; and
The in house legal resources of the firm to which she is transitioning.
In a transition, it is always good to think of yourself first and to resist the impulse to bring your friends with you. Good advice is the best way to avoid a bad move.
The author, James R. Miller, has been a practicing trial lawyer for 45 years. He has assisted financial advisors in transition for a majority of those years. He is one of the founders of The Miller Riggs Law Firm in Denver, Colorado.