Smooth Transitions : Rob Radcliff : Texas Non-Compete Lawyer & Attorney : Langley Weinstein LLP Law Firm : Dallas Employment & Employee Departures : Smooth Transitions Law Blog

Jay Shepherd's recent post on "Rethinking non-competes" in his Gruntled Employee Blog got me thinking.  His take was this:

But if [the employee] decide[s] eventually that it's time to leave the nest, then they should be free to do so. Even if it means that they're going to compete.

With one exception. They can't take our stuff. And by stuff I mean two things: our secrets and our client relationships. If their old jobs required them to work with our secrets — our legitimate, protectable secrets, not stupid things like prospect lists — then they should not be allowed to take them to their new jobs. And if in their old jobs we paid them to develop and maintain customer relationships to the extent that they became the face of our company, then they should have to stay away from those relationships for a reasonable period of time. A year, say. 

Seems like a pragmatic approach and employers get to protect their trade secrets and customer relationships.  Courts don't like enforcing non-competes that are simply punitive in nature, there has to be something real to protect and the law in Texas has evolved that way.

The optimal solution however is not one size fits all.  Instead, it should be industry specific. Non-compete agreements are not appropriate for every industry.  The industry need to take the initiative to work out employee transition agreements. I know, wishful thinking.  But it can be done. Broker Dealers have done so with The Protocol.  The industry knows what their  "special sauce" is and what truly needs protection.  The Protocol allows employees to move within the industry and take their clients.  This may not be appropriate in every industry.  But the point is the industry and the market, not lawyers or legislators, are in a better position to make the determination.  

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Predictions about a slowdown in financial advisor recruiting appear to be premature. Last week, Wells Fargo, which purchased Wachovia, which purchased AG Edwards, announced it was looking to add 1400 financial advisors.  It plans to recruit 400 new advisors and obtain the others from other firms. This comes on the heels of reports that BofA intends to add 2000 advisors.

Movement of established brokers often leads to litigation/arbitration when the parties involved are not members of The Broker Protocol.  Obviously there is no concern when a broker/dealer is hiring a trainee but even when a broker/dealer is a member of the Protocol it may still file suit or compel an arbitration when a competing firm is raiding its employees. 

Most recently, as covered by Mark Astarita of SEClaw.com, Raymond James was hit with a $12.1 million dollar arbitration award in a case involving 20 advisers in 4 branch offices. Wachovia alleged Raymond James raided its branch offices. A copy of the award is available at SECLaw.com. Allegedly, Wachovia lost $5.3 million dollars in production from the departure of the advisors. 

We'll keep an eye on BofA and Wachovia's recruiting efforts. 

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In Texas a non-compete has to be ancillary to an otherwise enforceable agreement. What does this mean?  The consideration (or value) in the separate agreement must give rise to the employer's interest in keeping the employee from working and the non-compete must be designed to prevent the employee from breaching the promise she gave as consideration (value) in the other agreement. Examples are the best way to understand what this means.

Say I go to work as a programmer for a  company that makes a state of the art mp3 player with a highly advanced new technology.   In order to carry out my job I will be provided access to the source code for the technology and my job will include manipulating and altering the  code.  The company states in my employment agreement that it will provide me with the source code and that because I am being provided with the source code I cannot work in the mp3 player industry for 1 year after I quit or am fired from the company.  (Yes there is a nondisclosure agreement and common law duty not to disclose an employer's trade secrets but ignore that.) So, there is an otherwise enforceable agreement (the agreement to provide me with the source code) and providing me with the code gives rise to the non-compete.

The alternative is an agreement that has nothing to do with a non-compete.  Say a company agrees to pay me $100 in the event I quit or am fired.  There is also a one year non-compete.  Yes, there is an ancillary agreement - the promise to pay $100- but it has nothing to do with keeping me out of the industry for a year.  This doesn't work.

The trick is to tie what the company is trying to protect to the non-compete.  Court's are far more likely to enforce a non-compete when the employer has provided something of value that is worth protecting.

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FINRA recently provided social media guidance to broker/dealers.  The Regulatory Notice  guides firms on applying communication rules to social media sites which FINRA defines to include blogs and social networking sites like Facebook.  It does not apply to sites used for purely personal reasons but the line between the two blurs as the growth of social media continues.

What are the highlights?  Here are a few:

• If a firm or its personnel are using social media to communicate about business it is required to keep records of all such communications.
• Don't recommend a security on a social media site or it will trigger the requirements of NASD Rule 2310 regarding suitability.  
• If a firm is going to recommend a security such recommendation must be approved approved by a registered principal of the firm.
• Webinars and other interactive electronic forums like a chat room are considered a public appearance under NASD Rule 2210.
• Static information on social media, such as a profile, background, or wall information must be approved by a registered representative before it is posted.
• FINRA considers a static blog an advertisement that requires approval of a principal but a blog that permits real-time interactive communications does not require prior principal approval.
• Interactive communications on a social media site that are real time do not require a registered principal’s approval.  
• Even though a principal's prior approval may not be necessary, the firm must supervise these electronic communications in a manner reasonably designed to ensure they do not violate the content requirements of FINRA's communication rules.

The notice goes on to provide more detail on supervision of social media sites and third-party posts.  Needless to say it's unlikely that a broker/dealer will recommend a security over Twitter or Facebook - that's just not smart at a number of levels.  Any real time communications regarding securities will require supervision by the firm and archiving of those communications.    I'm not sure the notice will "chill" social media use by broker/dealers but I'm also not sure it will drive them to use it as a business device other than general networking.

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