An irreverent Wall Street Blog
Citizens Securities Wins TRO in Non-Solicitation Federal Court Action
March 16, 2020
Among the more common questions asked of me by my law firm's clients is what can I do (or not do) after I've quit my current brokerage firm and join a new one. Pointedly, employees on the move are concerned about violating various non-solicit, non-compete, and confidentiality agreements. At what point does a mere communication to clients become a solicitation? At what point am I going to be deemed to be in competition with my former firm. If I get too cute and run afoul of something, exactly what should I expect will be my former firm's response. In a recent federal matter, we get to see how some of those concerns play out, even if only on a temporary basis.
The Federal Case
In a Complaint filed in the United States District Court for the Western District of Pennsylvania ("WDPA") http://brokeandbroker.com/PDF/DavittCompWDPA200214.pdf, FINRA member firm Citizens Securities, Inc. f/k/a "CCO Investment Services Corp. ("CCOISC") (also a wholly-owned subsidiary of Citizens Bank, N.A.) asserted against former Financial Advisor f/k/a "Financial Consultant" John P. Davitt, IV breach of contract, breach of the covenant of good faith and fair dealing, tortious interference with contractual relations, violation of the Pennsylvania Uniform Trade Secrets Act, unfair competition, conversion. and breach of fiduciary duty. Plaintiff Citizens sought a Temporary Restraining Order ("TRO") and Preliminary Injunction ("PI") to remain in place until the conduct of an arbitration hearing. Plaintiff requested that the scope of the TRO/PI be as follows:
(a) From contacting or soliciting business from any current or prospective client of Citizens whom Mr. Davitt served or whose name became known to Mr. Davitt while he was employed by Citizens;(b) From altering, destroying, using, disclosing, or transmitting Citizens' records or the information contained therein, including but not limited to the names, addresses, email addresses, telephone numbers, and financial information of Citizens' current and prospective clients;(c) Requiring Mr. Davitt to immediately cease using and to return, within 24 hours of entry of a temporary restraining order, all original Citizens records and reproductions thereof, whether in paper, electronic, or other form; and(d) From altering any of Mr. Davitt's computer environments including desktops, laptops, tablets, and smart phones or mobile devices, including those that Mr. Davit uses at or for GLFA and LPL, pending further order of this Court.
The Employment Agreement
a. You agree that all memoranda, notes, records or other documents made, or compiled by you, or made available to you, during the term of this Agreement concerning the business of CCOISC, Agency or Bank, or any account or portfolios of any of CCOISC's, Agency's or Bank's customers, are confidential business records and shall remain the property of CCOISC, Agency and Bank, and shall be delivered by you to CCOISC upon the termination of your employment or at any other time at CCOISC's request, and that none of such records, nor any part of them, is to be removed from the branch of Bank at which you are employed, either in original form or in duplicated or copied form, and that the names, addresses, and other facts in such records are not to be transmitted verbally except as necessary in the ordinary course of conducting business for CCOISC and Agency.b. You may obtain or have access to certain proprietary, privileged or other confidential information of CCOISC, Agency and Bank and their clients or customers, or prospective clients or customers, including those clients or customers you bring in (collectively referred to as "Confidential Information"). Confidential Information includes, but is not limited to, the identity of clients or customers or prospective clients or customers, business plans, strategies, products, services, programs, systems, databases, methods of operation, financial information, policies, procedures, or personnel information, of CCOISC, Agency or Bank. Confidential Information also includes any non-public information disclosed by a client or customer, potential client or customer, or other third party which CCOISC, Agency or Bank has agreed or is otherwise obligated to keep confidential, including, but not limited to, financial information concerning such individual or entity. You acknowledge and agree that CCOISC, Agency and Bank have obligations to protect the confidentiality of this information and that those obligations extend to you. You acknowledge and agree that such Confidential Information derives independent economic value, actual or potential, from not being generally known to, and not readily ascertainable by proper means by, competitors of CCOISC, Agency or Bank, that it is the subject of efforts that are reasonable under the circumstances to maintain its secrecy, and that it is therefore trade secret information under applicable law, including the Uniform Trade Secrets Act.You shall not in any way, commercial or otherwise, except to the extent required by the proper performance of your duties pursuant to this Agreement, use or disclose to any person, for any reason or at any time (whether during or after the term of this Agreement), any Confidential Information.c. Except as otherwise required in connection with the performance of your duties as contemplated herein, you agree that, during the term of this Agreement and for a period of one (1) year thereafter, you will not, either directly or indirectly, for your own account or as an agent, servant or employee, officer, director, shareholder, partner, member or manager of any entity, or member of any firm, or participant in any venture: (iii) Solicit by mail, phone, personal meeting or in any other manner the retail securities brokerage, investment advisory or insurance business of any customer whose name became known to you as a direct or indirect result of your employment with CCOISC and/or Bank.
at pages 4 -5 of the Complaint
Resignation
Plaintiff Citizens alleges that Defendant Davitt voluntarily resigned from Citizens' employment on January 6, 2020, and, thereafter, began employment with Good Life Financial Advisors ("GLFA") and LPL Financial LLC ("LPL").
SIDE BAR: Online FINRA BrokerCheck records as of March 16, 2020, disclose that Davitt was first registered in 2004, and, thereafter, he was registered with Citizens Securities, Inc. from 10/2010 to January 2020, and that he was employed with that same firm from September 2010 to January 2020. Additionally, BrokerCheck discloses that Davitt was registered with LPL Financial, LLC from January 6, 2020 to the present; and that he was employed by that firm from January 2020 to the present.
Direct Competition
The Complaint alleges that GLFA and LPL are direct competitors of Plaintiff Citizens, and in apparent recognition of that contention, Plaintiff sent Defendant a letter dated January 13, 2020, reminding him of the non-solicitation and confidentiality provision set out in paragraphs a, b, and c of the Employment Agreement.
Solicitation Campaign
The Complaint alleges that Defendant Davitt communicated to numerous customers via telephone and /or mail that he had left Citizens, provided his reasons for leaving, and invited the customers to meet with him or provided them with reasons why they should stay with or switch an advisor. The Complaint characterizes the cited communications by Davitt as part of a "letter and telephonic solicitation campaign." at page 6 of the Complaint.
The Complaint alleges that in response to Defendant Davitt's solicitation "several Citizens customers have moved their investments to GLFA/LPL, several others have indicated that they are considering . . . others have advised Citizens that they have arranged to meet with Mr. Davitt." at page 6 of the Complaint.
Citizens sent out a cease-and-desist letter dated January 27, 2020 to Davitt, but he purportedly continued his solicitation in purported violation of the Employment Agreement.
Consent Order
On March 12, 2020, Davitt and Citizens entered into a Consent Order for Preliminary Injuunction
http://brokeandbroker.com/PDF/DavittConOrdWDPA200312.pdf, whereby Davitt is restrained and enjoined, in part, as follows:
http://brokeandbroker.com/PDF/DavittConOrdWDPA200312.pdf, whereby Davitt is restrained and enjoined, in part, as follows:
1. Defendant John P. Davitt, IV, and all persons or entities acting in concert with him, or on his behalf, is hereby restrained and enjoined:a. From directly or indirectly soliciting, by mail, phone, personal meeting or in any other manner, the retail securities brokerage, investment advisory or insurance business of any client whose name became known to Mr. Davitt as a direct or indirect result of his employment with Citizens, which restriction, pursuant to Mr. Davitt's employment agreement, shall expire by its terms on January 6, 2021.b. From altering, destroying (except as provided in Paragraph 2 below), using, disclosing or transmitting information (except as provided in Paragraph 2 below) obtained from the records of Citizens, including, but not limited to, the names, addresses, and financial information of clients and prospects; andc. From intentionally altering any of Mr. Davitt's computer and electronic devices (except as provided in Paragraph 2 below), including desktops, laptops and smart phone or mobile devices or other computers (collectively, "computer and electronic devices") pending further order of this Court and/or an arbitration panel properly constituted by the Financial Industry Regulatory Authority ("FINRA"), or b\ agreement of the parties.2. Mr. Davitt shall immediately cease using and will return, within 24 hours of entry of a temporary restraining order, all original Citizens records and reproductions thereof, whether in paper, electronic, or other form. To the extent that Mr. Davitt has any information regarding Citizens¶ clients on his computer and electronic devices, or any Citizens records of any sort on his computer and electronic devices, he shall preserve such evidence for use in the case, provide it to his counsel, and then delete it from his computer and electronic devices; and3. Mr. Davitt shall fully disclose a list of every Citizens client that he has contacted (by mail, telephone, or otherwise) that became known to him as a direct or indirect result of his employment with Citizens, including the manner in which said client was contacted.4. Mr. Davitt represents and warrants that he has conducted a diligent search of his records and is not in possession of any of Plaintiff's records, but if any such records are subsequently discovered, Mr. Davitt shall return to Plaintiff any and all such discovered records, and any copies and/or other reproductions thereof in whatever form, within twenty-four (24) hours of his discovery thereof.
In entering into the above Consent Order, Defendant Davitt pointedly:
denies any violation of the employment agreement at issue in this matter, and nothing in this Order shall be deemed an admission of wrongdoing or violation of the terms of the employment agreement between the parties, and nothing in this Order shall be deemed a waiver of any potential applicable defenses by Defendant, either in this Court or before any FINRA arbitration panel. . . .
Bill Singer's Comment
No . . . Davitt has not lost his case nor has Citizens won its claims. All that transpired above is preliminary to the impaneling of a FINRA Arbitration Panel, their subsequent orders pertaining to the pending Consent Order, and their eventual adjudication. Nonetheless, until such time as the FINRA arbitrators take over the dispute, the Consent Order will remain in place and Davitt is prevented, in part, from:
directly or indirectly soliciting, by mail, phone, personal meeting or in any other manner, the retail securities brokerage, investment advisory or insurance business of any client whose name became known to Mr. Davitt as a direct or indirect result of his employment with Citizens, which restriction, pursuant to Mr. Davitt's employment agreement, shall expire by its terms on January 6, 2021.
For starters, wrap your head around just what might be deemed an "indirect" solicitation. Moreover, the Court's proscription covers "any client whose name became known" to Davitt directly/indirectly during his employment with Citizens. Again, the reach of a name that you learn of "indirectly" from your employment is a very expansive condition. On the other hand, the Consent Order acknowledges that the Employment Agreement only has a term running to January 6, 2021, and, accordingly, the Consent Order restrictions will naturally expire at that point. Of course, January 2021 is about 10 months from now, so that's quite a waiting period. I'm sure that Davitt hopes that the FINRA Arbitration will result in a favorable ruling in his favor long before January 2021, but, you know, sometimes these arbitrations can drag on and on.
Finally, note that in entering into the Consent Order, Davitt pointedly denied that he had committed any violation of the employment agreement. As such, he emerges from the federal case subject to the terms of the Order but without having been required to admit any wrongdoing or waiving any defenses.
For those of you who enjoy playing the Home Edition of Wall Street Employment Litigation, review the above fact pattern and answer a simple question:
Was Davitt required under the Consent Order to return any commissions or fees he earned from any client that Citizens alleges was wrongfully solicited? In trying to come up with an answer, consider this portion of the Consent Order:
READ the BrokeAndBroker.com Com "Non Solicitation" Archive3. Mr. Davitt shall fully disclose a list of every Citizens client that he has contacted (by mail, telephone, or otherwise) that became known to him as a direct or indirect result of his employment with Citizens, including the manner in which said client was contacted.
http://www.brokeandbroker.com/index.php?a=topic&topic=non-solicitation