For 14 years, the Protocol for Broker Recruiting has allowed financial advisors to leave their employer firms and take specific client information with them without fear of a retaliatory lawsuit. Recently, however, the Protocol has suffered significant setbacks. In the latest blow, the Georgia Court of Appeals held that employers can bring suit when advisors fail to give required notice before jumping ship.
The Protocol for Broker Recruiting, created in 2004, was designed to ameliorate an increasingly litigious atmosphere where major firms routinely brought lawsuits to stop their high-producing financial advisors from jumping ship to competitors. The Protocol, a contractual agreement among its signatory firms, provides a “safe harbor” for registered representatives of the signatories to depart their firms without incurring liability based on a non-solicitation agreement.
Specifically, the Protocol provides that “neither the departing registered representative nor the firm that he or she joins would have any monetary or other liability to the firm that the registered representative left” by reason of taking certain information or soliciting the clients the representative serviced at the prior firm. The client information that departing advisors may take with them consists of client names, addresses, phone numbers, email addresses and account titles — the Protocol specifically prohibits “taking any other documents or information.” In effect, the Protocol was designed to allow a departing financial advisor to bring with him or her basic client information (and to ask clients to come with the financial advisor) without immediately confronting a process server serving a complaint and motion for temporary restraining order from the firm they are leaving.
At its height, the Protocol was signed by nearly every major brokerage firm and covered the vast majority of financial advisors. It led to a significant decrease in departing advisor litigation, while concomitantly fueling an arms race of firms spending heavily to recruit top-producing advisors. In recent months, however, the Protocol has shown signs of cracking — and perhaps even becoming obsolete. First, several major firms recently made highly publicized departures from the Protocol, claiming it is no longer sustainable. Among the complaints levied against the Protocol is that it is being “gamed”: firms have been accused of joining the Protocol solely to recruit a top producer, hiring the producer away and then immediately exiting the Protocol.
Most recently, on June 27, the Georgia Court of Appeals, in an apparent case of first impression, placed a potentially important limit on the Protocol’s efficacy. In HA&W Capital Partners, LLC v. Bhandari, the Court of Appeals was tasked with determining what impact, if any, the Protocol has on clauses in advisors’ employment contracts requiring them to give advance notice of their departure. At issue was a group of advisors whose employment contracts required them to give either 60 or 90 days’ notice to their firm prior to their departure. Despite these clauses (sometimes known as “garden leave” provisions), the advisors attempted to terminate their employment without providing written notice and immediately commence working at a competitor firm.
When the employer firm filed a complaint and temporary restraining order, the advisors argued that the Protocol precludes any liability for violation of the advance notice provision. The advisors’ argument was, essentially, that the stated intent of the Protocol is to allow advisors “freedom of choice” in their employer and to allow them to freely solicit their clients (so long as they stay within the parameters of the Protocol). The advance notice provision, on the other hand, restricted their freedom of movement and was plainly designed to give their employer firm sufficient time to transition their clients to other advisors and otherwise work to retain them.
While the trial court credited this argument, the Court of Appeals disagreed. The court reasoned that the Protocol, which is fundamentally a contract, must be construed according to its express terms and that notice provisions are not even mentioned — much less prohibited — by the Protocol. Rather, the Protocol simply details the information that a financial advisor may take with her upon departure without incurring liability. Because the plaintiff firm “does not allege that the former employees are liable by reason of taking client information,” but rather “alleges that the former employees are liable by reason of having terminated their employment without prior notice,” the court held that a claim seeking to enforce the notice provision “does not contravene the express terms of the Protocol.”
While the Georgia Court of Appeals’ decision might seem to follow as a basic matter of contract law, the enforcement of advance notice provisions could allow firms to make additional end-runs around the Protocol. Financial advisors with such clauses in their contracts will face the choice of either giving their employers the requisite notice of their departures (allowing the firm to contact each of their clients and attempt to retain them), or violating their contracts and facing lawsuits — just what the Protocol was designed to eliminate. Although HA&W Capital Partners, LLC, applied Georgia law, firms bringing such suits in other states will cite to it and argue that it is premised on universally applicable principles of contract law.
Given these developments, is the Protocol on its way to becoming a dead letter, or have rumors of its demise been greatly exaggerated? As evidence of the latter, several major firms — and more than 1,500 smaller firms — remain signatories to the Protocol. Even while the Protocol appears to have been weakened, there is some benefit for firms to remain signatories: Financial advisors have a strong incentive to join signatory firms, given the decreased likelihood that they will be sued by their employers should they decide to leave. Protocol membership therefore remains an important and attractive signaling device for firms to recruit top advisors. Moreover, the Protocol may survive if for no other reason than lack of a viable alternative: A full return to pre-Protocol litigation would be undeniably costly and result in unwanted negative publicity. Thus, although the Protocol has shown recent signs of weakening, its ultimate fate remains to be seen.
McGuireWoods’ experienced broker-dealer/investment adviser team will continue to monitor and report on important issues affecting the broker-dealer industry. For more information, contact the authors of this article or any member of the team.