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Bear Not Entirely Without Tooth and Claw

Recognizing that the Massachusetts Suffolk Business Litigation Session (BLS) is an unreceptive venue for securities firms attempting to enforce restrictive coveneants against former employees, Bear Stearns has sued the former Executive Director of its Private Client Services Group in Federal District Court in Boston. The employee, a 20 year veteran of Bear Stearns, fled to Morgan Stanley on Monday, March 17, 2008, the day after Bear Stearns’ $2/share bail-out sale to Morgan Stanley was announced.

The Bear Stearns employee, Douglas Sharon, had an agreement with Bear Stearns that required him to provide 90 days notice of resignation. According to Bear Stearns, Sharon provided notice and left on the same day. Moroever, Bear Stearns asserts that Sharon took confidential and trade secret customer/client information with him, much of which was copied the weekend just prior to March 17th. Then, according to Bear Stearns, he used this information to contact his former clients at Bear Stearns.

As noted in the link above, the BLS (where this case would have ended up had Bear Stearns filed in state court) has been less than friendly to “broker” suits of this ilk. Apparently, Bear Stearns is hoping it will get better treatment in federal court, where its case has been assigned to Judge Nathaniel M. Gorton.

While a full hearing on Bear Stearns’ motion for preliminary injunction has not yet occurred, Judge Gorton did enter a temporary restraining order preventing Mr. Sharon from working for Morgan Stanley, communicating with his former clients, or inducing any Bear Stearns employees to leave Bear Stearns in favor of Morgan Stanley, pending the full court hearing.

Whether this order holds up on full hearing remains to be seen. Bear Stearns was right to be nervous about presenting this agreement to a BLS judge, such as Judge Ralph Gants. Mr. Sharon’s agreement is not a “covenant not to noncompete”; it is merely a notice period. If the 90 day notice period is intended to allow Bear Stearns to transition Mr. Sharon’s work to new employees with his cooperation, the cost of having someone else undertake that task may be adequate damages to compensate Bear Stearns under the contract, and an injunction would be inappropriate.

In state court, Mr. Sharon would appear to have a good argument that while he may be liable for some damages, he should not be enjoined from working for a competitor. Given the possibility that Mr. Sharon is being paid a $10 million signing bonus by Morgan Stanley (according to the Bear Stearns’ complaint), he should be willing to suffer what would, by comparison, be a slap on the hand.

Moreover, Mr. Sharon can use the arguments used to great effect in recent BLS cases, including the argument that preventing him from providing brokerage services to his former Bear Stearns clients will be harmful to those clients, and therefore the noncompete sought by Bear Stearns is against public policy.

However, federal judges are a breed apart from state judges. While they are bound to apply state law, they have a lot of discretion in a case of this sort. Whether Judge Gorton choses to apply the agreement liberally or conservatively remains to be seen.

The complaint is here. Bear Stearns’ preliminary injunction motion is here. And Judge Gorton’s temporary Order is here.

But on the other hand ….

In contast to the Suffolk Business Litigation noncompete cases discussed below, in National Engineering v. Grogan Massachusetts Superior Court Judge Maureen B. Hogan, sitting in Middlesex County, enforced a six month noncompete provision between a recruiting and staffing firm, and its former employee, Travis Grogan.

The heart of Judge Hogan’s decision is as follows:

Other than his employment at NESC, had no experience in the staffing industry. All of his knowledge of the business was gained through training provided by NESC and by working at NESC. His relationships with the customers and accounts of NESC were all developed and maintained while he was employed at NESC, through use of the resources and confidential information of NESC. The success of NESC’s business is grounded upon relationships and good will with its corporate customers and Managed Service Providers, developed through its sales executives, such as Grogan. NESC is entitled to protect its good will and relationships with its customers and accounts through the non-compete covenants to which agreed. These covenants restrict from engaging in competition with NESC and from soliciting and/or servicing its clients and accounts for a reasonable period of time-one year. The general non-competition covenant which restricts from working for a competitor within 50 miles of the office or area in which he worked while at NESC is also reasonable in scope. These covenants do not restrict from using his own skills, knowledge or talent, but rather prevent him from trading on the good will of NESC by restricting him from using the relationships he developed with NESC’s customers, clients and accounts and the confidential information of NESC, including knowledge of these customers and their needs.

Would this case have been decided differently in the Suffolk BLS? One wonders ….

A link to the full case is here.

Smith Barney/Citigroup: Darn, Foiled Again!

Albert Einstein once said that “the definition of insanity is doing the same thing over and over again and expecting different results.”

By this measure, Smith Barney has a problem.

In a recent case decided by Judge Gants in the Suffolk Business Litigation Session, Smith Barney sought a preliminary injunction against Michelle Griffin, who had held several positions with Smith Barney, culminating in “financial advisor.” When Ms. Griffin began at Smith Barney (then Shearson Lehman) in 1994, she had signed an agreement in which she promised not to solicit Smith Barney clients for six months after leaving. In fact, just before and after resigning to join N.Y. Life, she solicited many of her clients, attracting Smith Barney’s ire.

However, Judge Gants teed up the the case with the following comments:

This Court has heard many of these kinds of cases. The pattern is similar in all cases. A stock broker, or person seeking to become a stock broker, joins a brokerage house, signs a non-solicitation agreement and also agrees to keep certain information confidential. After a period of time, the broker, often solicited by a competing brokerage, decides to leave his employing-brokerage for the competition down the street. Without prior warning, the broker resigns at the end of the day on Friday and is up and running at his new employer by Monday morning. These brokers move around with astounding frequency, and the whole industry knows it….What follows is a race to the Court by the jilted brokerage seeking injunctive relief, all in anticipation of industry-mandated arbitration before the NASD.

After this wind-up, you don’t need a weatherman to know which way the wind is blowing. Judge Gants denied the motion on a variety of grounds:

First, the agreements unfairly punish the clients of the departing advisor/broker.

Second, hypocrisy was a factor. While the financial firms suing employees claim to be “shocked, shocked” (quoting Police Captain Louis Renault in the movie, Casablanca) that another financial service company would show so little respect for the sanctity of their contract with a former employee, they are themselves enaged in precisely the same “shocking” conduct:

As this Court observed in its July 12, 2004, order, since the establishment on October 2, 2000, of the Business Litigation Session of the Superior Court, previously to this case, this Court had addressed 29 cases by brokerage firms against individual brokers leaving, abruptly, to join another brokerage firm. In each instance the plaintiff firm sought injunctive relief. In those 29 cases, 21 have been brought by three major brokerage firms: Morgan Stanley DW, Inc., the plaintiff here; UBS PaineWebber , UBS, and Salomon Smith Barney (“SSB”). These three major brokerage firms have been the plaintiffs in seven cases each. In that same aggregation of 29 cases, MSDW and UBS have been the brokerage firm to which the defendant broker has defected in six cases each, and SSB has been that firm in five cases. Whatever happened to the “maxim of equity with the dignity of antiquity … that one who seeks equity must do equity?

Third, the non-solicitation agreements that the financial firms seek to enforce were presented to their new employees at the time of hire, without separate consideration:

the non-solicitation agreements enforced in most of these financial services preliminary injunctions were presented, as here, to the financial advisor when she first commenced employment with the company, without separate consideration beyond continued employment (or perhaps training), and without any choice apart from termination. Consequently, they are routinely signed without significant thought, in large part because the employee has no meaningful alternative. Since all (or virtually all) financial services companies require similar agreements, a refusal to sign such an agreement would effectively bar the employee from employment in the financial services industry. As such, these agreements stand in sharp contrast to comparable agreements involving the sale of a business, where the seller is receiving significant additional consideration for the agreement not to compete or to solicit, and has a meaningful alternative of rejecting such a restrictive covenant (albeit in return for a lower sales price).

This comment by Judge Gants is significant, since it has long been “black-letter” law in Massachusetts that separate consideration (apart from the initial hire or even continued employement, where the employer asks the employee to sign the agreement after employment has commenced) is not necessary for enforcement of a non-solicitation or noncompete agreement.

Fourth, the “goodwill” in these cases (goodwill being the legal term for “the relationship with the customer) is intertwined; it may belong to the employee, to the employer, or to both. If the goodwill belongs to the employee (who did the sales work to develop the customers), the employee should not be prevented from taking those relationships to her new job.

Fifth, although the confidential nature of the customer identities may be an alternative ground for enforcing a nonsolicitation or noncompete agreement, it is questionable whether the identities of the customers in this context can truly be considered confidential.

Motion for preliminary injunction denied. Perhaps after this decision Morgan Stanley, Salamon Smith Barney and UBS Paine Webber will reflect on Einstein’s comment quoted above, and the “Massachusetts broker noncompete wars” will finally come to an end.

A link to the full case is here.

Judge Young's Decision in the Situation Management Copyright Case

Many lawyers in Massachusetts would agree that Massachusetts Federal District Court Judge William Young is one of the most erudite judges in the district. Yet, he has written relatively few copyright law decisions in his 23 years on the federal bench. A Westlaw search shows that he has authored fewer than ten substantive copyright decisions.

In a decision issued on February 28th in the case Situation Management Systems v. ASP Consulting Group, Judge Young undertook the question that has caused many lawyers to call copyright law one of the most metaphysical of practice areas: how to draw the line between expression that is protected by the law, and that which is not. In this decision, Judge Young concluded that Situation Management System’s (“SMS”) workshop training materials, aimed at improving business and personal productivity, did not make the grade.

Judge Young found that the challenged texts, created by two former employees of SMS who had formed a competing business, had been created very quickly, indicating that the former employees had not started from scratch, but had likely used the SMS materials as a starting point. After explaining the famiar (to copyright afficionados) concepts of “idea v. express,”, scenes a faire and the fact that copyright law does not protect a “process,” Judge Young applied these docrines to the case at hand. He found that SMS’s materials were “aggresively vapid . . . hundreds of pages filled with generalizations, platitudes and observations of the obvious.” Comparing this work with some examples of great literature (The Odyssey by Homer, Cold Mountain by Charles Frazier and, of course, a sonnet by The Bard) he found that the SMS material was largely uncopyrightable. While the structure of the SMS texts were entitled to some limited protection, that protection inhered near the literal text level, which the defendant ASP did not copy.

Most importantly, in my view, Judge Young emphasized two points: first, the motivation of the copier is irrlevant. Here, the allegation that the former employees (now with the defendant) started their business to steal SMS’s materials and ruin their business, was irrelevant under copyright law if, as Judge Young concluded, they did not copy protected expression. This conclusion is not a surprise, but it’s nice to have it reinforced every once in a while by a respected federal judge.

Second, the fact that the defendants may have used SMS’s materials as their starting point was irrelevant, so long as the work the defendants created was not “substantially similar” under copyright law, which it was not. Again, not “new law,” but the first time it has been expressed by a court in the First Circuit.

The case is on the Pacer website, here.