Bear Not Entirely Without Tooth and Claw

by Lee Gesmer on March 31, 2008

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.

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