Thursday, February 9, 2006

For Brokers, Leaving Just Got Easier

Brokers who change firms with a restrictive covenant in place know the drill - you leave, your old firm sues and tries to get an injunction against you to prevent you from moving your clients. The so-called pact by some of the major firms two years ago did not stop the practice of attempting to enforce the injunction and keep the clients.

There are various defenses that brokers can use in such cases, but one that has some success is the doctrine of "unclean hands." In essence, the broker argues that his old firm recruited him, and encouraged him to move his clients. In fact, the argument goes, that is exactly what the firm does with its lateral hires, and it is now attempting to stop the exact same practice by a competitor.

The defense is not easy, since there are usually contract issue involved, but it just got easier. A federal court judge in Washington DC denied a request for an injunction by a firm on grounds of "unclean hands" and the US Court of Appeals just affirmed that decision.

Quoting from the original decision:

What finally tips the scale in favor of the defendants is their undisputed assertion that H&R Block’s standard operating procedure for recruitment and hiring instructs and encourages just the kind of behavior about which H&R Block is now complaining.”



The decision actually extends the doctrine of unclean hands since there was no evidence that the customers of these reps were encouraged to move, but rather that H&R Block engaged in such practices generally.

I can think of two major wirehouses who are not going to be happy with this ruling.


The full story is at Registered Rep - For Brokers, Leaving Just Got Easier
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