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By Katherine S. Bowles, Esq.  of Shustak Reynolds & Partners, P.C. posted on Monday, July 1, 2019.

Katherine S. Bowles

Katherine S. Bowles


Location: San Diego, California
Phone: (619) 696-9500 (Ext. 124)
Email: [email protected]

Since Morgan Stanley and others started withdrawing from the Protocol for Broker Recruiting in the fall of 2017, there has been a significant uptick in firms bringing legal action against departing advisors to prevent them from soliciting clients after they leave. Although these actions have had mixed results, California federal courts recently have been highly skeptical of this approach and reluctant to grant the “drastic remedy” of a temporary restraining order or preliminary injunction.

Firms like Morgan Stanley generally follow a “sue and ask questions later” strategy to minimize the damage caused by departing advisors. Shortly after the advisor resigns and joins a new firm, the prior firm will file a FINRA arbitration against them and simultaneously file an action in state or federal court seeking a temporary restraining order and/or preliminary injunction to stop the advisor from soliciting clients away from the prior firm. In the 21 months since Morgan Stanley withdrew from the Protocol, it has brought 13 of these cases in federal court seeking temporary restraining orders barring departing advisors from soliciting Morgan Stanley clients and using proprietary material. Out of these 13 cases, 7 courts granted the TRO request, 2 denied the request, and 4 cases settled prior to the ruling.

Recently, however, California courts have become more skeptical of this tactic and are requiring firms to put forth credible evidence that the departing advisor has actually misappropriated a trade secret or otherwise violated the law. In June 2019, Morgan Stanley lost their bid for a TRO against a California advisor who left to join Wells Fargo. The court held that Morgan Stanley failed to put forth any persuasive evidence to justify such a drastic remedy. The court generally held that in order to seek such a drastic remedy the conduct must be severe and supported by a digital trail or eyewitness account.  

Similarly, in May, a Northern District of California federal judge denied E*Trade’s attempt to get a preliminary injunction against an advisor who left for Morgan Stanley. The court looked at the advisor’s agreements with E*Trade and his conduct in light of California’s Business and Professions Code section 16600, which says that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

The court found that portions of E*Trade’s employment agreement regarding solicitation of clients violated this statute, and held that E*Trade had not put forth credible evidence that the departing adviser had misappropriated E*Trade’s trade secrets. Edward Jones suffered a similar fate in October 2018 when a federal judge in California summarily denied its request for a temporary restraining order against a departing adviser.

Firms filing these types of actions have to be cognizant of the recent shift in how courts are interpreting non-solicitation law in California, and as one judge put it, “to the extent the law regarding Section 16600 is ‘evolving,’ it is developing in a direction unfavorable to [firms’] arguments.”

While advisors always face a threat of litigation when they switch firms outside the Broker Protocol, California federal courts are signaling they are skeptical of these types of bullying tactics and will require credible evidence of actual wrongdoing before they will take the drastic step of issuing a temporary restraining order or preliminary injunction.  

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We routinely represent broker-dealers and financial advisors in arbitrations, financial advisor transitions, broker protocol disputes and related matters. Please contact us today for a confidential, complimentary consultation.


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