New Jersey District Court Enjoins Former Financial Services Employee from Taking Customer Information

In a case to be noted by financial services entities that are signatories to the “Protocol for Broker Recruiting,” a New Jersey District Court issued a preliminary injunction to a financial services employer, Ameriprise Financial Services, Inc. (“plaintiff”) to prevent a former financial advisor employee from retaining certain client information that he downloaded from his computer prior to his departure from plaintiff. Plaintiff was a party to the “Protocol for Broker Recruiting” that prescribes a method for a departing employee to retain certain client information when leaving for another financial services institution. To grant the injunction, the Court found that plaintiff showed it likely would succeed on its underlying breach of contract claim, it would suffer immediate irreparable harm absent the injunction, defendant would not suffer harm if enjoined, and the injunction favors the public’s interest. The Court essentially decided that if the Protocol is not followed in the first instance, a departing financial representative’s subsequent compliance is tainted and insufficient to withstand subsequent legal challenge.

Factual Background

In Ameriprise Financial Services, Inc. v. Paul Koenig, defendant, had access to confidential information which included customer lists, contact information, financial information and new client prospects. Plaintiff adopted “The Protocol for Broker Recruiting” (“Protocol”) which prescribes a method for a financial services employee to retain certain customer information when departing to join a new financial services employer and permits the employee to solicit clients after joining the new firm, absent some other contractual or common law limitation on solicitation. The Protocol further provides that if the steps in the Protocol are followed, the departing employee and the new employer will not be liable for damages for retaining the information. When defendant began employment, he signed a Financial Advisor Agreement (“FA”) agreeing not to reveal certain confidential information of plaintiff.

Plaintiff terminated defendant for insubordination because he refused to attend a mandatory meeting. Defendant then attempted to resign by complying with the Protocol, which plaintiff refused to accept. However, after the termination, plaintiff found several client paper files missing, and it forensically determined that before his termination, defendant sent emails to his personal email with client contact information. Plaintiff also found that certain contact information and client meeting information had been deleted from its client contact database. Plaintiff filed a lawsuit for breach of contract, tortious interfrence with contract, misappropriation of trade secrets and unfair competition. Plaintiff also made a motion for a temporary restraining order.

Court’s Ruling

The District Court applied the standard for deciding requests for temporary injunctive relief — the existence of immediate irreparable harm, the likelihood of success on the merits, the potential harm to the party to be enjoined and the public interest — and with respect to the breach of contract (FA) claim, granted an injunction. The Court required defendant to return confidential customer information removed from plaintiff “in excess” of information permitted under the Protocol. The Court noted that while a former employer should not be able to undermine a financial representative’s efforts to follow the Protocol by refusing to accept the representative’s submission, the defendant’s departure did not comply with the spirit of the Protocol. Email was sent to a personal email account containing client financial plans — which exceeds the information permitted to be transferred under the Protocol. In analyzing the misappropriation of trade secrets claim, the Court found that plaintiff did not show irreparable harm, yet it did not need to decide this issue because it separately granted the injunction on the breach of contract claim and limited the relief to requiring return of client information “in excess” of that covered by the Protocol.

Further Analysis

In addition to the result of the preliminary injunction being granted, the case is significant because the Court noted that certain client information at issue may constitute trade secrets under New Jersey law. The definition of trade secrets, which has been a hotly contested subject, has recently been codified by the new New Jersey Trade Secrets Act. Furthermore, the Court disregarded defendant’s argument that the “fluid nature of the industry” often involves brokers switching firms and taking clients with them, i.e., the basis for the Protocol, which undermined plaintiff’s claim of irreparable harm. In response, the Court noted that “disclosure of confidential information could put [the former employer] at a competitive disadvantage and result in loss of customer trust and goodwill.” For signatories to the Protocol and their employees, the Court’s holding in Ameriprise suggests that strict adherence to the Protocol is likely to be enforced by New Jersey District Courts.

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