In a new case filed by Charles Schwab & Co. Inc. against former employees who staggered their departures to a competitor, we have a prime example of the risks involved when a team departs over time versus simultaneously. To avoid claims of violations of fiduciary duties or non-poaching clauses, some advise that teams should have the junior members resign first and at a later time the senior members of the group should follow. This approach is fraught with the danger apparently exemplified by the allegations of misconduct made in a case brought by Schwab against several of its former employees in Texas state court yesterday.
According to the Petition, in 2009, Connie Mack Jr. left Schwab and his teammates Richard Rosso and Mark Blom to form his own financial advisory firm, Clarity Financial LLC. After Blom gave notice in March 2012 that he was resigning to go to work for Clarity, Schwab alleges it asked Rosso if he intended to join Blom and he responded that he had “no plans to leave.” The Petition alleges that thereafter Rosso engaged in conduct to deter other Schwab representatives from establishing relationships with Blom’s clients and that his subsequent contact with those clients enabled him to lay the foundation for his future departure to Clarity with those clients. Rosso allegedly compounded his “bad leaver” conduct by providing misleading information about his future business plans when he resigned from Schwab by saying he was pursuing a career in communications when he shortly thereafter joined his former team members at Clarity.
Schwab has a history of aggressively enforcing its restrictive covenants and its success has in the past hinged in part on pre-departure conduct. In a recent FINRA arbitration award, a panel awarded compensatory and punitive damages as well as attorneys’ fees against a broker who had spoken to customers about moving prior to his resignation.
The lesson to be learned from this situation is that it is often very difficult to manage and control the behavior of the team member(s) left behind. Communications among team members will necessarily continue and are laden with risks. On balance, the exposure to claims against the senior member of the team for breach of duty or of any non-solicit of employees covenant is often less than the consequences and resultant claims when departures are staged over time and inevitable mis-steps occur in the interim period. Former employers are also better equipped to handle a definitive all-at-once group departure rather than one where they are continually dealing with re-assignments, replacement and re-training.