Metropolitan News-Enterprise


Friday, August 21, 2009


Page 3


C.A. Tosses Injunction Against Solicitation of Former Employer’s Clients


By SHERRI M. OKAMOTO, Staff Writer


The Fourth District Court of Appeal has thrown out the portion of a preliminary injunction preventing five financial advisors from soliciting their former employer’s customers to transfer their patronage to a competing brokerage firm.

In a July 30 decision ordered published yesterday, Div. One explained that a trial court cannot specifically enforce a contractual clause purporting to ban former employees from soliciting an employer’s customers unless such injunctive relief is based on the former employees’ independently tortious acts.

The panel then reversed San Diego Superior Court Judge Judith F. Hayes’ order enjoining James Galante, Michael Lambrix, Tim Sullivan, Jeremy Laub, and Shawn McElderry from contacting the former and potential clients of The Retirement Group. 

The Retirement Group—which bills itself as “a group of financial professionals who focus entirely on retirement planning and the design of retirement portfolios for the corporate transitioning employee”—claimed that it spent substantial resources to develop a customer database through seminars and other marketing efforts throughout the country.

Before the advisors terminated their independent contractor status with The Retirement Group and joined Monarch Retirement & Investments in 2008, they had signed a written “Marketing and License Agreement” in which they promised not to “disclose or use” the confidential database information after leaving the company.

Alleging that the advisors had misappropriated trade secrets by using contact information from its confidential database to contact clients and solicit them for the rival company, The Retirement Group sought and obtained a preliminary injunction that enjoined numerous categories of conduct.

On appeal, the only aspect of the preliminary injunction challenged was a prohibition against the advisors from “[d]irectly or indirectly soliciting any current TRG [customers] to transfer any securities account or relationship from TRG to [advisors] or any broker-dealer or registered investment advisor other than TRG[.]” 

Writing for the appellate court, Justice Alex C. McDonald acknowledged “two competing strands of legal principles in California” were at issue in this case.

“The first strand, on which Advisors rely, provides that California courts refuse to enforce most ‘noncompetition’ agreements as violative of a strong public policy… favoring free competition” he said. “The competing strand, on which TRG relies, provides that California courts will protect an employer from the misappropriation of its trade secrets by anyone, including its former employees.”

Based on these principles, McDonald reasoned that an employee may be barred from soliciting existing customers to redirect their business away from the former employer and to the employee’s new business if the employee is utilizing trade secret information to solicit those customers, emphasizing “it is not the solicitation of the former employer’s customers, but is instead the misuse of trade secret information, that may be enjoined.”

While client lists can qualify as trade secrets, McDonald added, lists that embody information readily ascertainable through public sources do not qualify for protection.

As The Retirement Group did not dispute the advisor’s claim that customer information could be obtained from independent third party sources, McDonald said the client database was not protectable trade secret information.

The injunctive provision challenged on appeal therefore only served to bar the advisors from engaging in conduct that was substantively indistinguishable from the contractually proscribed conduct in a noncompetition agreement, he said. Since such a covenant is void as an unlawful business restraint unless enforcement is necessary to protect a trade secret, McDonald concluded the challenged portion of the injunction could not be upheld.

Joined by Justices Gilbert Nares and Terry B. O’Rourke, McDonald said the trial court must vacate the preliminary injunction and enter a new and different injunction deleting the language enjoining advisors from “directly or indirectly soliciting any current TRG customers to transfer any securities account or relationship from TRG to defendants or any broker-dealer or registered investment advisor other than TRG.”

The case is The Retirement Group v. Galante, 09 S.O.S. 5079.


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