How can financial advisor firms protect their client lists?


Customer relations are a major asset for companies in the financial advisory and wealth management sector. In California, however, the law is making it increasingly difficult to prevent departing employees from soliciting clients after going to a competing business. Courts strike down non-solicitation and even confidentiality agreements that prohibit former employees from soliciting their former clients. Taking steps to establish that these customer relationships are a trade secret may be the best way to protect this valuable asset.

California Courts Begin Applying Non-Competition Law to Non-Solicitation and Confidentiality Agreements

It is widely believed that California law prohibits employers from imposing non-competition agreements on employees. Even if a California employee voluntarily agrees to a non-competition clause, the courts will not enforce it because such agreements violate a statewide policy of open competition codified in Business & Occupations Code. more permissive laws, California courts routinely invalidate non-competition clauses if the employee is based in California.

Because non-competition is unsustainable, for many years Californian companies have protected customer contact lists through non-solicitation agreements. But courts have increasingly extended the principles invalidating non-compete agreements to non-solicitation clauses as well. Following a 2008 California Supreme Court case, a number of state and federal courts in California have struck down non-solicitation of customer provisions.

Next come confidentiality agreements. If a confidentiality clause were worded broadly to include customer contact information, perhaps this could prevent employees from soliciting customers if they moved to a competitor?

Although the law is not settled, there is reason to doubt that confidentiality clauses can be used in this way. For example, in 2020 a California court refused to allow a stock trading firm to use a broad confidentiality clause to prevent a former employee from soliciting clients. The confidentiality clause acted “as a de facto non-competition clause” which would prohibit the former employee “in perpetuity from performing any work in the securities field”. Other cases suggest that this decision is part of a trend. In two recent private venture capital arbitrations, our firm relied on these and other cases to strike down overly broad confidentiality clauses, winning our claim that our client’s former employer could not not use confidentiality to prevent him from soliciting institutional investors with whom he had previously worked. .

Note that confidentiality clauses are still likely protecting an actual customer contact list. In other words, we think it’s likely that a well-tailored confidentiality clause could prevent an employee from taking a physical or digital copy of a customer contact list with them when they leave. But several recent cases question the ability of confidentiality clauses to prevent a former employee from soliciting clients from this list.

Using Trade Secrets to Protect Customer Information

Considering that in California, non-competition, non-solicitation, and perhaps even sweeping confidentiality clauses are unlikely to prevent former employees from soliciting clients, trade secrets may be the best way. protect customer relationships.

A trade secret can be any information that “derives independent economic value” from not being generally known, and that is the subject of “reasonable” efforts to protect its secrecy. Customer lists, in some cases, may be trade secrets.

However, not all client lists are created equal. For companies that want to protect their customer relationships as trade secrets, here are some tips to maximize your chances:

Keep a record of the efforts and costs involved in developing the list: The effort required to identify the customers in the customer list matters a lot. Courts are “reluctant to protect customer lists” if they contain information available “through public sources, such as business directories”. Conversely, a customer list that has been “obtained at considerable time, effort and expense is a protectable trade secret”.

Distinguish between firm clients and individual advisor clients: In financial services, who devoted energy to developing clients also determines whether a client list is a trade secret. In one case, outgoing brokers foiled a trade secret claim by showing that they had developed their clients through their own efforts and without significant assistance from their brokerage firm. The court concluded that the client list, although secret, did not belong to the brokerage firm.

Consider brokerage protocol: A company’s adherence to the brokerage protocol can affect its ability to protect its customer list as a trade secret. Since the protocol allows outbound brokers to carry certain customer information with them, at least that information cannot be considered a trade secret.

Simple contact information is probably not protectable: Customer databases that contain information about customers’ “special needs or characteristics” are more likely to be protected than lists of “simple identities and locations”. Information that “links” each customer to other confidential information, such as “the customer’s buying habits, product needs and preferences,” makes a customer list much more likely to be protected. Similarly, a list reflecting research on many customers and their preferences is more easily protectable than a list containing market research on, say, a “single major buyer who is likely aware of his own needs.”

Do not use boilerplate confidentiality clauses: As the cases discussed above and our firm’s two recent successful arbitrations show, overly broad, boilerplate confidentiality clauses can actually provide less protection than a clause carefully tailored to your business. Wherever possible, be specific about what information needs to be protected.

Make efforts to protect the secrecy of the list: Finally, keep in mind the obligation to make “reasonable” efforts to protect the secrecy of a client list. If there is a company-wide customer database, protect it with passwords and limit access to those who need to know it. Don’t allow employees to keep versions of the list on their personal devices. Require employees to sign non-disclosure agreements. And engage in good HR hygiene when employees leave: conduct exit interviews; require certifications that departing employees have returned all company information; and for manager-level employees, survey whether their computer use was unusual in the weeks before they left.

Alex Reese is a litigation partner specializing in matters of business secrecy and unfair competition and Kyle McLorg is a litigation partner in the office of Farella Braun + Martel in San Francisco.


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