New York High Court Gives Guidance on How Far Advisors Can Go in Assisting Their New Firm in Transit Hot

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Although the ruling in the case is specific to a situation where an advisor has sold his practice to his firm, the decision is still very useful in offering guidance about financial advisors—both in New York and elsewhere—should handle interactions with their clients if they have left their firm in a situation where their employment agreement restricts them from soliciting their clients.
In the Bessemer Trust case, defendant Branin had been a highly successful financial advisor and the CEO of the investment management firm Brundage, Story & Rose (BSR).  Pursuant to an asset purchase agreement (which did not have any restrictive covenants against the sellers) Branin and the other BSR shareholders sold the assets of the firm, including all BSR client accounts, to Bessemer Trust for $75 million.  After the asset sale, Branin and the other BSR principals went to work as at-will employees of Bessemer, and continued servicing their former BSR clients.
Branin soon became unhappy with his new role at Bessemer, and began to explore new opportunities during which he explained to potential employers that he could not be involved in actively soliciting his former BSR clients to leave Bessemer and transfer to a new firm.  Less than two years after joining Bessemer, Branin resigned and joined the firm of Stein Roe Investment Counsel LLC (Stein Roe).
Branin did not advise his clients about his decision to leave Bessemer and join Stein Roe.  Moreover, when he announced his departure, he cooperated with all Bessemer’s requests for assistance in transitioning his clients to new Bessemer advisors, such as compiling a comprehensive client list. 
However, after Branin joined Stein Roe, his clients started contacting him there.  Among these was his largest client, the “Palmer Family.”  After learning of Branin’s departure from the new FA at Bessemer assigned to the Palmer account, Mr. Palmer contacted Branin and requested a meeting to discuss how his family’s accounts might be managed were he to opt to move them to Stein Roe.  In advance of that meeting, Branin facilitated a strategy session with Stein Roe personnel to plan for the meeting with Palmer.  During the meeting, Branin described to his new colleagues the Palmer family’s investment philosophy and other background information about this client, but did not share any confidential information proprietary to Bessemer.
When the meeting with Palmer was held, Branin was present to conduct introductions but essentially played no role in the discussions.  After the meeting, Palmer asked Branin for a formal proposal regarding fees and other specifics, and Branin traveled (at Palmer’s request) to meet with Palmer at his home in Ohio.  After considering the Stein Roe proposal—and the competing presentation from Bessemer—Palmer moved his accounts to Stein Roe, and Bessemer sued.
Bessemer’s lawsuit alleged that Branin breached his duty of loyalty by improperly soliciting his former clients, and damaged the client good will which Branin and BSR had sold to Bessemer under the asset purchase agreement.  After a bench (judge) trial, the judge awarded Bessemer $1.2 million in damages against Branin.  Branin then appealed the decision, and the appellate court sought guidance from the New York Court of Appeals about the question of, under New York law, what kinds of activities cross the line into improper solicitation.
The New York Court of Appeals determined that Branin had not committed improper solicitation.  While business owners remain under a permanent “implied covenant” not to solicit their former customers after selling, buyers nevertheless assume the risk that in the process of trying to take possession of the customer good will for themselves, that some customers will not follow.  Further, the court noted, business sellers are free to compete with the buyer of the business and even to accept their former customers, so long as they do not “actively solicit such trade.” 
The court went on to note that as a matter of New York law, there is no bright-line rule in determining when a seller of good will has crossed the line and engaged in improper solicitation of former clients, and it refused to create a formula.  Instead, the court held that such issues must be decided on a case-by-case basis, taking into account such factors as:
  • Did the business seller initiate the contact with the client/customer, or did the client?
  • Did the seller send targeted mailings or make individualized phone calls to their former clients?
  • If the client initiated contact with the business seller, did the seller “tout” their new firm, or merely provide factual responses to questions?
  • Did the seller disparage the buyer of his former business or try to explain why he believes his products/services are superior?
Applying these screens to the facts of the lawsuit, the court found that Branin had not engaged in improper solicitation.  Important to the court’s analysis was that it had been Palmer (the client) who had proactively sought to conduct due diligence about Stein Roe’s investment strategy, resources, and fees—and that it was entirely appropriate for Branin to assist in dealing with these factual matters.  The court also held that  Branin had not crossed the line of improper solicitation by educating his new Stein Roe colleagues about Palmer’s investment preferences, financial goals and risk tolerance because such information was not necessarily proprietary to Bessemer.  Finally, the court also found that Branin had not done anything wrong in having assisted Stein Roe in the “active development” of a plan for the sales pitch which Palmer requested, and that even having been at the sales pitch itself had been acceptable because Branin’s role in the meeting was “largely passive,” and “limited to responses to factual matters.”
The Bessemer Trust case only applies directly to situations where financial professionals have sold their practice to a firm, and only where those transactions are governed by New York law.  Nevertheless, it offers important guidance to financial advisors generally about they should handle dealings with clients if they leave their firm and are under a restrictive covenant.  The more you are able to characterize your conduct as paralleling the way in which Branin handled his affairs when he left Bessemer, the better a position you (and your new firm and your lawyer) will be in making a smooth transition with those clients who are determined to have you as their advisor wherever you go.


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