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Insurance broker personnel raids may test noncompete clauses

Firms file lawsuits to ward off poachers

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A flurry of broker poaching lawsuits may show how seriously the industry takes defections, but such suits face a minefield of legal and practical obstacles.

Enforceability of noncompete agreements depends on the facts of the given case, terms of the employment agreement and the law of a specific jurisdiction.

State laws vary widely and are changing. Some states are moving to limit restrictive covenants while at least one, Georgia, has made them easier to enforce, legal sources say. Courts in the United Kingdom, meanwhile, have imposed restrictions on enforceability similar to those in many U.S. jurisdictions, according to legal sources.

Overall, more jurisdictions are looking skeptically at noncompete agreements as their use and resulting litigation have grown over the last decade, lawyers say.

Employers in many cases have gone “overboard” and “just as a matter of course are throwing noncompetes into all their agreements,” Peter A. Lauricella, a partner at Wilson Elser Moskowitz Edelman & Dicker L.L.P. in Albany, New York. “That's why there's been a little bit of a backlash.”

The past six weeks has seen three brokers file poaching suits. They include:

Willis Ltd., a unit of Willis Group Holdings P.L.C., which is suing Jardine Lloyd Thompson Group P.L.C. in a London court for luring employees of its fine art, jewelry and specie division as Willis sought to sell the division and other operations to Miller Insurance Services L.L.P.

Last week, Willis won a temporary injunction barring JLT from recruiting any employees of the division worldwide, Willis confirmed in a statement.

Beecher Carlson Holdings Inc., a unit of Brown & Brown Inc., has filed suit in U.S. District Court in Atlanta against former employees Michael Stern and Mark Ouimette for forming a rival broker, Stern Risk Partners L.L.C., and allegedly poaching Beecher employees and clients. Messrs. Stern and Ouimette, who could not be reached, have filed a motion to dismiss the suit.

And Arthur J. Gallagher & Co. Inc. filed suit in London to halt alleged poaching of employees and clients by David Ross, the former head of its international unit, who left with other Gallagher employees to join Towergate Group P.L.C., according to news reports.

A Gallagher spokeswoman did not respond to requests for comment.

The flurry of litigation really is business as usual, said Tim Cunningham, managing director at Chicago-based investment banking and consulting firm Optis Partners L.L.C. “People are always moving from one broker or insurer to another.”

Such suits often are intended to send a message to employees and competitors. “I can't remember the last time one went to trial,” Mr. Cunningham said.

While courts have enforced noncompete provisions for companies, not just brokers and insurers, the standards can be tough, lawyers say.

An employer must show it has a legitimate business interest in enforcement, such as protecting trade secrets or client relationships developed at the company's expense; that the provision is limited in time and geography so it is not overly burdensome; and that it doesn't limit competition, Mr. Lauricella said.

U.K. courts have similarly required a showing of legitimate business interest and reasonable duration and geographic scope, according to legal sources.

Restrictive covenants may include separate provisions for confidentiality as well as for noncompetition or nonsolicitation of employees and clients. An employer might win a suit for violations of confidentiality or trade secret restrictions even where noncompete provisions can't be enforced, said Daniel P. Hart, a partner at Seyfarth Shaw L.L.P. in Atlanta.

State laws vary widely.

California, North Dakota and Montana largely prohibit noncompete agreements, for instance, while New York is much friendlier to employers. Massachusetts lawmakers are likely to limit use of noncompete agreements, lawyers predict.

Meanwhile, Georgia has moved in the opposite direction. Voters in 2010 amended the state constitution to allow noncompete provisions; Georgia then enacted a new law affecting contracts dated after May 11, 2011, to make it easier for employers to enforce restrictive covenants, Mr. Hart said.

Companies operating in multiple states may seek the forum most amenable to restrictive covenants, but even that may not work.

For example, Ascension Insurance Holdings L.L.C., a brokerage based in Walnut Creek, California, but incorporated in Delaware, sued a former employee in Delaware Chancery Court to enforce a noncompete agreement that included a Delaware choice-of-law and venue provision. However, the court ruled in January that California law, which voids noncompetes, should apply because the parties were located in California, and the contract was signed there.

A noncompete may also be ruled unenforceable if an employee isn't adequately compensated for agreeing to it, said Terrence P. Canade, a partner at Locke Lord L.L.P. in Chicago. A court, for instance, may question whether an employee has been with a firm long enough — and therefore received adequate compensation from employment — to justify a one- or two-year noncompete provision, he said.

While defecting workers once may have photocopied company records before leaving, thumb drives and smartphones have made it easier to take large volumes of data. Beecher's lawsuit, for instance, alleges that Messrs. Stern and Ouimette used multiple thumb drives to download confidential Beecher data before quitting.

Employers more often are alleging violations of the U.S. Computer Fraud and Abuse Act, Mr. Canade said, one of the counts in Beecher's suit. Some courts have ruled that the law, aimed largely at hacking and terrorism, isn't applicable where data has been copied but computers have not been damaged, he said.

While states have to weigh employer protections against potential restraints of trade in allowing restrictive covenants, companies likewise have to weigh the benefits of litigation over lost clients, experts say.

“Ultimately, the customer is going to go where the customer goes,” Mr. Lauricella said. “You wonder sometimes if the employer really is going to keep that relationship if the customer wasn't satisfied enough to stay there in the first place.”