Guest Post: New York County Commercial Division Grants TRO Enforcing Restrictive Covenants Pending FINRA Arbitration with Departing Employees

This guest post was written by Isaac B. Zaur of Clarick Gueron Reisbaum LLP.

Last week saw rapid-fire briefing and argument before Justice Marcy Friedman of New York County’s Commercial Division over dueling requests for "emergency" interim relief in a dispute concerning the departure of a Deutsche Bank investment advisory team. Three days after the first action was commenced, the Court entered partial interim relief in favor of Deutsche Bank. The dispute sits at the intersection of the substantive law concerning the enforceability of restrictive covenants in employment agreements and the phenomenon of injunctive relief "in aid of arbitration."

On Friday, May 16, 2014, ten New York-based members of Deutsche Bank's "discretionary portfolio management" division, including that division's two most senior members, handed in letters of resignation. Over the next several days, another eight Deutsche Bank employees resigned. The resigning personnel have indicated an intention to join an investment advisory and private wealth management firm named HPM Partners, but apparently are continuing to appear for work each day at Deutsche Bank.

Following an exchange of letters, Deutsche Bank (represented by Baker & Hostetler) filed a summons and complaint on the day after Memorial Day against HPM and six of the most senior departing employees. Deutsche Bank's complaint seeks enforcement of certain restrictive covenants allegedly applicable to the defendant employees, including notice and non-compete provisions as well as language prohibiting solicitation of Deutsche Bank's employees. At the same time, Deutsche Bank moved by order to show cause for a preliminary injunction and temporary restraining order declaring the enforceability of the restrictive covenants and enjoining defendants from violating them. In particular, Deutsche Bank insisted in its papers that the sudden departure of these employees would both cripple Deutsche Bank's own ability to continue in this market and inevitably lead to customer defections to HPM in violation of various non-compete obligations in its employee handbook and certain employee contracts. Deutsche Bank's brief is available here.

The following day, the two most senior departing employees (represented by Vladeck, Waldman, Elias & Engelhard) commenced a special proceeding against Deutsche Bank, seeking a declaration that the restrictive covenants are inapplicable or unenforceable and enjoining Deutsche Bank from enforcing them. The employees' brief is here. HPM, represented by Quinn Emanuel, also submitted an opposition to Deutsche Bank's application, which is available here.

Because most of the departing personnel are registered with FINRA, both sides acknowledge that the enforceability and applicability of the restrictive covenants will probably be determined in the end through FINRA arbitration. Accordingly, both sides' requests for interim relief were made "in aid of arbitration" (as provided for by C.P.L.R. § 7502) – to establish a governing state of affairs pending the outcome of the arbitration.

At argument on Thursday afternoon, May 29, 2014, counsel for Deutsche Bank (Baker & Hostetler’s John Siegel) characterized the relief sought as "narrow" and intended only to preserve the status quo pending arbitration. In particular, he emphasized that the duration of the proposed enforcement relief was short, since FINRA arbitration was expected to commence in approximately 15 days. He also characterized the covenants as typical, of a sort that are "enforced on Wall Street every day."

As a matter of procedure, Justice Friedman asked why, given the anticipation of FINRA arbitration, Deutsche Bank had commenced a plenary action (rather than a special proceeding). Siegel replied that the plenary action was commenced in an abundance of caution, since there was some question as to whether one of the named defendants was subject to FINRA arbitration. He also noted that some or all of the defendants might elect to forego their right to arbitrate before FINRA, in which case a plenary action would be the appropriate mechanism to seek a determination by the Court concerning the covenants' applicability and enforceability. That being said, Siegel acknowledged that the substantive issues would likely be decided in arbitration and that if defendants sought a stay of Deutsche Bank's plenary action pending arbitration, Deutsche Bank would most likely not oppose such a stay.

Kevin Reed of Quinn Emanuel appeared on behalf of HPM. He emphasized HPM's view that no interim relief was necessary or appropriate, because even assuming applicability and enforceability of the covenants, no violation was threatened. In that connection, he noted that HPM had already sent a letter to Deutsche Bank (on Tuesday of the previous week) stating that HPM was aware of the purported restrictive covenants, had doubts as to their applicability and enforceability, but nonetheless would not be party to any violation of them pending determination by an arbitration panel. Second, he argued that Deutsche Bank had not presented any significant evidence that any violation of any restrictive covenant had occurred, in part because the employees remain at Deutsche Bank pending expiration of their notice periods, but also because Deutsche Bank alleged only a single instance of an employee defendant attempting to solicit a Deutsche Bank customer to switch its business.

Valdi Licul of Vladeck argued for the petitioning employees (Benjamin Pace and Lawrence Weissman), both in opposition to Deutsche Bank's application and in favor of Pace and Weissman's application for an interim declaration that the restrictive covenants were either inapplicable or unenforceable. Licul urged that the covenants: (1) do not apply to one of the senior executives because they do not appear in any employment agreement; (2) are not enforceable insofar as they appear only in Deutsche Bank's employee handbook because that handbook, by its own terms, does not create a binding employment contract; and (3) are unenforceable in the present context because Deutsche Bank constructively discharged the employees without cause when it allegedly pressured them to sell inappropriate investment products to their clients. Licul also joined HPM's argument that no violation of the covenants was threatened.

Edward Powers (of Zukerman Gore Brandeis & Crossman) and Howard Elman (of Matalon Shweky Elman) appeared on behalf of two sets of more junior employee defendants in the Deutsche Bank action, and presented brief arguments specific to their clients – for instance that certain employee defendants have no written employment agreements at all.

Justice Friedman did not rule from the bench, but the next day (on Friday), she entered an edited version of Deutsche Bank's proposed order to show cause (available here), setting June 24 for further argument and granting Deutsche Bank much – though not all – of the relief it had sought. Specifically, Justice Friedman restrained the employee defendants and HPM from: (1) soliciting business from or doing business with any Deutsche Bank customer on whose account the employee defendants had worked while at Deutsche Bank; or (2) soliciting Deutsche Bank employees from the employee defendants' division to work for HMP. Justice Friedman also directed that confidential Deutsche Bank information be preserved in confidence and that all documents be preserved. She was careful to note that her order was not intended to prevent the employee defendants from serving clients whom they had brought with them to Deutsche Bank or who had come to Deutsche Bank solely from a desire to work with the employees.

Justice Friedman appears to have crafted the timing for further proceedings with care. Deutsche Bank's counsel indicated at oral argument that a FINRA arbitration had already been demanded and would commence, under the FINRA rules, no later than fifteen days following demand. Justice Friedman's order makes the next round of briefing due June 13 – exactly 15 days after last Thursday's argument. The order also sets further argument for June 24. Hence, Justice Friedman appears to be communicating an intention to excuse the parties from further briefing if FINRA arbitration is actually underway – but also to hold them to a tight timeframe in the event that FINRA proceedings do not encompass all parties or all issues.

Justice Friedman's order is also careful not to opine on the enforceability of the covenants in question – except by implication in the sense of having, in fact, temporarily ordered their (qualified) enforcement. "The striking of injunctive provisions [in Deutsche Bank's proposed order to show cause] shall not be construed as determining the enforceability of the Notice and Non-Solicitation provisions." Thus, if the parties do proceed to FINRA arbitration, the Court will have granted interim relief "in aid of" such arbitration without having issued any opinion concerning the likely enforceability of the covenants at issue.

Among other things, this approach maximizes the freedom of the arbitration panel to consider the enforceability of the covenants on a clean slate. Of course, it also means that practitioners are unlikely to have the benefit of the Court's view concerning the ultimate applicability and enforceability of the covenants at issue here. Some of the arguments raised concerning those issues in the parties' respective briefs (and some that were not briefed, including the standard for review of the non-recruit provisions) address arguably open questions and do merit judicial attention.

We will be watching this matter closely, though we suspect that its final resolution will occur behind FINRA’s closed doors.

See also coverage by Bloomberg here and by Law360 here (subscription required).

The cases are 651622/2014 and 651623/2014.