For Brokers, Leaving Just Got Easier

Feb 7, 2006 12:18 PM, By John Churchill

H&R Block Financial Advisors recently lost an appeal to stop three departing brokers from soliciting or contacting their clients. For reps around the country, the ruling means that moving your book could get a lot easier.

On Jan. 24, the U.S. Court of Appeals for the District of Columbia ruled in favor of Derek Majkowski, Justin Romero and George Shirley, three reps in H&R Block Financial Advisors’ Washington, D.C., office. The reps left the firm on Jan. 9 to go to The Capitol Group, a Vienna, Va.-based office of SunTrust Investment Services. H&R Block immediately filed an injunction to stop them from soliciting or contacting clients.

While that injunction was upheld, the federal District Court in D.C. and now the U.S. Court of Appeals have ruled that H&R Block, by attempting to stop the reps from contacting or soliciting clients, is violating the “doctrine of unclean hands.” This is equitable court doctrine that says essentially: You can’t enter into court complaining about something someone has done if you yourself do it also.

U.S. District Judge James Robertson, who presided over the case, writes in the ruling: “What finally tips the scale in favor of the defendants is their undisputed assertion that H&R Block’s standard operating procedure for recruitment and hiring instructs and encourages just the kind of behavior about which H&R Block is now complaining.”

Normally, if the unclean hands doctrine is raised, it is only applicable to the two parties involved. Block recognized this and pointed out further that the three reps did not even raise an unclean hands defense. The judge partially agreed but said since the type of solicitation behavior Block was trying to stop was really “business as usual in the brokerage community” with its “live by the sword, die by the sword” mentality, unclean hands is extendable to these reps. And perhaps many more.

“It’s a great ruling for reps,” says James Eccleston, a partner in Shaheen Novoselsky Staat Filipowski & Eccleston in Chicago, Ill. “The judge has extended the application of the unclean hands defense,” says Eccleston. More importantly, it is now the second federal court ruling to do so.

The first victory for an extended application of this doctrine, says Eccleston, was in November 2003 when a Vermont federal court ruled against Merrill Lynch and in favor of a group of brokers in a similar type of case. In his concluding opinion, Judge William Sessions III wrote: “Even if Merrill Lynch had demonstrated irreparable harm, the court would deny its demand for preliminary injunctive relief under the doctrine of unclean hands.” Further, he wrote, “By seeking to halt such solicitation, Merrill Lynch seeks to enjoin the same behavior in which it engages as a matter of common policy.”

As in the H&R Block case, while the judge recognized Merrill’s contention that the doctrine of unclean hands was not directly related to the specific claim against the brokers, “the court, however” wrote Judge Sessions, “has broad discretion in refusing to aid the unclean litigant.”

“In the Merrill Vermont case, the judge might have had a bad day or disliked Merrill’s counsel,” says Eccleston. “But now you’ve got two federal cases essentially saying the same thing—it’s a great decision for brokers.”