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Former broker employees blocked from soliciting old clients

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A federal appeals court has refused to lift a preliminary injunction issued on behalf of Edgewood Partners Insurance Center Inc. prohibiting two former employees from soliciting their old clients, in a ruling over the validity of nonsolicitation agreements.

At issue in Tuesday’s ruling by the 6th U.S. Circuit Court of Appeals in Cincinnati in Brian K. Hall; Michael G. Thompson v. Edgewood Partners Insurance Center Inc. was the validity of the agreements the two men had reached with their previous employer, Valhalla, New York-based  USI Insurance Services L.L.C.

According to the ruling, Mr. Hall and Mr. Thompson, who had built a significant client base as equipment rental insurance brokers, brought some of their clients to a specialty division of the Toledo, Ohio-based Hylant Group Inc.

Then, USI agreed to pay a “substantial sum” to acquire the division’s assets and to keep Mr. Hall and Mr. Thompson on as employees. In return, the men gave up their ownership interest in their old clients, and promised if they were terminated, they would refrain from soliciting their old clients for two years from the date they were no longer employees, according to the ruling. They also agreed USI could assign their employment contracts to a subsequent purchaser, according to the ruling.

In November 2016, USI entered into a purchase agreement with San Francisco-based EPIC for USI’s equipment rental and retail rental client accounts, including the men’s old clients, according to court papers. But Mr. Hall and Mr. Thompson could not work out an arrangement with EPIC during the transition phase of the deal, and USI terminated them, according to the court papers.

In conjunction with the asset purchase agreement, USI and EPIC entered into an “assignment and assumption of employment agreements,” which assigned Mr. Hall and Mr. Thompson’s employer agreements and included the nonsolicitation agreements, according to court papers.

Upon their termination, the men began reaching out to their old clients, and sought a judicial declaratory judgment permitting them to do so.  In response, Edgewood sought a preliminary injunction barring the men from breaching their nonsolicitation agreements.

The U.S. District Court in Toledo granted the injunction. The court’s July 2017 ruling said the nonsolicitation agreements were “enforceable and reasonable,” and the record demonstrated both men had solicited EPIC customers in violation of the agreements.

Mr. Thompson and Mr. Hall appealed, and a three-judge appeals court panel unanimously largely upheld the District Court’s ruling. “Given Edgewood’s strong likelihood of success on the merits and the irreparable harm it is likely to suffer absent the injunction, the District Court did not abuse its discretion,” said the ruling.

It said, however, that the District Court had failed to distinguish between clients Mr. Thompson recruited “with the benefit of Hylant’s and USI’s resources” and those he recruited solely on his own record.

The panel ordered the District Court on remand to determine which of Mr. Thompson’s clients he recruited and developed on his own accord,” and to modify the preliminary injunction to exclude them.