Broker lawsuits proliferate as talent moves onPosted On: Jul. 1, 2019 12:00 AM CST
Mergers and acquisitions, a talent shortage, competition for business and anger over alleged disloyalty are fueling increased litigation in the brokerage sector as firms more frequently charge departing employees with violations of nonsolicitation and noncompete agreements.
Recent litigation has included several suits filed in the wake of Marsh & McLennan Cos. Inc.’s acquisition of Jardine Lloyd Thompson Group PLC, but litigation involving several other brokers has also been filed.
Amid warring brokers, risk managers — who can do business with whomever they choose — are left to decide whether to remain with their departing producer, stay with their current firm, or going to a third broker (see related story).
There are steps, though, brokers on both sides of the issues can take to avoid problems when individual employees or teams of brokers are poached by rival firms (see related story).
Recent litigation includes:
• Guy Carpenter & Co. LLC filed suit over three Guy Carpenter officials leaving to join Lockton Cos. LLC. Lockton said in March it had formed a global reinsurance business called Lockton Global Re and hired the three executives.
• Lawsuits were filed in multiple courts by Lockton earlier this year alleging rival brokerage Alliant poached more than two dozen staff from a Denver-based Lockton unit. In June, the Delaware Chancery Court granted Lockton a preliminary injunction in the case.
• Marsh LLC sued NFP Corp. for allegedly poaching 13 former JLT Specialty Insurance Services Inc. real estate employees. Marsh filed a separate lawsuit against four of the employees who left JLT to work for New York-based NFP.
• In June, a federal appeals court vacated a preliminary injunction order issued by a lower court against Alliant, which allegedly poached the employees of Camden, New Jersey-based Corporate Synergies Group LLC, stating Alliant had given inadequate notice of the injunction.
• In April, an Illinois appeals court affirmed a lower court ruling in favor of a benefit broker’s former president who is now a Hub International Ltd. official, who was charged with violating his noncompete agreement. Downers Grove, Illinois-based Axion RMS Ltd. had filed suit against its former president Michael Booth, who is Hub International’s president of employee benefits and chief sales officer of Hub International-Midwest. The court said the noncompete agreement was unenforceable because he had served less than two years after signing the agreement.
• In July 2018, a federal judge denied a Willis Towers Watson PLC unit’s petition for a temporary restraining order against Brent Hartman, a construction insurance broker, and Alliant, which Mr. Hartman had joined the previous week. The case was later settled.
• In April 2018, a Pennsylvania judge dismissed a request from Wells Fargo to stop a group of former brokers in Pittsburgh who joined rival EPIC Insurance Brokers & Consultants from soliciting business from their former clients.
The litigation, which is usually settled before trial, is often motivated as much by anger as it is by business reasons, say experts.
The snubbed brokerage will often seek a preliminary injunction against departing workers, although their success may hinge on the terms of their noncompete or nonsolicitation agreements, with courts generally reluctant to enforce agreements they consider too restrictive. Noncompete agreements restrict employees from going to a competitor after their employment’s termination, while nonsolicitation agreements permit former workers to work for a competitor, but restrict their access to prior clients.
The recent high-profile cases signal an increase in broker vs. broker litigation, say some experts.
“It’s increasing because there are certain firms ... that are really aggressively recruiting people without any consideration given to the existence of noncompete agreements,” said John J. Kelly, managing partner of consulting firm Hanover Stone Partners LLC in New York.
“We have seen an uptick in litigation in this area over the past several years, particularly as the economy has strengthened here in Arizona,” said Myles P. Hassett, of the Hassett Law Firm PLC in Phoenix.
“There’s kind of a talent war to drive organic growth,” said Timothy J. Cunningham, managing director of Optis Partners LLC in Chicago. “We’ll continue to see teams being brought over, and to the extent that they’re violating restrictive covenants, litigation will likely ensue,” he said.
Daniel P. Hart, a partner with Seyfarth Shaw LLP in Atlanta, said while he is unsure if there has been an uptick in such litigation, “as the economy moves into more of an information economy, I think it’s inevitable that there will be an increase in suits involving restrictive covenants.” Certainly, in the insurance industry, “relationships and confidential information are at the heart of a company’s assets.”
“Typically, business concerns are driving the issue,” said Paul A. Lauricella, a partner with Wilson Elser Moskowitz Edelman & Dicker LLP in Albany, New York.
“As the insurance brokers continue to consolidate, the value of the books of business goes up,” he said. “The impact of one broker or team of brokers leaving has a more substantial impact on that organization, so the more consolidation there seems to be, the bigger the impact and the more reason to fight over those noncompete agreements.”
Mr. Lauricella said litigation is driven by a combination of anger and business reasons, but “typically it’s probably more the anger,” with the former broker feeling, “‘I hired this employee or this broker and I gave them a book of business to work on,’” and made them broker of the year, “‘and lo and behold, this what he or she does,’” Mr. Lauricella said. “I’ve never had an unemotional noncompete litigation case.”
“It’s analogous to divorce,” said Mr. Hassett.
“You have people who have forged, sometimes over many years, a close working relationship, when one of those parties decides that the relationship is over. There are feelings of anger and betrayal that rise to the surface, which may dominate the thinking of otherwise rational people.” In litigation, “both sides accuse the other of doing terrible, dastardly things,” Mr. Cunningham said.
The poached company will “paint this picture of this disloyal employee who did all these terrible things, and in turn the defense paints the employer as this draconian sweatshop. But that’s common in litigation,” Mr. Cunningham said. “Judges see through that.”
Mr. Lauricella said most of these cases settle.
However, he added, “it depends on what you mean by settling. They often settle before a full trial, but in these cases there’s often a preliminary injunction hearing” to determine whether those who left the business should be at least temporarily stopped from continuing to compete with the former employer “while the issues are being hashed out in the case.”
In 2017, for instance, Brown & Brown Inc. said it was receiving $20 million in a settlement of litigation over hiring of several of its employees by Lake Mary, Florida-based broker AssuredPartners Inc.
“But the standard for getting a temporary injunction necessarily involves getting into the issue of whether the noncompete agreement is valid and reasonable in scope and duration,” Mr. Lauricella said.
“Does it protect legitimate business interests?” he said. “The judge’s decision on that injunction motion is often what drives a settlement in the case because if it’s granted, then the broker who left is now, by court order, forced to stop competing, at least until another court hearing is held, but that could be months and months down the road.”
Mr. Hassett said also the use of alternative dispute resolution approaches, such as mediation or arbitration, are increasing because “the expense involved in taking these kinds of case to trial can be very large.”
Meanwhile, in conducting the litigation, courts tend to look unfavorably on noncompete and nonsolicitation agreements that are too broadly written, say experts.
It has been difficult to claim producers have been poached because they are essentially free to choose where they work, according to E. Al Diamond, president of Cherry Hill, New Jersey-based Agency Consulting Group Inc.
Olie Jolstad, a principal at Olie Jolstad & Associates in West Linn, Oregon, a consultant, said in one case in which he was involved, the noncompete agreement said the broker “could not transact a business of insurance within a 75-mile radius of Dallas,” which would have eliminated cities including Fort Worth, Plano and Frisco, Texas.
“The judge said, ‘You can’t deny this guy a right to make a living,’” but the court did call for a financial remuneration to the poached company, he said.
Noncompete agreements “vary widely from state to state,” said Mr. Hart. “Increasingly, many states are taking actions to reduce noncompete, and to some extent customer nonsolicitation agreements, with lower level employees,” he said.
“A handful of states like California have more or less outright barred customer nonsolicitation and noncompete agreements, but most states follow what’s known as the reasonableness rule, in that they will enforce these kinds of agreements if they are reasonably limited as to time, geography and scope,” said Mr. Hart.
Even in states where noncompete agreements are not permitted, Mr. Hart added, “The law still protects trade secrets, and to the extent that an outgoing broker is alleged to be using a confidential client list or other confidential information,” the former brokerage is still potentially protected.