Troutman Pepper

A recent ruling by EDVA District judge Henry Hudson, granting a preliminarily injunction against four former employees of a wealth management company who left the firm to open a rival firm, is a good illustration of the speed with which the EDVA responds to requests for preliminary orders. Salomon & Ludwin, LLC v. Winters, Civil Action No. 3:24-cv-389 (HEH), 2024 U.S. Dist. LEXIS 13038, July 23, 2024. Judge Hudson’s ruling also illustrates how employment agreements with confidentiality and nonsolicitation provisions can be used to prevent former employees from using a company’s confidential customer information to solicit the company’s clients.

Background

The plaintiff, Salomon & Ludwin, required its employees to sign employment agreements containing two key provisions. The agreements included a nonsolicitation clause that prohibited employees from soliciting customers for two years following the termination of their employment. The agreements also contained confidentiality provisions, in which employees acknowledged that client relationships were trade secrets. The agreements also explicitly prohibited employees from disclosing or using client lists and company information.

The defendants were two financial advisors and two operational professionals who left Salomon & Ludwin to form a competing firm. The employees did not bring clients to Salomon & Ludwin at the time of their hiring, and they did not bring in new clients during their employment. The four employees all left at the same moment, formed a firm and began soliciting clients from their former employer. Salomon & Ludwin sued the former employees for multiple claims including violations of the Defend Trade Secrets Act (18 U.S.C. SS 1836(b)(1), the Virginia Uniform Trade Secrets Act (VUTSA), Va. Code SS 59.1-336, et seq., and breach of the defendants’ employment agreements.

Likelihood of Success on the Merits and “Raiding”

Judge Hudson applied the traditional four-factor test for a preliminary injunction, looking at the likelihood of success on the merits, the irreparable harm to the plaintiff and the defendants, the balance of the equities and the public interest. The key factor in determining whether a preliminary injunction is granted is the likelihood of success. This is because the DTSA or VUTSA require that a plaintiff prove that the information is a trade-secret and that the defendant has misappropriated it. The defendants’ main defense was that the Protocol for Broker Recruitment allowed them to use the client data. Both Salomon & Ludwin, and the defendants new firm, were signatories of the Protocol. This Protocol allows financial advisors access to certain information if leaving to join another firm. The Protocol does not define the term “raiding”, so the parties presented articles by industry experts as well as expert testimony to help define the term. Adopting a definition from one of the articles, Judge Hudson found that the combination of the number of employees who left and the number of clients lost constituted a severe economic impact to Salomon & Ludwin that satisfied the definition of “raiding.”

Irreparable Harm, Balance of the Equities and the Public Interest

Judge Hudson’s conclusion on the likelihood of success on the merits led directly to a finding that Salomon & Ludwin had suffered irreparable harm from the potential loss of goodwill, loss of customers and loss of the ability to attract new customers. The defendants, on the other hand, suffered little irreparable damage because they were allowed continue to serve their existing customers. The only restriction was that they could not solicit any more of Salomon & Ludwin’s clients. Lastly, the court noted that the public interest favors the protection of confidential business information, and an injunction would not prohibit clients from leaving Salomon & Ludwin of their own volition.

Takeaways

An important takeaway is that this decision demonstrates, once again, how swiftly plaintiffs can obtain injunctive relief in the EDVA. Salomon & Ludwin sued in late May, and within a few short days they were able get a hearing for a request for a restraining temporary order. The court agreed to a standstill at the hearing and held a subsequent hearing on a preliminary injunction one month later. In total, only two months passed between the filing of suit and the entry of a preliminary injunction.

The case also illustrates how important it is for employers to develop strong employment agreements to protect their trade secrets and confidential information and to institute policies to protect the secrecy of their most important company information. Taking those steps eliminates many of the arguments a defendant can raise regarding a claim under the DTSA or the VUTSA.

Finally, the entry of a preliminary injunction in a case such as this one is often dispositive of the merits. Since Judge Hudson’s ruling, there has been no further action in the case. However, his conclusion that Salomon & Ludwin will likely succeed on the merits may lead to a settlement.