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An ongoing legal battle between two large national insurance brokerage firms over employee poaching is a byproduct of a hazard faced in the financial services industries where relationships and knowledge of business practices are premium assets, experts say.
A jury in Fresno, Calif. recently ruled against Aon Corp. in yet another poaching lawsuit that involves the U.K.-based brokerage and rival Alliant Insurance Services. That suit, in which Aon accused the defendants of an “ongoing, premeditated raid on Aon’s officers, employees and clients” dating back to 2011, is still ongoing on a number of counts.
Last month Aon filed a cross-complaint seeking injunctive relief and damages against Alliant, an executive who left the firm and other employees. According to that suit, the alleged raid led to the defection of roughly 75 executives and employees at Aon’s Fresno, Salinas and Walnut Creek offices.
A similar ongoing case between Aon and Alliant in set to be heard in Illinois, while a third such case in 2011 involving both firms was eventually settled, court documents show.
In all three cases, Aon has accused Alliant of poaching executives and employees, among other alleged transgressions.
What’s the beef between the two?
It’s nothing personal. It’s just business, according to Damian Cavaleri, a partner at Hoguet Newman Regal & Kenney LLP in New York who has worked on several such cases
“These types of liftouts happen quite often in the financial services industry,” Cavaleri said. “There is a substantial amount of litigation in that area.”
“Liftouts,” another term for the more commonly used “poaching,” typically occur when a substantial investment exists in maintaining a client base despite the existence of a restrictive covenant between an employee and the firm, explained Cavaleri.
This chart from the law firm Beck Reed Riden LLP offers a state-by-state look at the legal status of non-compete agreements.
With a lawsuit, legal fees and an adverse decision at stake, why would one firm go after another’s executives and employees?
It’s because these suits most often turn into negotiations, so the stakes may not be as high as they seem, Cavaleri said.
“It doesn’t surprise me one bit that where there’s a business group that is profitable that a competitor wouldn’t try and get business from them,” Cavaleri said. “At the end of the day, a lot of these things, depending on what kind of line the companies want to take, turn into business discussion.”
No known data tracks whether there are more or fewer lawsuits between brokerages over these contracts, but several experts reached for this article believe there are more of them now– and there may be more in the near future.
One reason may be technology. Cavaleri believes that technology— email, proprietary software, and expansive and easily downloadable databases— is giving employees more access to closely-held trade secrets, and that same technology also makes it easier for employees to take this information with them when they leave.
In fact, it has become a common practice that when an employee announces a departure from a firm, managers or executives will review that employee’s email correspondence in search of evidence such as a client list sent to a personal email address, according to Cavaleri.
Trade secrets are at the heart of a matter involving former Aon executive Michael Heffernan.
A lawsuit brought by Aon against Heffernan and Alliant last year charges that along with staging “a raid” in 2016 and allegedly taking more than two dozen Aon employees, Heffernan also took closely-held information on Aon clients.
The suit, filed Feb. 3, 2016, seeks injunctive relief and damages arising out of Heffernan’s alleged breaches of restrictive covenants contained in agreements between Heffernan and Aon, as well as statutory and common law duties, and Alliant’s alleged aiding and abetting of those breaches.
Attorneys for Heffernan did not respond to requests for comment. Aon and Alliant also declined opportunities for interviews.
The apparent increased frequency of these disputes in the brokerage world could also be explained by the growing popularity of covenants.
Phil Trem, senior vice president at MarshBerry & Co. Inc., a consulting and investment banking firm, said restrictive covenants are so common among insurance brokerages that firms that do not draw up such contracts could be considered outliers.
“There are a very small minority of firms in the industry that don’t have some restrictive form to protect their business,” Trem said. “Frankly, it’s not very good business practice. They need to protect their assets.”
There are various forms of restrictive covenants. In a non-compete agreement, an employee who leaves cannot compete with the firm in any way. Another form is a non-solicit agreement, which prevents an employee from pursuing a firm’s accounts for typically a 12- or 24- month period. There are also non-accept agreements, in which an employee cannot accept business from a customer of the company being left.
“What most firms have with their agents are non-solicit agreements, which say ‘If you leave, you can’t come after our accounts or you can’t you can’t come after our employees,'” Trem said.
Non-compete agreements, usually between a firm and a shareholder, are less common, he said.
“A non-compete is very restrictive,” Trem added.
Tony Tatum, director of corporate mergers and acquisitions for the Insurance Office of America, said the prevalence of non-solicit agreements and the omnipresence of social media make for a potential quagmire.
He offered a scenario in which an employee who had signed a non-solicit leaves a firm.
“So, if I’ve got 400 followers on LinkedIn, and some of these are probably going to be my clients, if I update where I’m working that’s going to send out a blast to those 400 people,” he said. “Is that a solicitation?”
Winning or losing such a case is largely dependent on what state a case is heard in, according to Kerry Fields, professor of clinical finance and business economics at the Marshall School of Business
University of Southern California.
Parties know the venue is critical. “It compels a race to the courthouse,” said Fields, who is also author of the book, Contemporary Employment Law. “You want to appeal to a court that will apply the law that is the most favorable to you.”
California law, for example, favors employees and renders non-competes unenforceable.
The California law is rooted in Business and Professions Code Section 16600, which states: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”
That language voids non-competes, however it doesn’t enable employees who are moving on from a firm to do as they wish, Fields said, adding that an employer can keep an employee in an employment contract from organizing a competing business, or stealing trade secrets.
“The California courts do not want an employee to try and construe a trade secret agreement into a covenant not to compete,” Fields said.
The case involving Heffernan is still in the early stages, but Aon won a battle in February when a judge ruled that the case will be heard in Illinois, rather than in California as Alliant wanted, because that’s what Heffernan agreed to in a non-compete agreement he entered into while employed by Aon.
Taking the case out of California against Alliant’s wishes and placing it in Illinois was a small victory for Aon and a blow to Alliant’s defense, according to Fields The laws of more than 30 states enforce non-compete agreements and one of these states is Illinois, according to Fields.
According to the complaint filed by Aon in the Heffernan suit, at the time he resigned, Heffernan was executive vice president and regional managing director of Aon’s construction services group and was the head of Aon’s San Jose office.
The day of Heffernan’s resignation, according to the lawsuit, Alliant “raided Aon’s officers, employees, and clients by orchestrating a mass exodus of Heffernan and 26 other Aon employees from Aon’s San Jose office.”
Alliant appointed Heffernan executive vice president in its San Jose office the same day. According to the suit, prior to Jan. 26, 2016, Alliant did not have an office in San Jose, but following the exodus, Heffernan and most of the 26 employees joined the newly-created San Jose office
Also the complaint alleges that shortly before resigning from Aon, he downloaded a report from, AonWrap, the company’s proprietary software and data management system, which Aon says includes confidential data files on wrap up insurance projects.
That contained data related to construction projects performed by over 8,000 companies, the complaint states.
The day he left Aon to join Alliant, Heffernan filed the pre-emptive action in California seeking a declaration that the restrictive covenants he signed with Aon were unenforceable under California law. The agreements with Aon included restricted stock unit agreements, according to the suit.
In 2011, Alliant and Peter Arkley, another former Aon executive, allegedly led a prior raid on Aon’s clients and employees. Aon filed an action in a New York court seeking to enforce the restrictive covenants in Arkley’s employment agreement, and Arkley and Alliant sought to dismiss the action on grounds of the prior action pending in California.
The New York court maintained the action in New York, finding, among other things, that “the evident disfavor California law holds for restrictive covenants, supports the motion court’s finding that the California action was a pre-emptive measure undertaken to gain a tactical advantage so as to negate the force and effect of the restrictive covenants, which the parties had freely agreed upon.” The case was Aon Risk Services v. Cusack.
At some point, Cavaleri believes that defendants may begin to rely on the Defend Trade Secrets Act in these types of cases. The DTSA, passed into law last year, creates a federal civil cause of action for trade-secret misappropriation. The federal law under certain circumstances even enables a firm that has had trade secrets taken to obtain an order to have U.S. Marshals seize pilfered documents.
“We actually had an experience with that last year because an individual took a client list and was non-responsive to any court orders,” Cavaleri said.
He thinks more firms are catching on to the power and potential of this new law.
“It is increasing in usage,” Cavaleri said. “I think people are still trying to feel it out to see how they can use it and see what it means.”
Fields noted that Alliant is no stranger to the other side of the fence in lawsuits involving restrictive covenants.
“Alliant should be aware of this because they sued to enforce one in 2008 against a guy named Gaddy,” Fields said. “They are no virgins. They were seeking to enforce it against somebody else.”
He was referring to Alliant Insurance Services, Inc. v. Gaddy, heard in the Superior Court of San Joaquin County.
In 2004, Alliant purchased insurance brokerage Gaddy Ward & Company Insurance Brokers for $4.1 million, and under the deal G. Scott Gaddy, the firm’s majority shareholder, agreed to refrain from carrying on a business that provides any of Alliant’s business within the state’s 58 counties, court records show.
When Alliant discovered that Gaddy was contacting its clients, the firm obtained a preliminary injunction. An appeal by Gaddy argued the scope of the injunction was unlawful and that it should have been limited to the counties where Alliant has construction clients, the records show.
In that case the court rejected Gaddy’s arguments and affirmed the order granting the preliminary injunction.
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