ETrade Fin. Corp. v. Eaton

Citation: 305 F. Supp. 3d 1029Docket: No. CV–17–02471–PHX–JJT

Court: District Court, D. Arizona; April 24, 2018; Federal District Court

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Honorable John J. Tuchi, United States District Judge, is presiding over competing motions for preliminary injunction filed by E*Trade Financial Corporation and Defendant Lance Eaton. E*Trade's motion (Doc. 52) and Eaton's response (Doc. 74) are juxtaposed against Eaton's own motion (Doc. 58) and E*Trade's response (Doc. 73). Following limited discovery, an evidentiary hearing was conducted on April 6, 2018, where both parties presented extensive arguments (Doc. 86).

To obtain a preliminary injunction, the movant must demonstrate: 1) likelihood of success on the merits; 2) likelihood of suffering irreparable harm without relief; 3) a favorable balance of equities; and 4) that the injunction serves the public interest. The Ninth Circuit allows for a sliding scale where serious questions regarding the merits and a significant hardship for the movant may also justify an injunction if the other two elements are satisfied.

In analyzing E*Trade's motion, three claims are examined: breach of duty of loyalty, breach of employment contract, and intentional interference with E*Trade's business relations. Regarding the breach of duty of loyalty, the Court recognizes that employees owe fiduciary duties to their employers and are prohibited from competing during employment. While E*Trade is likely to demonstrate that Eaton competed post-employment, the Court finds insufficient evidence to support claims of active competition during his employment. Eaton accessed client files shortly before resigning but did not contact those clients to solicit them while still employed. Further evidence may emerge during arbitration, but no compelling proof of competition during employment has been established at this stage.

Eaton's extensive access to client records on July 3 and 4, 2017, may indicate preparation for client solicitation, which relates to a potential breach of the non-solicitation clause in his employment agreement. At the time of access, Eaton had authorization and was fulfilling his role as an E*Trade employee. Thus, without further evidence, the Court finds E*Trade's claim of breach of duty of loyalty insufficient to support a motion for preliminary injunction.

In contrast, E*Trade's breach of contract claim is more compelling. Eaton's 'Nonsolicitation and Nondisclosure Agreement' from May 16, 2011, explicitly prohibits the copying or removal of E*Trade's confidential information and restricts him from soliciting clients for one year post-employment. Evidence shows Eaton violated the agreement by retaining contact information for approximately ten clients on his cell phone, breaching both Paragraphs 4 and 7 by failing to return or delete this information after leaving E*Trade. However, the Court notes that E*Trade has not demonstrated that these breaches directly caused harm, which is necessary for a contract claim.

Nonetheless, Eaton also breached Paragraph 5 of the Agreement by soliciting approximately fifty former clients shortly after his termination, which he acknowledged during examination. This indicates a clear violation of the non-solicitation provision within the stipulated timeframe.

Eaton claimed that his outreach to approximately fifty former clients was to comply with CFPB Rules of Conduct, which mandate that Certified Financial Planners disclose their current contact information and any changes thereof. Both parties acknowledge that contacting clients for this purpose would be privileged and not a breach of the Agreement, provided it was solely for notification. Eaton successfully contacted over thirty clients, informing them of his transition from E*Trade to Morgan Stanley and providing his new contact details, while also inviting questions. Many clients expressed interest in following him to Morgan Stanley, resulting in about thirty account transfers.

E*Trade submitted evidence of texts from Eaton to former clients, including one to J.N., a client who had already decided to move her account. In a text, Eaton suggested J.N. encourage D.N. (another former client) to also transfer his accounts to Morgan Stanley, which the Court interpreted as indirect solicitation in violation of the Agreement's non-solicitation clause. Despite Eaton's defense that the communication was casual, the Court found that J.N. acted on his request, leading to a new client for Eaton at E*Trade's expense. Consequently, the Court concluded that E*Trade is likely to succeed in proving that Eaton solicited D.N. to transfer his accounts, constituting a breach of the Agreement and resulting in financial loss for E*Trade.

Eaton contacted a select group of former clients from E*Trade, insisting on delivering his new Morgan Stanley contact information exclusively through telephone conversations, which created no electronic record. This approach suggested his primary intention was to solicit these clients to transition to Morgan Stanley, specifically within the one-year prohibition period outlined in his agreement. Eaton only attempted to reach approximately fifty of his hundred former clients and did not follow up with those who did not respond to his calls, meaning many former clients never received his new contact details, which he was obligated to provide under CFPB licensing rules.

The court found compelling evidence indicating that Eaton's actions crossed the line from mere notification to solicitation, likely affecting multiple former clients. E*Trade demonstrated a likelihood of success on its contract claim, as Eaton's conduct constituted intentional interference with existing business relationships, leading to the termination of those relationships and resulting in E*Trade suffering damages, such as lost accounts. The court referenced relevant case law to support its conclusions regarding E*Trade's claims against Eaton.

Irreparable harm refers to damage that cannot be adequately remedied by monetary compensation, as established in Ariz. Dream Act Coal. v. Brewer. E*Trade successfully argues that substantial business losses without injunctive relief qualify as irreparable harm, as supported by Doran v. Salem Inn, Inc. While quantifiable losses from client account transitions due to breach can be assessed, losses related to goodwill and reputation cannot. The Court concludes that E*Trade has demonstrated that irreparable harm will occur without injunctive relief.

In evaluating the balance of equities, the Court weighs the hardships faced by E*Trade against those faced by Eaton. The Court finds that ordering Eaton to terminate relationships with clients he has already acquired from E*Trade is impractical and beyond its authority, respecting clients' rights to choose their investment management. Additionally, the Court determines that an injunction preventing Eaton from contacting clients not in the process of moving to him poses minimal hardship, as he was aware of the non-solicitation clause and has had ample time to contact former clients. Consequently, the balance of hardships favors E*Trade.

Regarding the public interest, the Court acknowledges the critical value of client contact information in the wealth management sector. While client names may be public, their association with client status is confidential. Protecting proprietary information and contractual rights serves the public interest, as affirmed in Compass Bank v. Hartley. The Court concludes that an injunction is warranted and aligns with public interest considerations.

Eaton contends that E*Trade should not receive equitable relief due to its alleged unclean hands, claiming the firm acted in bad faith by delaying and obstructing the transfer of thirty accounts to Morgan Stanley. The Court examined the evidence, including Mr. Mastellone's testimony and related exhibits, and found Eaton failed to substantiate claims of unclean hands. The evidence revealed that E*Trade offers two types of accounts: managed and self-directed, each with distinct services and fee structures. E*Trade's procedures for account transfers contributed to delays; specifically, a managed account must be terminated and converted to a self-directed account before transfer requests are processed. This automatic rejection of transfer requests for open managed accounts resulted in clients needing to resubmit requests after conversion, impacting all twenty-nine accounts attempting to transfer to Morgan Stanley. Additionally, E*Trade's protocol includes verifying client transfer requests, which further delays the transfer process until confirmation is received. This verification procedure's operation was not as thoroughly evidenced as the cancellation feature, but the Court noted it impacted the initiation of account terminations.

The procedures followed during the transfer of E*Trade client accounts to Morgan Stanley after Eaton resulted in an extended account transfer process. For twenty-nine accounts, the average duration from the request for account termination to the transfer of assets was just under sixteen calendar days, with some transfers taking as little as eight days and others as long as thirty-four days. Each transfer request was rejected and canceled by E*Trade's system at least once, with one case experiencing three rejections. Yvette Parris, a Business Services Manager at Morgan Stanley, provided a declaration indicating that, in her experience, the transfer process could take only thirty minutes to an hour once a client decided to transfer their account. Eaton argues that the prolonged transfer times at E*Trade reflect a bad faith effort to obstruct the transfers. Parris noted that E*Trade's rejection of nearly all transfer requests was highly irregular, a situation she had not encountered in her fourteen years in the industry. However, the Court found Eaton's argument insufficient to demonstrate unclean hands. Parris’s observations were limited to her experience at Morgan Stanley, and Eaton failed to show that Morgan Stanley's processes were comparable to E*Trade’s, which involved additional steps due to the nature of managed versus self-directed accounts. The Court was also unimpressed by Eaton's reference to FINRA Rule 2140, which prohibits interference with account transfer requests, stating that whether E*Trade interfered is a question for the FINRA panel to resolve based on a fully developed record.

Eaton claims that all accounts he transferred from E*Trade to Morgan Stanley faced multiple transfer request rejections and significant delays, suggesting that E*Trade intentionally obstructed these transfers. However, the Court notes that without comparative data from other accounts not associated with Eaton, this assertion cannot be verified. Evidence presented indicates that the procedures for processing termination and transfer requests were consistent across all managed accounts, regardless of the client, and all transfer requests were ultimately completed, albeit taking between eight and thirty-four days. The delays were attributed to E*Trade’s verification processes and the rejection of transfer orders prior to the conversion of accounts. The Court finds that E*Trade's actions do not demonstrate “unclean hands” unless it can be proven that the clients were specifically targeted or that the procedures violated legal or contractual obligations.

The Court grants E*Trade's motion for a Preliminary Injunction without requiring a bond. In contrast, Eaton's conditional Motion for Preliminary Injunction is denied. Eaton sought reciprocal injunctive relief contingent on E*Trade's actions that would prevent him from contacting former clients. Since the Court's order does not inhibit Eaton from working with clients who have moved or are in the process of moving, the condition for reciprocal relief is unmet. Furthermore, Eaton's request for E*Trade to provide his contact information to former clients is denied, as he had ample opportunity to contact these clients himself without any restrictions.

The court has granted the Plaintiff's Motion for Preliminary Injunction, placing several restrictions on Eaton. Specifically, Eaton is prohibited from using E*Trade's confidential information related to clients who have not transferred their accounts to Morgan Stanley or were not in the process of doing so as of the order date. Eaton is also barred from soliciting E*Trade clients until July 7, 2018. Additionally, Eaton must immediately return all physically transferable E*Trade confidential information and delete non-physically transferable information, such as client contact details on personal devices, except for clients who have moved to Morgan Stanley or were in the process of doing so.

The court denied Eaton's Motion for Preliminary Injunction and directed the Clerk of Court to terminate the matter. Evidence presented included declarations from six clients who moved from E*Trade to Morgan Stanley, all indicating Eaton's service was a motivating factor in their decision, although they denied being solicited. The court acknowledged that Eaton's service level could reasonably influence clients to switch, independent of solicitation.

During preliminary proceedings, Eaton sought data on other rejected transfer requests from E*Trade, but the court limited discovery to align with the nature of the temporary injunctive relief sought. A declaration from Ms. Parris mentioned that, according to FINRA regulations, E*Trade must process transfer requests within two business days upon receiving a properly completed ACAT form. However, the court found this claim insufficient to demonstrate unclean hands on E*Trade's part, noting that no specific FINRA regulation was cited and that a violation would need to show intentional targeting of Eaton's clients.