Wells Fargo Denied Injunction, Constructive Trust Against Former Brokers

A team of insurance brokers left Wells Fargo, probably took $6.5 million in business with them and managed not to get enjoined.  But they might be toast in the end and owe Wells Fargo lots of money.  Let’s take a look:

Case Background 

Joshua Tyndell, William Dineen, H. Keith McNally, Thomas Blue, and Erin Repp (“Defendants”) all worked for Wells Fargo Insurance Services, an insurance brokerage, for several years. In 2010, years after they began working for Wells Fargo, each of the Defendants signed a document called Trade Secrets, Confidential Information, Non-Solicitation and Assignment of Inventions Agreement (“the Agreement”). The Agreement contained two restrictive covenants: The Agreement prohibited Defendants from (1) recruiting Wells Fargo employees or (2) soliciting business from Wells Fargo clients, both for a period of two years following their departure from the Company.

Another highly pertinent fact: Wells Fargo paid the Defendants based on commission. In 2014, longer after the Defendants began working for the Company and long after they signed the Agreement, Wells Fargo changed its commission structure. First, Wells Fargo announced that any accounts generating less than $2,500 in commissions would be transferred to a centralized office in Arizona. Then Wells Fargo increased that threshold to $10,000. At the same time, Wells Fargo reduced commission on accounts generating less than $100,000, changing the payout from 35% to 30%. As a result, the Defendants and other Wells Fargo employees earned substantially lower commissions.   You can guess where this is headed.

The Defendants Jump Ship

Unhappy with the bank’s new commission policies and certain problematic customer service practices, the Defendants decided to leave Wells Fargo and – to the extent possible – take their client base with them.   The Defendants formed a new company called BK-JET Group, LLC. (“BK”) On January 14, 2016, the Defendants resigned from Wells Fargo and went into business for themselves. Shortly thereafter, Wells Fargo clients began to notify the Company that they were moving their business to BK. All told, more than 200 Wells Fargo clients made the move.

The Lawsuit Non-Compete & Fiduciary Duty Lawsuit

In March of 2016, Wells Fargo filed suit against the Defendants and made the following claims (1) breach of fiduciary duty (2) tortious interference (3) breach of contract (4) theft of trade secrets and (5) unjust enrichment.   In October, Wells Fargo filed a motion seeking (1) a preliminary injunction and (2) the imposition of a constructive trust that would hold all the revenue BK generated from former Wells Fargo clients until the litigation was resolved.

On December 12, 2016, the United States District Court for the Eastern District of Washington denied Wells Fargo’s motion in its entirety: No injunction and no constructive trust.

First, the Court held that Wells Fargo was likely to succeed on its breach of fiduciary duty claim.   In Washington, it is black letter law that employees owe their employers a duty of loyalty.   That was the case here. The Defendants owed Wells Fargo a duty of loyalty and, while employed by Wells Fargo, they likely engaged in conduct that violated that duty. Specifically, record evidence suggested that prior to leaving Wells Fargo, the Defendants had solicited certain clients and convinced them to move their business.   And Wells Fargo made a strong preliminary showing of damages: Almost all of BK’s clients – 98% – were formerly at Wells Fargo. Their expert offered a report opining that the Company had lost $6.5 million in business to BK. So there you have it: Wells Fargo had a strong breach of fiduciary duty claim.   But that damage was already done. In seeking a preliminary injunction, Wells Fargo was banking primarily on it’s non-compete claim. And that claim was suspect.

First, the Court noted that when Wells Fargo changed its compensation structure, this could have rendered the non-compete unenforceable against the employees who were adversely impacted by those changes. This could be done either through the doctrine of prior breach or through unclean hands. Likewise, the Court recognized a possible defense to non-compete enforcement based on failure of consideration. Recall that the employees signed these Agreements several years after they began working for Wells Fargo. Under Washington law, the promise of continued employment is not adequate consideration to support a non-compete. Given the foregoing, Wells Fargo could not demonstrate a likelihood of success on its non-compete claim.

From here, the Court ran through the remaining injunction factors. Wells Fargo argued that it would face irreparable harm because the Defendants had caused $6.5 million in damages and they would never be able to pay such a judgment. This argument is obviously nonsense and the Court rejected it as such. Wells Fargo is a big company and the only harm it could show was financial. That’s not the type of harm that gets you an injunction (at least not in courts that properly apply Fed. R. Civ. P. 65). On the flip side, the Court found that the balance of harms cut in favor of the Defendants. After all, Wells Fargo was asking for all of BK’s revenues to be put into a constructive trust pending resolution of the litigation. This sort of remedy is truly extraordinary. It would have crippled the Defendants financially.  Bottom line: The Court got it right.

The Takeaways

State to State Variation in Non-Compete Law: Non-compete law varies tremendously from state to state.  Choice of law frequently is outcome determinative in non-compete cases.  Washington will enforce reasonable non-compete agreements but they are subject to numerous defenses.  This same case would have turned out completely different under a different state’s non-compete law.  Take Florida as an example.  Florida is arguably one of the most pro-non-compete states in the country. That’s not hyperbole. In my opinion, Florida courts routinely issue injunctions in non-compete cases where (1) there is no legitimate business interest and (2) there is no irreparable harm. It’s a problem. So if you put this same case in Florida, Wells Fargo gets an injunction.  Bottom line: Choice of law is critically important in non-compete cases.

Fiduciary Duty Exposure:  Even in a pro non-compete state like Florida, if you build the right defense, you may have a shot of beating a non-compete cases.   But people really mess themselves up with exposure for breach of fiduciary duty claims. Critical point to remember: If you work for a company and are planning to jump ship, start your own business, do a mass exodus with your team—- be careful. In some instances, you may be able to lay some groundwork. Form corporations. Have a website built. Secure office space. You can prepare to compete. Preparing to compete is not a breach of fiduciary duty. But if, while still employed somewhere, you start sabotaging the company’s business and lining up the clients so they immediately follow you out the door, then you might have exposure on a breach of fiduciary duty claim. The case at bar as a great example: The Defendants will probably beat the non-compete claim. But they have significant exposure on the fiduciary duty claim.  They’ll have to fight that one by attacking Wells Fargo’s claimed damages. Best advice: Talk to a good lawyer before you plot your departure.

The case is Wells Fargo Ins. Servs. USA, Inc v. Tyndell, 2016 WL 7191692 (E.D. Wash. Dec. 12, 2016).

Jonathan Pollard is a competition lawyer based in Fort Lauderdale, Florida and principal of the growing litigation boutique Pollard PLLC.  He has extensive experience litigating complex non-compete and trade secret cases and has been quoted on related issues in the Wall Street Journal, Bloomberg, FundFire, on PBS NewsHour and more. His office can be reached at 954-332-2380.