A federal appeals court upheld an injunction against a team of advisors who left a Virginia-based RIA last year to launch a Dynasty-backed firm of their own (though the appeals court overturned an ruling affecting the new firm itself).
The lead attorney for the former firm lauded the decision, arguing that the Broker Protocol that the departing team cited in its defense is “not a get-out-of-jail free card for rogue employees.”
In the original suit filed last June, Richmond, Va.-based RIA Salomon & Ludwin accused four former team members of taking the firm’s trade secrets and breaching employment agreements not to solicit clients.
The team members who left formed Founders Grove Wealth Partners with support from Dynasty Financial Partners. The team previously managed $750 million in assets, and included Managing Partner and CEO Jeremiah Winters, President Kate Atwood, Chief Operating Officer Jen Thompson and Client Experience Director Abbey Sorenson.
According to the original suit, the former employees signed contracts when joining Salomon & Ludwin that allegedly prohibited them from disclosing or obtaining proprietary information about the firm’s clients and from soliciting clients for two years. Nevertheless, S&L accused them of devising a scheme to allegedly “line their pockets by willfully stealing S&L’s clients and sabotaging its operations.”
But the Founders Grove team fired back a week later, claiming their actions were protected by the Protocol for Broker Recruiting. The protocol allows departing advisors to take certain information and solicit clients regardless of prior agreements (Founders Grove joined the Protocol after its founding, and S&L has been a member since 2018, according to the firm that manages the Protocol).
In their suit, the team also included their resignation letters that accused S&L’s leaders of running a workplace rife with poor communication and accountability. Examples included instances where founder Dan Ludwin had allegedly engaged in “body shaming” and other “reckless behavior or decisions,” including “misinformation being provided to regulatory authorities by (founder) Dalal Salomon.”
Last year, a Virginia Eastern District judge approved an injunction barring the Founders Grove advisors (and the firm itself) from contacting old clients and using any information from S&L, finding the defendants were not permitted to “raid” the former firm for information. The Founders Grove team then appealed the decision to the Fourth Circuit Court of Appeals, which has jurisdiction over most of Virginia.
In this week’s decision, Circuit Judge A. Marvin Quattlebaum wrote that from the court’s perspective, the district court erred in deciding the team “raided” their former workplace.
However, the judges nevertheless affirmed the injunction.
According to the decision, the Founders Grove team’s agreements with S&L stated that if the latter firm ever joined the Broker Protocol, the non-soliciting agreements would take precedence over the protocol’s standards.
By the time the Founders Grove team joined S&L, the latter firm had already joined the Broker Protocol (making the language of the contracts outdated). The judge acknowledged this could lead to a “contractual gap.”
“But the text of this provision, read as a whole, indicates that the agreements prevail over the Protocol whether or not Salomon is a member,” the decision read. “Precisely when Salomon became a member does little to change that.”
However, Quattlebaum argued that this didn’t extend to the Founders Grove firm, which was not a party to the S&L contracts. Therefore, the court overturned the injunction against the firm, though they stressed that the injunction on the former employees extended “to actions they take on behalf of Founders Grove.”
Attorneys for the Founders Grove team did not respond to requests prior to publication.
Paul Werner, an attorney with Sheppard Mullin and the lead counsel representing S&L, said the firm was happy the court decided “the so-called Broker Protocol is not a get-out-of-jail free card for rogue employees to jump start a competing firm using stolen information and clients in brazen violation of their clear contractual obligations, and we look forward to holding them accountable for the harms they have caused as the litigation moves forward.”
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