Remember this scene from The Godfather? Michael and Kate (played by Al Pacino and Diane Keaton) are watching as Johnny Fontane arrives at Connie's wedding. Michael tells Kate the story of how Luca Brasi helped Johnny get out of his contract with the bandleader: “Luca Brasi held a gun to his head, and my father assured him that either his brains or his signature would be on the contract.”
It's astounding to me that in financial services companies in 2011, firms are able to get away with making the corporate equivalent of “the offer you can't refuse.” Last week, it was widely reported that U.S. Trust Advisers were told by Bank of America that they had to sign an employment agreement which mandated a 60 day “garden leave” for reduced pay, plus a total of 8 months during which time they could not solicit their clients. They were forced to sign it in order to receive their 2010 bonuses. In effect, these Advisers were made the same type of offer that Luca Brasi made: You don't have to sign, but then you are forfeiting your bonus (which you already earned!) and you must leave now. With no other job lined up, Advisers had no other choice but to sign. B of A: Good luck recruiting new Advisers to the U.S. Trust side of the house!
Legacy Smith Barney Branch Managers who are choosing to leave the Morgan Stanley Smith Barney joint venture are being held to a similar contract that Smith Barney made them sign a few years ago. This contract, which also required a signature in exchange for a bonus and continued employment, says that a departing Branch Manager cannot solicit other employees for up to 18 months after he or she departs the firm.
Attorneys tell me that these “contracts of adhesion” would be difficult to enforce in a court of law because the employee was given neither equal bargaining power at the time the contract was presented nor adequate consideration for their part of the agreement.
So if these agreements will not hold up in Court, how are they being enforced? Because they rarely make it to end of the case! As Thomas B. Lewis, partner in Stark and Stark out of Princeton, NJ states: “The firms file their applications for injunctions as a means to intimidate.” Companies go to court to enforce a signed contract, and sometimes get a Temporary Restraining Order (TRO) to enforce a signed agreement. The Adviser or Manager goes to FINRA to get it lifted and then asks FINRA for an arbitration hearing to examine the facts.
Why do all these cases get settled before trial/arbitration? Because for different reasons, both sides are highly motivated to settle. The Corporation wants to deter other employees from also leaving by flexing its legal muscles, but is scared that a case that ultimately went to trial/arbitration would establish a precedent which could void their employee contracts. The departed employee wants to settle to avoid the time and cost of a trial/arbitration and to get back to work. Fighting the old agreement is at best a distraction and is often a deterrent to prospective employers.
Maybe one day one of these cases will make it all the way to trial so we can hear these companies defend their Godfather tactics. If the U.S. Trust action becomes more common, within either Merrill or elsewhere in the industry, then I'm sure we will.
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