Advisors Must Know Whether or Not Their Home State Allows Use of Memory to Formulate Customer Lists After Their Resignation

Employment agreements frequently define "Confidential Information" as including the identities and contact information for an advisor's clients and prohibit the use of any such confidential information for one or more years after resignation from the firm.

News of a recent Massachusetts court opinion made headlines nationwide. The judge ruled that a former Fidelity advisor could not resign and then recreate his client list from memory. The court remarked, "The result is not changed by the fact that [the advisor]walked out of Fidelity's offices with the names of most, if not all, of his former clients stored only in his memory, as opposed to written on a piece of paper or saved to a computer flash drive."

Yet, for all of that headline news, the laws of each state vary. Just as it is critical to examine each employment agreement in every employment transition to a new firm, it is critical to examine the law (court opinions and statutes) of each home state regarding confidentiality, trade secrets, and yes, the use of memory to create client lists. And even in a particular state, the law of that state may change over time.

Consider New York. In a 1972 decision, New York's highest state court employed the term "casual memory", and proceeded to rule that the use of casual memory to create a customer list was permissible. A 1999 New York federal appeals court nonetheless distinguished that ruling by noting that the parties, in that case, had "an express confidentiality agreement protecting customer lists." Confusing the issue, in 2008 a New York appellate court found the use of casual memory to be "irrelevant", but also required the client list not only to be the subject of a confidentiality agreement but also to qualify as a trade secret. Finally, in 2014, a New York federal district court attempted to clarify when it stated that, "as a general rule", a former employee had a right use "information based on casual memory."

As one can see, the devil is in the details. Financial advisors, and their transition consultants must retain competent securities counsel to carefully study the law of the home state, and not just rely on the national headlines.