A federal judge in the District of Minnesota recently shared his views on the public policy implications regarding non-solicitation agreements for financial advisors. This discussion can be found in footnote 4 of the decision in Ballast Advisors, LLC v. Peterson, 23-CV-3769 (PJS/TNL) (D. Minn. Dec. 11, 2024), which is an order denying in part and granting in part a motion to dismiss. In Ballast Advisors, Chief Judge Patrick Shiltz was presented with a motion to dismiss a number of unfair competition claims pursuant to Rule 12 of the Federal Rules of Civil Procedure. The Judge’s opinion is useful for its review of the minimal pleading requirements for these types of claims, but it is more notable for its discussion of public policy when it comes to non-solicitation provisions and financial advisors under Minnesota common law.
Case Background
This factual background in the Ballast Advisors case is somewhat complicated. The Plaintiff, Ballast Advisors, is a Minnesota-based financial services firm. Ballast hired Scott Peterson as an investment advisor in 2017. Peterson started with Ballast in Minnesota, but he relocated to Florida in 2019. Peterson remained employed by Ballast, and he worked alongside another defendant in the case, Melinda Bradley, who worked as Peterson’s client-service manager. Peterson and Bradley both had access to confidential information, including lists of current and prospective clients.
At Peterson’s suggestion, Bradley left Ballast in June 2022 to join MMX Wealth Partners, a Florida financial services firm formed by a mutual friend of Bradley and Peterson.
On September 23, 2022, Peterson signed a new employment agreement with Ballast, including non-solicitation and confidentiality provisions. Peterson took a leave of absence from Ballast starting in December 2022. In the meantime, Peterson formed MMX WP. Peterson returned from his leave of absence in early February 2023. He resigned shortly thereafter.
The order indicates that while he was on his leave of absence, Peterson emailed his personal phone number to at least two clients and asked them to call him. He also forwarded an email chain from his work account to his personal account. Ballast was not aware of these activities.
After Peterson resigned, Ballast terminated his access to its systems. However, Ballast granted Peterson limited access for a wind-down period to transition clients to other Ballast employees. During that time, Peterson emailed a client to call his personal cell, emailed another client with instructions to communicate with his personal email, and forwarded another email chain to his personal account. He also connected external hard drives to his Ballast laptop.
After the wind-down period, Peterson began working through MMX WP, and he entered into a consulting agreement with MMX Wealth Partners (Bradley’s employer) for professional referrals, workspace, administrative support, etc. Eventually, about 60 clients left Ballast to work with Peterson.
Procedural History
Ballast sued Peterson, Bradley, and both MMX entities for claims of breach of contract related to the non-solicitation agreement, misappropriation of trade secrets, and tortious interference, among other claims. The Defendants moved to dismiss all claims against them. The Court largely denied the motion to dismiss based on the high bar established by Rule 12.
Arguments and Court Analysis
First, the Defendants moved to dismiss the non-solicitation breach of contract claim for lack of consideration. Plaintiffs alleged in the complaint that the new agreement was supported by a payment of $500. Defendants tried to introduce evidence that the $500 was not paid in exchange for signing the employment agreement, but the Court held that external evidence would need to be presented as part of a motion for summary judgment, not a motion to dismiss. The Court’s decision does, however, reaffirm that non-solicitation agreements (like non-competes before they were barred in Minnesota), must be supported by independent consideration.
Next, the Defendants argued that the non-solicitation and confidentiality provisions were overly broad on their face. As the Court described it:
“Peterson argues that the non-solicitation agreement prohibits Peterson from accepting Ballast clients who approach him on their own initiative-that is, without prompting from Peterson-thereby depriving Ballast’s clients of the right to work with the financial advisor of their choice. Second, Peterson argues that the non-solicitation clause’s definition of ‘Client’ encompasses more persons and entities than is necessary to protect Ballast’s legitimate business interests. And third, Peterson points out that the confidentiality clause has no time limit and defines ‘Confidential Information’ to include client names. As Peterson argues, the problem with perpetual confidentiality clauses that are deemed to apply to client names is that they function as perpetual non-solicitation and non-compete clauses.”
The court appeared to sympathize with these arguments, but ultimately held “[a]lthough Peterson raises important questions, those questions cannot be addressed on a motion to dismiss.” In a footnote, however, the Judge expanded on his views about public policy and non-solicitation provisions. The Judge wrote:
“The Court views this [the right of a client to work with a financial advisor of their choice] as a major concern. In finance, as in medicine and law, clients develop longstanding relationships with trusted experts to whom they disclose their most sensitive information and on whom they depend to advise them with respect to their most important decisions. Thus, at least in this Court’s opinion, a strong argument can be made that contractual restrictions that interfere with a client’s ability to continue to seek financial, medical, or legal advice from her longtime financial advisor, doctor, or lawyer should be invalid as against public policy. Such restrictions not only interfere with ‘the right of a party [i.e., the financial advisor, doctor, or lawyer] to work and earn a livelihood,’ but also with the right of the party’s clients or patients to choose to remain in a relationship with that party. See Freeman, 334 N.W.2d at 630-31. It is one thing to say that a financial advisor cannot solicit or initiate contact with a former client; it is quite another to say that the financial advisor’s former employer can effectively bar the client from continuing her relationship with her financial advisor, even if the financial advisor has not solicited or even initiated contact with that client.”
Emphasis and bracketed explanations added.
This footnote is significant for two reasons. First, it suggests that financial advisors and physicians may have a public policy defense against enforcement of non-solicitation provisions (lawyers already have this protection). Second, it adds context to a long-standing tension in Minnesota law between a restriction on actively soliciting a client versus passively agreeing to provide services if the former client tracks down the advisor and asks to continue to work with them. It remains to be seen if this footnote will evolve into a recognized public policy provision under Minnesota law.
If you would like to discuss this decision further, or if you have any questions about non-solicitation agreements, non-competes, or other restrictive covenants, please contact John Ella or the rest of our HR & Employment Law Team.
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