Troy Kennedy (Kennedy”) left his position as director and executive officer of a trust and investment company when that company was bought by Central Trust & Investment Company (“CTI”). Kennedy left to found a competing firm. Both companies provided financial advice and investment management services. Within six months, Kennedy had successfully solicited 85 former clients. 

Before the sale and departure in question, Kennedy had placed a detailed list of 200 clients in a safe deposit box upon the advice of legal counsel. Kennedy did not register his new company, ITI, with the SEC as an investment adviser. Instead, Kennedy affiliated himself as an investment adviser representative of an RIA called SignalPoint Asset Management, LLC (“SignalPoint”), the defendant in this case. The agreement between Kennedy and SignalPoint allowed Kennedy to offer investment services through SignalPoint in exchange for various fees on an independent contractor basis.

CTI filed suit against Kennedy and his new company, ITI. At the time it filed suit, it didn’t even know about the client list in the safe deposit box. The suit included causes of action for conspiracy, misappropriation of trade secrets (MUTSA) and tortious interference with business relations. CTI then added SignalPoint as a third defendant. All three defendants filed motions for summary judgment. The trial court granted SignalPoint’s only. The Supreme Court ordered the matter transferred to it from the Court of Appeals. The Supreme Court’s analysis of the three different claims begins on page 7 of the 2014 Opinion [Click HERE]. The Opinion is a must read for attorneys representing agents or representatives that are about to “change ships” or broker-dealers or RIAs that are taking on a competitor’s producer.

The Supreme Court sustained the dismissal of the statutory trade secret claim because CTI could not establish that SignalPoint had access to the client list. In doing so, it side-stepped the issue of whether the client list qualified as a trade secret. Ironically, the most valuable portion of the opinion for practitioners might be the two extensive footnotes (8 and 9) about client lists that prove that lawyers and judges can render obscure what should be obvious. Regardless, the Supreme Court concluded that because there was no access, there was no misappropriation, so there was no MUTSA violation.

The first 10 pages of the opinion fail to pin the law to the reality of the situation—that Kennedy had access to the list and was using it to benefit himself and SignalPoint. Ironically, the plaintiff’s attorney couldn’t pin that tail on the donkey either—he or she somehow failed to plead any theory of vicarious liability. The theory of respondent superior was not available either—Kennedy’s IAR Agreement clearly established him as a non-employee. CTI needed but failed to plead that Kennedy was an agent over whom SignalPoint had a sufficient degree of control.

The Court proceeded to set forth the elements of a claim for tortious interference:

  “To prove a claim for tortious interference with a contract or a business expectancy, the plaintiff must prove the following five elements: “(1) a contract or a valid business expectancy; (2) defendant’s knowledge of the contract or relationship; (3) intentional interference by the defendant inducing or causing a breach of the contract or relationship; (4) absence of justification; and (5) damages resulting from defendant’s conduct.”

The Court concluded that the fourth element requires a showing of “improper means” and the plaintiff could not establish any because there was no misappropriation of a trade secret. The civil conspiracy claim died from the same wound. Food for thought.

The Cosgrove Law Group represents individual agents and reps both before and after they make a move to a new B/D or RIA. Retaining counsel before the litigation starts just might help you prevail and prosper.