In Bessemer Trust Company v. Branin, the Court of Appeals held that an executive who sold his company and later joined a competitor could assist his new employer in a variety of ways to pitch his former clients without violating the law on non-solicitation. This is an important development for service-sector businesses and companies that acquire them.

Background

Francis S. Branin owned a company that provided financial advice to high net-worth individuals. He later sold his business to Bessemer and became an employee there. Branin ultimately left Bessemer to join Stein Roe, a rival financial advisory firm. Bessemer had not required him to sign a non-compete agreement, restrictive covenant, or agree to any post-employment restriction when Bessemer bought Branin's company, nor at any time afterward.

When Branin resigned from Bessemer, he did not inform his clients of his departure, nor did he approach them after he joined Stein Roe. Nevertheless, after Branin started working at Stein Roe, the largest client with whom he worked at Bessemer learned that Branin had left, and contacted him. The client requested a meeting with Stein Roe to decide whether his account should stay with Bessemer or follow Branin to Stein Roe. Branin arranged a meeting between the client and his new partners. Prior to this meeting, Branin assisted in developing the strategy for the meeting and provided information to his new partners about the client's needs and preferences. Branin also attended the client meeting alongside his new partners, although his role, according to the court, was limited to providing factual information in answer to the client's questions. The client ultimately decided to move his business from Bessemer to Stein Roe, and Bessemer filed a lawsuit against Branin for breach of the purchase agreement and breach of his duty of loyalty to Bessemer.

Decision

The court found that Branin's actions were not unlawful in the absence of a written restrictive covenant, and noted that a seller of a business does have several obligations to an acquirer that extend beyond the seller's employment with the acquirer. First, a seller has a common-law duty not to disparage the purchaser of the business. Second, the seller cannot explain to clients why he believes his new employer's products or services are superior to those of his prior employer, which had acquired his company. Third, a seller has an implied duty not to solicit his former clients, whose accounts were part to the goodwill he sold.

The court analyzed Branin's actions and held that he did not "solicit" a client to join Stein Roe. The court reasoned that the client sought out Branin, and Branin's role in the meeting with the client was limited to answering the client's factual inquiries. The court further explained that although a seller of a business shall not actively solicit former clients, clients are free to choose with whom they do business. Furthermore, a seller may answer the factual inquiries from a former client, as long as the responses do not go beyond the scope of the specific information sought by the client. Because Branin had not crossed any of these lines, his actions were deemed not to have violated his duties to Bessemer.

Although the court found that Branin's actions did not constitute a solicitation, it is undeniable that his actions played a role in persuading the client to move his account from Bessemer to Stein Roe. Stein Roe would not have performed nearly as well at the client meeting without the assistance of Branin, who had intimate knowledge of the client's needs and preferences. Furthermore, although Branin's role at the meeting was limited to responding to factual inquiries, the mere presence of Branin – who had known and worked with the client for many years – surely had an influence on the client.

>> The Bottom Line

This case illustrates how easy it is for a seller and a former employee's actions to fall outside the common-law limitations on the seller's ability to solicit his clients once he joins a new firm. In both the sale-of-business and non-sale contexts, New York courts may not sustain improper solicitation claims unless an employer can prove that a seller and former employee actively solicited former clients.

The case further illustrates the importance of specific contractual provisions with sellers who have client relationships and who remain employees of the acquired firm. These contractual provisions should:

  • be prepared in connection with the sale, and should prohibit the seller from either soliciting or servicing, either directly or indirectly, the clients of his former firm.
  • define "solicitation" more broadly by contract than Bessemer based upon the implied duty under the common law.

A properly drafted contractual provision might have allowed Bessemer to win in this case.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.