The U.S. Court of Appeals in Richmond has upheld a lower court ruling that barred a Merrill Lynch broker who moved to Prudential Bache from dealing with his former clients.
The decision was a major victory for Merrill Lynch, which has waged a protracted fight against rival firms that have lured its brokers away with large bonuses. As part of its counterattack, Merrill Lynch has filed several hundred legal actions against departing brokers.
Prudential Bache said it had not yet decided whether to appeal the decision of the 4th Circuit Court of Appeals to the U.S. Supreme Court.
The Virginia case was decided against the background of a heated three-year struggle among major securities firms to expand and improve their brokerage staffs in an increasingly competitive financial environment. The number of arbitration cases at the New York Stock Exchange dealing with broker-jumping increased from 107 in 1982 to about 250 last year.
At issue in the Richmond appeals case was whether Chief District Judge John A. McKenzie was prevented by federal arbitration laws from enjoining broker Kenneth D. Bradley from soliciting his former clients at the Newport News office of Merrill Lynch after he moved to the Virginia Beach office of Prudential Bache.
Prudential Bache lawyer Joel E. Davidson argued that the court should not have granted the temporary injunction but should have let the matter go to arbitration at the New York Stock Exchange, where, under established procedures, the arbitrators would have the authority to determine what damages, if any, Merrill Lynch had sustained.
Merrill Lynch lawyer Guy R. Friddell argued that the loss of Merrill Lynch clients could be prevented only by an immediate injunction, pending arbitration.
The appeals judges said they thought the lower court was "within its discretion in concluding that the balance-of-hardship test tips decidedly in Merrill Lynch's favor because Bradley did not establish that the preliminary injunction, pending expedited arbitration, would cause him harm and because Merrill Lynch faced irreparable, noncompensable harm in the loss of its customers."
The court's decision surprised members of the investment community because it ran counter to earlier rulings of the 8th Circuit in St. Louis and the 10th Circuit in Denver in similar cases. Attorney Charles R. Waters II of Norfolk, who represented Bradley, said he was "astounded by the decision" because of the precedents.
The 4th Circuit covers Virginia, West Virginia, Maryland and North and South Carolina.
The effect of the ruling, lawyers said, will be to create a geographical difference in the way broker-jumping cases are viewed by the federal courts. In the 4th Circuit, at least, the new ruling will make it almost impossible for Merrill Lynch brokers who have signed employment contracts -- promising not to do business with former clients for a year if they move -- to go to a new firm and take their customers with them, at least until arbitration proceedings are concluded.
Bradley has now requested arbitration to the NYSE.
Bonuses for brokers willing to jump to a new firm generally are based on the broker's gross production -- the amount of money he is making on sales of investment products. Bonuses in the $50,000 to $100,000 range were said by industry sources to be not uncommon.
If a broker cannot take his clients with him, his value to a rival firm may diminish substantially.
Although many of the cases of broker-jumping have involved solicitation, Bradley said his case was an exception. He left Merrill, he said, because he was unhappy with the firm, and although he received a bonus from Prudential Bache, he was not solicited by that firm. He declined to disclose the amount of his bonus, although he said it was under $50,000.
Bradley said his reasons for leaving included a 39 percent cut in pay when Merrill Lynch lowered commissions on options trades. The 34-year-old Bradley, a former Coast Guard lieutenant, said he earned about $70,000 during 1983 at Merrill Lynch, but that because the court prevented him from contacting his customers after moving to Prudential Bache, his 1984 earnings were only about half of that.