Two registered investment advisors have gone to court against Focus Financial Partners and two of its subsidiaries over what they call highly restrictive covenants contained in a management agreement, Think Advisor reports.
James Patrick and William deButts filed their lawsuit last month in the U.S. District Court for the Southern District of New York. against Focus, along with Edge Capital Group and SCS Capital Management. Patrick and deButts are former advisors with Edge, which was acquired by Focus in 2018.
Following that acquisition the firms carried out a management agreement which the plaintiffs contend is “anticompetitive”, and “contains staggeringly overbroad restrictive covenants” that bars them from soliciting any prospective client of Focus, Edge and SCS, and harms their ability to run their business at their new firm.
Among the terms, they say, are that Patrick and deButts are prohibited from working with “former or prospective clients,” of Focus for two years, which could include customers the advisors “never knew existed.”
The lawsuit alleges that the agreement also:
-Binds RIAs and their clients to Focus into perpetuity
-Blocks RIAs who leave Focus from fairly competing against Focus or its affiliated companies
-Prohibits former RIAs and their new employers from accepting business from clients of Patrick and deButts or their affiliated companies, irrespective of any solicitation or any material contact with those clients
-Chills Focus’ clients from pursuing RIA services from anyone other than Focus through the threat of legal entanglement.
Patrick and deButts say they are also barred from ever using or disclosing Focus’ data, including non-public customer contact information, and from hiring any former colleagues for a year after their exit. New York law bars non-compete clauses that exceed what is “required for the protection of the legitimate interest” of the employer, impose “undue hardship” on an employee and are “injurious to the public,” according to the advisors’ complaint.
Furthermore, the advisors claim that after their resignation, Focus and other defendants “sought to drive” them from the industry through arbitration, defamed them to customers, business contacts and at least one representative at Goldman Sachs, and “engaged in other misconduct designed to improperly restrain competition” to “accomplish indirectly what they are not entitled to accomplish legally.”
Following their resignation, the lawsuit alleges that “Focus launched a campaign of intimidation designed to prevent Plaintiffs from engaging in the RIA business, from fairly competing, or from earning a living, and designed to chill those clients who might elect to do business” with them or from working with them at future potential employers.
Focus has not responded to a request for comment, according to ThinkAdvisor.
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