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Latuszewski v. Valic Financial Advisors

December 18, 2007

GARY LATUSZEWSKI, JAMES ROGAN AND REED BIGHAM, PLAINTIFFS,
v.
VALIC FINANCIAL ADVISORS, INC., DEFENDANT AND
VALIC FINANCIAL ADVISORS, INC. AND THE VARIABLE ANNUITY LIFE INSURANCE COMPANY, COUNTERCLAIM PLAINTIFFS,
v.
GARY LATUSZEWSKI, JAMES ROGAN AND REED BIGHAM, COUNTERCLAIM DEFENDANTS



The opinion of the court was delivered by: Gary L. Lancaster, United States District Judge

FINDINGS OF FACT AND CONCLUSIONS OF LAW

A. Introduction

This action was originally filed in state court seeking a declaration of rights under employment contracts between plaintiffs, Gary Latuszewski, James Rogan, and Reed Bigham ("The Employees"), and defendant VALIC Financial Advisors, Inc. The employment contracts included a non-compete covenant, as well as trade secret and confidentiality provisions. After removing the declaratory judgment action to this court, VALIC Financial, and a related company, the Variable Annuity Life Insurance Company, filed numerous state law counterclaims against each of The Employees, as well as a breach of contract counterclaim under the same employment contracts. VALIC sought a preliminary injunction.

The district court found that the employment contracts were unenforceable due to a lack of consideration, but issued a preliminary injunction enjoining The Employees' misappropriation of trade secrets. Both parties appealed. The Court of Appeals for the Third Circuit reversed in part, and affirmed in part. While finding that "the District Court properly held that the information described in the preliminary injunction constituted protectable trade secrets," the court of appeals concluded that "the record does not support the preliminary injunction to the extent that [it] can be read to foreclose [The Employees] from servicing former clients of VALIC who have become [The Employees'] clients without being solicited by them using information currently supplied by those clients." The court of appeals did not rule on the enforceability of the employment contracts.

A bench trial began on November 13, 2007 and ended on November 21, 2007. Prior to the trial, both parties submitted extensive proposed findings of fact and conclusions of law. The court has considered the evidence and the submissions of the parties and is prepared to set forth its findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rule of Civil Procedure, and render its judgment.

B. Findings of Fact

(a) General Background Facts

1. Valic Financial Advisors, Inc. is a broker-dealer headquartered in Houston, Texas. Its representatives sell investment products, including products offered and serviced by the Variable Annuity Life Insurance Company ("VALIC").

2. VALIC is a life insurance company also headquartered in Houston, Texas. VALIC sells and services annuity contracts that are used for retirement programs sponsored by schools, hospitals, governmental entities, and other non-profit organizations.

3. Although VALIC and Valic Financial Advisors, Inc. are two different entities, for purposes of this case they can be referred to collectively as VALIC.

4. Annuity products become profitable only after they have been held by a customer for several years. Therefore, the maintenance of long-term relationships with customers is vital to the success of VALIC's business.

5. VALIC's agents, called financial advisors, market and sell the annuity contracts, and other products and services, to customers within their assigned territory.

6. A supervisor typically assigns territories to the financial advisors.

7. An assigned territory is a group of geographically related schools, hospitals, or governmental units. For instance, Mr. Latuszewski's territory prior to his resignation was Duquesne University, LaRoche College, Sisters of the Divine Providence, and the Blood Bank.

8. Territories are exclusive, meaning that only one financial advisor is assigned to any one group, giving that advisor the exclusive right to develop business on behalf of VALIC within that group.

9. Prior to their resignations, The Employees were financial advisors in VALIC's Pittsburgh office.

10. Each Employee was assigned a territory, with an existing customer base, when he started working with VALIC.

11. Gary Latuszewski began his professional affiliation with VALIC in 1987.

12. James Rogan began his professional affiliation with VALIC in 1990.

13. Reed Bigham began his professional affiliation with VALIC in 1997.

14. The three plaintiffs are referred to herein collectively as The Employees. Where they must be discussed individually, they are referred to by their last name.

(b) The Employees' Relationship With VALIC 15. Each Employee signed a contract when he began his association with VALIC, and continued to sign updated contracts throughout the relationship. All of these contracts contained non-compete covenants and trade secret provisions.

(i) Employment Contracts - Non-Compete Covenants

16. When Latuszewski and Rogan joined VALIC, they signed a contract prohibiting them from diverting business to another financial services organization during the term of their employment.

17. In 1993, Latuszewski and Rogan both signed a contract that included, for the first time, prohibitions against inducing customers to end their relationship with VALIC and providing services to former customers after leaving VALIC's employ. The 1993 contract also included a provision relating to trade secrets and other proprietary information.

18. Latuszewski and Rogan both signed contracts with similar restrictions in 1998.

19. Bigham signed a contract containing such restrictions when he joined VALIC in 1997.

20. In 2000, VALIC offered their financial advisors the opportunity to become employees. Previously, The Employees were not technically employees of VALIC, but had been independent contractors.

21. Latuszewski, Rogan, and Bigham applied for employment, and were offered positions.

22. In order to become employees, each was required to sign a Registered Representative Agreement (the "2001 Agreement").

23. The 2001 Agreement again included the prohibitions against inducing customers to end their relationship with VALIC and providing services to former VALIC customers.

24. The 2001 Agreement also prohibited inducing other employees to end their employment with VALIC.

25. Instead of including provisions relating to trade secrets and other proprietary information, however, the 2001 Agreement incorporated by reference a business policy that dealt with these matters.

26. About a year later, when American International Group, Inc. acquired VALIC, a new Registered Representative Agreement was needed to reflect the change in ownership.

27. This 2002 Agreement was forwarded to all the financial advisors as an attachment to an e-mail message that explained some key features of the new Agreement. The message stated that the new Agreement still contained a non-compete covenant, but described some differences in its scope. These differences included, among other things, that the number of companies with which an employee could not compete was reduced, and that an employee could now induce other employees to end their relationship with VALIC.

28. All financial advisors were given more than three weeks to read, consider, and consult with third parties regarding the 2002 Agreement before returning a signed copy to management.

29. The advisors were explicitly invited to raise any questions regarding the Agreement with their Regional Vice President.

30. In order to continue their employment, however, all financial advisors were required to sign the 2002 Agreement.

31. Each of The Employees signed the 2002 Agreement, without reading it, without raising questions about it, and without consulting with any other person regarding its contents.

32. The 2002 Agreement contained the following statement: I acknowledge, represent and agree that I have reviewed all the terms of this Registered Representative Agreement, including, but not limited to the provisions relating to my Non-Competition, Non-Solicitation and Proprietary Information obligations and the Computer Schedule; that I have not modified, deleted, or added to any of the terms and conditions of the Registered Representative Agreement as presented to me by Broker-Dealer; and that I agree to be legally bound to all the terms and conditions in this Registered Representative Agreement.

33. The non-compete covenant in the 2002 Agreement read as follows:

During the term of this Agreement and for a period of one (1) year after its termination, Registered Representative will not directly or indirectly induce or attempt to induce any Protected Customer to either (a) end or alter his or her relationship with Broker-Dealer or Protected Companies, or (b) accept business relating to competing products or services from any Protected Customer, except in the performance of his or her regular duties as a Registered Representative of Broker-Dealer.

34. These restrictions were similar in all relevant respects to those found in the 1993, 1998, and 2001 contracts that The Employees had previously signed.

35. VALIC, acknowledging the drafting error in their own contract, abandoned enforcement of subsection b of the non-compete covenant during trial. Subsection b places a blanket prohibition on accepting any business from former customers for one year after termination of the employment relationship.

36. The non-compete covenant in the 2002 Agreement, therefore, provides only that the former employee "will not directly or indirectly induce or attempt to induce any Protected Customer to [] end or alter his or her relationship with Broker-Dealer or Protected Companies."

37. To induce is to lead or move someone toward a course of action by influence or persuasion. dictionary.com, dictionary.cambridge.com, Merriam-Webster On-line (m-w.com).

38. Inducement does not require that force, pressure, or hard sales tactics be used, or that promises or guarantees be made, in order to obtain the desired course of action.

39. VALIC received no additional competitive restrictions from its employees when they signed the 2002 Agreement. Rather, the non-compete covenant in the 2002 Agreement was less burdensome on the employee than the non-compete covenant in the 2001 Agreement. For instance, the 2002 Agreement: (1) reduced the number of protected companies with which the employees could not compete; and (2)removed the prohibition against inducing fellow employees to leave VALIC's employ.

40. In addition to reducing the extent to which an employee was restricted, the 2002 Agreement also provided employees with several other benefits. These benefits included: (1) the ability to file suit under the Agreement in a jurisdiction other than Harris County, Texas; (2) the removal of a provision requiring the employee to pay the company's attorneys fees in the event judgment was entered against the employee in a matter involving enforcement of the 2002 Agreement; and (3) the addition of the right of the employee to request an arbitration action under the agreement, which option was previously only available to the company.

(ii) Employment Contracts - Trade Secrets

41. The 2002 Agreement also contained several provisions relating to trade secrets, and other confidential and proprietary information.

42. One provision acknowledged that sensitive business information would be shared with The Employees:

During the term of this Agreement, Registered Representative will have access to and become familiar with certain trade secrets and other confidential, proprietary information that belongs to Broker-Dealer and Protected Companies and that is or may be used in the conduct of Broker-Dealer's business or the business of Protected Companies.

43. The Employees promised not to use or disclose VALIC's trade secrets other than for purposes of their work for VALIC:

Registered Representative shall not, during the term of this Agreement, or at any time after its termination, disclose or use, directly or indirectly, any Trade Secrets of Broker-Dealer or Protected Companies, including but not limited to, customer identities and account information, except as required in the regular course of [his] business with Broker-Dealer or Protected Companies.

44. The Employees also promised not to use or disclose any other confidential or proprietary information for a period of two years after leaving VALIC's employ:

Registered Representative shall not, during the term of this Agreement and for a period of two (2) years following its termination, disclose or use any such Other Confidential or Proprietary Information, directly or indirectly, except in the regular course of [his] business with Broker-Dealer or Protected Companies.

45. VALIC maintains a substantial amount of information about each of its customers on its computer system. Some financial advisors also chose to maintain paper files on their assigned customers. This customer information includes contact information, account balance amounts, contribution history, investment strategy and preferences, account status (active, suspended, flowing, penalties upon transfer, etc.), and contact history with customer service, among other things.

46. The computerized data is stored on VALIC's computer system and is accessible to VALIC's financial advisors through programs such as AgileNet, 4Sight, and AdvisorNet.

47. Advisors must use a series of passwords in order to obtain access to this information.

48. The computerized information on one financial advisor's customers is not generally available to other advisors or office staff.

49. In addition to the customer information on VALIC's computer system and in a financial advisor's paper files, financial advisors also maintain a significant amount of customer information in their minds.

50. Each of The Employees relied on this customer information in servicing customers while employed by VALIC.

51. This customer information, in whatever form, is not generally known outside of VALIC's business.

52. This customer information, in whatever form, would not be shared with a competitor.

53. Such customer information would be of significant value to a competitor.

54. VALIC has spent millions of dollars to assemble and maintain this customer information.

55. VALIC has employees dedicated to the maintenance, security, and support of its computer systems and data.

56. It would be very difficult, time consuming, and expensive, for a competitor to attempt to recreate this customer information using only publicly available contact information.

57. The Court of Appeals for the Third Circuit agreed with the District Court that "[t]he identity of plaintiffs' customers and key information regarding those customers, including account balances, investment preferences, which customers were still contributing to their accounts, i.e. flowing, and whether they could transfer investments without penalty" were protectable trade secrets.

(iii) Pre-Departure Activities

(a) Latuszewski

58. Latuszewski gave notice of his resignation on January 7, 2003. He continued to be employed by VALIC until February 2, 2003.

59. In January of 2002, before resigning, Latuszewski, and Greg Jacobs, formed a new entity called North Atlantic Asset Management, which would provide financial and retirement planning services.

60. Before resigning, Latuszewski talked with Greg Jacobs about how much business he planned to bring to North Atlantic.

Latuszewski estimated that he could bring 20 to 25 customers with him, representing $4 million in assets under management.

61. In the week prior to giving notice of his resignation, Latuszewski spent five hours compiling and printing detailed reports about his customers from VALIC's computer systems.

62. He took at least some of these reports with him when he left.

63. At least some of the customers included in the reports ultimately transferred their assets to North Atlantic.

64. Before leaving, Latuszewski also asked Denise Alfieri, his supervisor's administrative assistant, to come to work for him at North Atlantic. She accepted the offer.

65. Thereafter Alfieri*fn1 sent information on more than 1,000 of Latuszewski's customers from VALIC's computer system to her home computer. She later loaded the data onto her North Atlantic computer.

66. Alfieri also assisted Latuszewski in preparing for his departure by forwarding e-mails from his work e-mail account ...


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