Three investment advisers thought they had untangled themselves from the restraints of a non-compete agreement with their former financial services firm. A court of appeals this month said, “Not so fast!”

            The three advisers abandoned their firm and its chief after the chief was terminated by LPL. In the trial court, the three argued that their former financial firm didn’t have a legitimate interest in enforcing the non-compete because the firm was effectively dead after the termination and departures.

           The appellate court started off its opinion by explaining LPL’s involvement with the parties to dispute:

“LPL Financial is one of the largest independent broker-dealers and RIAs in the wealth management business. Among other services, it provides a trading platform and accounting support to independent financial advisers and brokers across the country. LPL Financial assigns IARs a “branch” identification number to indicate the firm or entity with which the adviser works. It also assigns a “rep code” to individual advisers working with the branch. LPL Financial is the custodian of individual client accounts. It collects fees and commissions associated with stock trades, keeps a percentage, and pays out the remaining compensation to registered representatives. It can provide its stock trading platform and other services to numerous financial advisors and firms in the same geographical area, all of whom can compete directly for business.”

The court then proceeded to review the asset purchase agreement or non-compete signed by each party to the controversy.

            According to the opinion, LPL discharged the plaintiff’s key member and original owner in the fall of 2018. The three defendants left for greener pastures shortly thereafter and took their clients with them. They subsequently opened their own RIA Firm and “provided wealth management services to many of the same clients with whom they had worked at [plaintiff RIA]”

            Years of litigation followed until, in the summer of 2021, the trial court issued an order in favor of the three departed advisers. In doing so, it noted that the plaintiff was unable to provide any investment advice after the defendants left. Therefore, the logic went, the remaining RIA/plaintiff could not enforce its non-compete agreements:

“At the time the Defendants left [Lamkin Wealth], the company was unable to provide any investment advice. No one at [Lamkin Wealth] could have worked for the clients by conducting securities trades for those clients. Since [Lamkin Wealth] was not affiliated with a broker dealer, there was no way to create and house accounts on behalf of [Lamkin Wealth]. Given that [Lamkin Wealth] had no legitimate business interest to protect at the time the Defendants left, the covenant not to compete would be unreasonable. [Lamkin Wealth] could have asked the clients to return after a new broker dealer had been obtained. While [Lamkin Wealth] was an independent business solely owned by Mark Lamkin, it never had any clients and was not offering securities through [LPL Financial]. Given that Mark Lamkin was fired for securities violations from [LPL Financial], there were no legitimate business.”

            The plaintiff appealed this order and prevailed. In ruling in favor of the plaintiff RIA, the court of appeals first noted that “Kentucky favors the enforcement of restrictive covenants.”[1] With that legal premise as its foundation, the Court of Appeals proceeded to reverse the trial court, concluding that the remains of the RIA were still in a position to enforce its contracts:

“With respect to whether Lamkin Wealth had a legitimate business interest in enforcing its restrictive covenants, it appears that indeed it did -- at least until the moment that Lindsay, Smith, and Upton discontinued their association with it and took the clients who had worked with them at Lamkin Wealth.

Lindsay, Smith, and Upton freely executed the non-solicitation agreements. The covenants were not overly broad, and the associates had a clear understanding of what conduct was prohibited. As noted above, Kentucky strongly favors enforcement of such covenants -- especially where they involve the provision of professional services. Enforcement of the agreements does not appear to violate public policy. Moreover, the decision to leave the company simultaneously, thereby leaving it potentially to founder, cannot legitimately serve to immunize them from an exposure to legal action to enforce the restrictions.

We are persuaded that the circuit court erred by concluding -- as a matter of law -- that Lamkin Wealth could not enforce its restrictive covenants. Consequently, it also erred by concluding that the remaining claims of Lamkin Wealth (including breach of the duty of good faith and fair dealing, civil conspiracy, and interference with Lamkin Wealth’s actual or prospective economic advantage) were null as well.”

            While the opinion probably has limited applicability outside of Kentucky, it does show that even in the shadow of the Department of Labor’s coming ban on noncompete agreements, these restrictive covenants are alive and well, at least in the world of registered investment advisers and financial services firms.


[1] This is no longer true in many states.