Bankers changing jobs from one bank to another is nothing new. The volume of moves may ebb and flow over time, and we have witnessed this in the Arkansas market for years. While risk is inherent in any move, bankers and their new employers are advised to consider a few steps to mitigate legal risks. A recent Federal Reserve lifetime ban on two Wyoming bankers is an alarming reminder of the severity of these risks.
Banks routinely impose some limits on departing employees, typically confidentiality or nondisclosure agreements to protect bank trade secrets and proprietary and customer information. Restrictions that completely prohibit an exiting employee from engaging in the banking business are rare in the Arkansas market. Most common are restrictions on management-level employees impacting their ability to solicit customers and other employees.
Employees are generally able to prepare to compete before actually leaving a job. This could include negotiations with a prospective employer, securing office space and similar activities. At the top of the list of impermissible activities before leaving employment would be contacting current customers to recruit them to follow. This can present legal liabilities, potentially including breach of fiduciary duty and improper use of the employer’s proprietary information and trade secrets.
Looking beyond the potential for claims by a former employer, the Federal Reserve action in Wyoming takes the issue to a more concerning level. In 2018, it named two Wyoming bank executives in a “Notice of Intent to Prohibit” — effectively proposing to bar their further participation in banking. The lifetime ban was considered after the bankers were accused of taking trade secrets and recruiting clients from a former employer. The Fed alleged that they engaged in unsafe and unsound practices and broke their fiduciary duties to their employer.
The Fed issued a late March ruling that upheld a lifetime ban. The agency found that the bankers conspired while they were working for Central Bank & Trust to misappropriate its proprietary business information in taking jobs at Farmers State Bank. The order indicates that the bankers got commitments from customers to move loans and accounts while they were still employed by Central. The order effectively is a ban from banking work.
Any banker considering leaving one job for another should first consider what duties they owe to their current employer. All prior employment agreements, letters and other documents should be reviewed to assess whether any contractual restrictions exist. Some restrictions are structured so that they become enforceable upon the employee’s receipt of an equity award without him or her having actually signed any document involving the restriction. All previous documents and agreements should be reviewed.
Beyond any contract responsibility, the law separately imposes fiduciary duties on corporate officers. Officers owe a duty of loyalty to their current employer, meaning any competition prior to resigning is a breach of this duty. Discussions with key customers and co-workers prior to any job change can be risky.
Because of the risk of litigation by an ex-employer, bankers and their new employers should tread carefully in the recruitment and transition process. The risk of a lifetime ban may better protect banks, but creates heightened risks, too. If not careful, the same bank that threatens to report a former employee to the Federal Reserve may also be hiring a new employee who has engaged in the same conduct.
The best advice is that bankers take nothing with them to their new job other than personal knowledge. In particular, note that the Fed’s order indicates that the individuals took proprietary information, including forms and customer information.
For the new employer, early discussions with prospective employees should involve legal limits and plans for the transition. The employer should make clear to the new employee what conduct is and is not acceptable.
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