A tight labor market in the mutual fund industry is creating new business for courtroom lawyers - filing suit on behalf of money management firms to enforce the non-compete provisions in executives' employment agreements.

State Street Corp. of Boston, the parent company of State Street Global Advisors, has sued three former executives - two quantitative investment professionals and a top salesperson - who left SSgA earlier this month to join Deutsche Asset Management Americas of New York. (MFMN 9/13/99) State Street has asked a state court judge in Boston to enforce the so-called non-compete provision in the employees' contracts, a clause that State Street contends prohibits the employees from joining Deutsche. State Street filed the suit against Dean Barr, Joshua Feuerman and Richard Goldman on Sept. 3, according to court records. Deutsche announced it had hired the SSgA executives on Sept. 2.

Liz Kennedy, a spokesperson for SSgA, declined to comment, as did a spokesperson for Deutsche. Barr, the former chief investment officer of global active quantitative strategies, Feuerman, a former SSgA portfolio manager, and Goldman, a principal in charge of corporate sales for SSgA, could not be reached for comment.

Until recently, money management firms resolved disputes over non-compete provisions out of court in order to avoid unwanted publicity. That strategy appears to be changing because of the tight labor market for top executives, according to mutual fund lawyers. Indeed, the State Street suit marks the third time in the past two years in which a Massachusetts state court judge has been asked to stop an ex-employee from leaving a money management firm to join a potential competitor or to start his own business.

Companies are more willing to sue in an effort to discourage existing workers from leaving and to ward off competitors who might try to woo employees away, according to mutual fund industry and employment lawyers. Nevertheless, the non-compete agreements often are difficult to enforce in court, said Nancy Shilepsky, an employment lawyer with Goulston & Storrs, a Boston law firm.

"We live in a state and a country in which there is a great reluctance to interfere with a person's right to earn a living," Shilepsky said.

Courts usually are reluctant to enforce non-compete agreements which use broad language to keep a person out of a profession for a period of time, Shilepsky said.

In Massachusetts, however, mutual fund companies have some precedent behind them in their efforts to enforce non-compete provisions in employment contracts and partnership agreements. In February, 1998, a Massachusetts state court trial judge upheld aspects of a non-compete provision involving Wellington Management Company of Boston and one of its former partners, Arnold Schneider. Schneider left Wellington to start his own firm and some clients left Wellington to invest with Schneider. The court ruled that Schneider could start his own firm but was prohibited from taking Wellington clients with him. A Massachusetts appeals court upheld the decision.

The Schneider case was atypical in that it went to trial, according to lawyers. Indeed, in August, United Asset Management Co. of Boston and one of its subsidiaries, Pilgrim Baxter & Associates of Wayne, Pa., settled a case with a former Pilgrim Baxter portfolio manager on the eve of a public hearing scheduled to take place in state court in Boston. (MFMN 8/9/99) UAM and Pilgrim Baxter filed the suit after the portfolio manager, James McCall, resigned from Pilgrim Baxter to join Merrill Lynch & Co. of New York. McCall had signed an employment agreement containing a non-compete provision with Pilgrim Baxter which UAM and Pilgrim Baxter contended prevented McCall from joining Merrill Lynch. The parties did not disclose terms of the settlement.

SSgA may have more of an interest in filing suit than simply discouraging its current top executives from leaving, said Geoffrey Bobroff, a lawyer and mutual fund company consultant in East Greenwich, R.I. Barr was instrumental in SSgA patenting a quantitative strategy for investing. Suing Barr may be a preemptive move to prevent Barr and Deutsche from modifying the patented process only slightly and then soliciting the clients who invested with SSgA based on the patented strategy, Bobroff said.

The outcome of the SSgA case is difficult to predict, lawyers and observers said. If the dispute is like most others, it will result in a settlement before trial, lawyers said. But the litigation of non-compete agreements is likely to continue and perhaps increase, so long as the labor market remains tight in the mutual fund industry, lawyers and observers said.

"We haven't seen the end of this issue," Bobroff said.

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