Horter Inv. Mgmt., LLC v. Cutter

• Decision Date: 15 June 2017
• Docket Number: Case No. 1:15-cv-00477.
• Citation: 257 F.Supp.3d 892
• Parties: HORTER INVESTMENT MANAGEMENT, LLC, Plaintiff, v. Jeffrey CUTTER, et al., Defendants.
• Court: U.S. District Court — Southern District of Ohio

257 F.Supp.3d 892

HORTER INVESTMENT MANAGEMENT, LLC, Plaintiff,

v.Jeffrey CUTTER, et al., Defendants.

Case No. 1:15-cv-00477.

United States District Court, S.D. Ohio, Western Division.

Signed June 15, 2017

Filed June 16, 2017

John Patrick Gilligan, Matthew L. Fornshell, Nicole Rene Woods, Steven David Forry, Ice Miller LLP, Columbus, OH, for Plaintiff.

Aaron Mark Herzig, Russell S. Sayre, Taft Stettinius & Hollister LLP, Donald James Mooney, Jr., Pamela King Ginsburg, Ulmer & Berne LLP, Cincinnati, OH, Danise A. McMahon, Ferguson, Braswell & Fraser, P.C., Plano, TX, for Defendants.

Order Regarding Defendants' Motions for Summary Judgment

Susan J. Dlott, Judge

This matter is before the Court on the Motion for Summary Judgment by Defendant Jeffrey Cutter (Doc. 71) and the Motion for Summary Judgment by Defendants Ryan Borer and PCM Advisory LLC ("PCM") (together, "Borer/PCM"). (Doc. 72.) Defendants move for summary judgment as to each claim asserted against them by Plaintiff Horter Investment Management, LLC ("Horter") in its Second Amended Complaint.¹ (Doc. 43.) For the reasons that follow, Cutter's Motion will be GRANTED IN PART and DENIED IN PART, and Borer/PCM's Motion will be DENIED.

I. BACKGROUND

Broadly, this action concerns the enforceability and interpretation of noncompetition and nonsolicitation provisions in a contract between Horter and Defendant Cutter. The contextual facts relevant to this contract and its aftermath are set forth below.

A. Facts²

1. Horter's business

Horter is a registered investment advisory ("RIA") firm located in Cincinnati, Ohio that is licensed with the Securities and Exchange Commission. Investment advisor representatives ("IARs") have the option to operate under their own RIA or to contract with an RIA such as Horter. The benefit of the latter is assistance with overhead, including licensing, compliance, fund managers and custodians, and administrative support. In practice, individual investment clients contract with IARs, who then provide investment offerings through their IAR's RIA. The RIA charges a fee for services to the individual investment clients (the "Gross Client Revenue")—a portion of which goes to the IAR according to the contract between the RIA and IAR. IARs in this scenario are independent contractors.

Because IARs secure and maintain individual investment client relationships, an RIA's profitability is tied to its roster of IARs. To attract more IARs, RIAs frequently partner with field marketing organizations ("FMOs") that, like RIAs relative to investment products, assist those who are selling insurance products (e.g. , annuities and life insurance). Many IARs also are licensed to sell insurance products; by partnering with an FMO, an RIA gains access to the FMO's IAR pool for recruitment. In this case, Horter had partnered with an FMO called 3–Mentors. If a 3–Mentors IAR registered his investor license with Horter, 3–Mentors was entitled to a referral fee. This partnership was not exclusive; 3–Mentors was contractually free to, and did, partner with RIAs other than Horter.

2. Cutter and Lang join Horter

Cutter and Pete Lang³ were IARs who had registered their investor licenses with Horter. Cutter first joined Horter in late 2011, and Lang joined around the same time.⁴ Horter required that its IARs sign an independent contractor agreement. Horter's form IAR agreement contains restrictive covenants. In March of 2014, Cutter executed a new IAR Agreement (the "2014 IAR Agreement") that contained provisions unique to Cutter. The portion of the 2014 IAR Agreement that forms the basis of this controversy is the following:

3. Non-competition. In consideration of this Agreement and fees to be received for the performance of his/her duties hereunder, [Cutter] hereby agrees that, as long as this Agreement remains in full force and effect and for a period of twelve (12) months after the termination of this Agreement, whether by the action of Horter or [Cutter], [Cutter] will not, directly or indirectly, own, have a proprietary interest of any kind in, be employed by, be a partner in, or serve as a consultant to or in any other capacity with any firm, partnership, corporation, business enterprise or individual which is engaged in competition with Horter for the providing of financial planning or investment advise [sic] that is located within sixty (60) miles of Hamilton County, Ohio. [Cutter] further hereby agrees that, during the term of this Agreement and for a period of twelve (12) months after the termination of this Agreement, [Cutter] will not directly or indirectly set up his own/or any affiliated Registered Investment Advisor firm, solicit any employee, or contractor of Horter for employment with [Cutter] himself/herself or with any other company or organization with which [Cutter] associates himself/herself. [Cutter] may go to another Registered Investment Advisor firm.

1) [Cutter] or any associated entities or persons will not establish a Registered Investment Advisor firm.

2) [Cutter] or any associated entities or persons will not solicit any employees or contractors/advisors (other than those directly recruited by [Cutter] ) of Horter[.]

3) [Cutter] may go to another Registered Investment Advisor firm but not of an associated entity or person.

4) [Cutter] or any associated entities or persons may not recruit any ELITE advisors of Horter that [Cutter] is currently affiliated with.

5) [Cutter] or any entities or persons is also prohibited from using any Horter Training Materials including the Horter websites at any time after Termination.

4. This prohibition against soliciting any Horter employee, Horter advisors (other than those directly recruited under Independent Contractor/Jeffrey Cutter/Cutter Financial Group "Cutter" or affiliated entity direct recruits), meaning also Independent Contractor/Jeffrey Cutter/Cutter Financial Group⁵ "Cutter" cannot recruit any Elite Advisors, contractor (advisor) or money manager is absolute, regardless of the type of business or employment or whether or not it is in competition, direct or indirect, with Horter....

(Pl.'s Second Am. Compl., Ex. A, ¶¶ 3, 4 at PageID 390–91, Doc. 43–1.) The numbered paragraphs 1–5 set out by parentheses and the final paragraph (4.) are the provisions unique to Cutter's 2014 IAR Agreement.

The parties do not agree on the precise reason that these provisions were incorporated into the 2014 IAR Agreement, but they do not dispute the following with respect to Cutter's position among other IARs. First, in 2012, Cutter created a marketing company called Radical Promoting ("Radical") with a partner, Leibel Sternbach, which was designed to streamline marketing and branding for investment professionals. Horter knew that Radical worked with certain of Horter's IARs, but there was no contract between Radical and Horter governing Radical's relationship with Horter IARs. Second, Cutter and Drew Horter, Horter's president and founder, had negotiated additional compensation to Cutter for referring IARs to Horter, though this arrangement was not reduced to a written agreement.⁶ Third, both Cutter and Lang were considered "ELITE" IARs, a term distinctive to Horter and that refers to its ten most valuable IARs based on assets under management.

3. Creation of a new RIA: PCM

Toward the end of 2014, Cutter actively began pursuing a path out of Horter. Earlier in 2014, Cutter had met Ryan Borer, who had an ownership interest in an entity called Fusion. While Fusion already operated an RIA at that time, Cutter was looking for an RIA with a model more focused on its IARs. Cutter and Borer both admired the "Keller Williams" business model, in which IARs eventually could benefit from ownership/profit sharing with their RIA. At this time, Lang was also planning to leave Horter, though the parties disagree on what ultimately triggered his departure.⁷

Toward the end of 2014, Borer, Cutter, and Lang communicated about an RIA modeled on the ideas that they had discussed. In November of 2014, Borer took the formal steps to create PCM.⁸ PCM is a Texas limited liability company with its principal place of business in Texas, while also maintaining an office in Ohio. PCM contracted with Radical for marketing and technology services.⁹

Lang and Cutter resigned from Horter effective February 2, 2015 and February 4, 2015, respectively, and registered with PCM.

4. Horter/3–Mentors partnership terminates and twenty-four Horter IARs go to PCM

In early 2015, 3–Mentors entered into a partnership with PCM, similar to that which it had with Horter. Between March 26 and March 27, 2015, 3–Mentors hosted a conference in Atlanta (the "Atlanta Conference"), at which both Cutter, on behalf of Radical, and Borer, on behalf of PCM, made back-to-back presentations. Horter did not attend this conference and ultimately terminated its relationship with 3–Mentors.¹⁰

Between early February of 2015 and mid–July of 2015, twenty-four Horter IARs left Horter to register with PCM. All but four of these IARs left Horter subsequent to the Atlanta Conference. Of the twenty-four, Horter considered four of them IARs to be "ELITE" as that term is used in Cutter's 2014 IAR Agreement: Scott Moore, Don Cloud, Rick Durkee, and Pete Lang.

B. Procedural Posture

This civil action originally was filed in the Hamilton County Court of Common Pleas on May 22, 2015. PCM removed the lawsuit to the Southern District of Ohio on July 20, 2015.

Cutter and Borer/PCM have moved for summary judgment as to each claim asserted against them in Horter's Second Amended Complaint. Against Cutter, Horter alleges breach of contract, breach of fiduciary duty, and tortious interference with business relations. Against Borer/PCM, Horter alleges tortious interference with contract and tortious interference with business relations. Horter seeks injunctive relief against all Defendants. The Motions are ripe for adjudication.

II. STANDARD OF LAW

Although a grant of summary judgment is not a substitute for trial, it is...