E*Trade Financial Corp. v. Eaton
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By Paul J. Dubow

Fraud on the court embraces only that species of fraud, which does, or attempts to, defile the court itself, or is perpetrated by officers of the court so that the judicial machinery cannot perform in the usual manner its impartial task of defining cases.

E*Trade Financial Corp. vs. Eaton, No. 17-02471 (D. Ariz., 12/9/19).

In April 2018, E*Trade obtained a preliminary injunction against Eaton, a former E*Trade financial planner based in Arizona who had joined Morgan Stanley in 2017. The injunction prohibited Eaton from soliciting any of his former clients at E*Trade and was based on provisions in a Nonsolicitation and Nondisclosure Agreement (“Nonsolicitation Agreement”) which Eaton had signed when he joined E*Trade in 2011. Eaton now moves to vacate the injunction on the ground that E*Trade committed fraud on the Court by concealing another agreement that Eaton signed (“Employment Agreement”) that contained a California choice of law clause. The restrictive covenants in the Nonsolicitation Agreement, which did not contain a choice of law clause, would not have been enforceable under California law.

The District Court notes initially that not all fraud is fraud on the court. Rather, it embraces only that species of fraud, which does, or attempts to, defile the court itself, or is perpetrated by officers of the court so that the judicial machinery cannot perform in the usual manner its impartial task of defining cases. It does not, without something more, encompass nondisclosure or perjury by a party or witness. Instead it requires a grave miscarriage of justice. Based on this criteria, the Court declines to vacate the injunction.

Its decision is largely based on a declaration by Jennifer Persico, E*Trade’s inside counsel. She testified that neither she, nor E*Trade’s outside counsel, was aware that Eaton had signed an Employment Agreement until he filed the motion to vacate the injunction. E*Trade had required its new employees to sign the Employment Agreement when E*Trade was headquartered in California, but, except in the case of California-based employees, it had ceased doing so in 2004, when it moved its headquarters to New York. She believed that E*Trade had supplied the Employment Agreement to Eaton inadvertently.

She submitted several pieces of evidence that supported the notion that E*Trade erroneously provided Eaton with the Employment Agreement on his hire date, such as the offer letter from E*Trade, which was expressly made contingent on his execution of the Nonsolicitation Agreement, but made no mention of the Employment Agreement. Similarly, Eaton participated in E*Trade’s Incentive Compensation Plan. His eligibility under the plan explicitly hinged on him signing the Nonsolicitation Agreement and another form. The compensation plan made no reference to the Employment Agreement. The Nonsolicitation Agreement also contained an integration clause, which stated it “contains the entire agreement and understanding by and between [E*Trade and Eaton] with respect to the covenants and subject matter contained herein.”

Although the Court does not condone E*Trade’s “sloppiness,” it holds that Eaton failed to meet the “demanding burden” of demonstrating fraud on the court by clear and convincing evidence. It further notes that E*Trade’s eight-year actions are not at issue in the motion and that what the Court decided was whether E*Trade’s actions “throughout this litigation” amounted to “defilement of the court itself” and it concludes that it did not.

(P. Dubow) (EIC: See SOLA Ref. No. 2018-18-04 for our coverage of a prior District Court decision in this case. Our thanks to Mr. Dubow for that summary as well.)

(SOLA Ref. No. 2020-02-04)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis.

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