Saturday, 18 February 2012

Restrictive Covenants and Leaving with a Client Following

The dire expense of litigating any restrictive covenant means that there is very little case law on the topic, so we must be grateful to the Financial Services sector and Towry and Raymond James Investment Services for giving Mrs Justice Cox the opportunity to produce a detailed judgement about the interpretation of a non-solicitation covenant on 14 February 2012. The judgement is as long as a decent novella and has more than enough human interest for one- all that it lacks is phone hacking (they only had the mobile phone bills - the recordings would have been to die for).

The case deals with a non-solicitation clause. There was no non-dealing/non-acting clause. You will probably find one of those in your law firm employment contract/partnership agreement so you may not find this case as helpful as it might otherwise be, especially as the judge says, albeit obiter in paragraph 383, that these may still be reasonable.

There is not a lot of law in the decision, and the Honorable Mrs Cox deals with it briefly, mainly relying on the text books and concludes:
"In my judgment a contractual, non-solicitation clause of the kind in this case means that ex-employees must not directly or indirectly request, persuade or encourage clients of their former employer to transfer their business to their new employer. Employers are entitled to prevent ex-employees from exerting influence of this kind over their clients. The question in this case is therefore whether Towry has demonstrated to the civil standard on all the evidence that an individual Defendant's communications with Towry's clients, as they became, contained a material element of persuasion, with a view to gaining the business of those clients. Whether there has been persuasion or encouragement will depend, in each case, on all the circumstances. Determination of this issue is clearly fact specific".(paragraph 440 - my emphasis)
It was accepted that solicitation and canvassing were the same thing (paragraph 434).
The other important point to note is that the burden of proof to the civil standard lay firmly with Towry and the stories show that even with cross-examination they could not get that evidence before the Judge. 
The value of this judgement to those in the real world it gives us the facts and story line for each of the  individual defendants.

In this case the leavers were not motivated by personal greed - their original employer Edward Jones had failed to make its US model work in the UK and sold out in financial difficulties to Towry, so their employees were being ported across with new contracts that did contain a non-dealing clause (as well as many other changes to their working practices and environment) and some chose to go to Raymond James after resigning and/or having their employment terminated when they refused the new terms. The covenant issue loomed large from the beginning and all parties had taken advice. As it transpires that initial advice was worthwhile. 

Since the clients all knew there was a hiatus, it is not surprising that many contacted their former advisers without being contacted first. Google Ads from other advisers are still suggesting that clients transfer away from Towry.

The evidence of what was done after the former clients had made contact and expressed a desire to transfer was not taken into account as solicitation. See for example:
"Making particular recommendations, explaining fees and costs, or giving information or advice as to how to give effect to their decision to transfer and move forward, after those clients had already made their decision to stay with Mr Bennett and to do what was necessary to bring that about, does not in my judgment evidence solicitation." (paragraph 635)

It is likely that the judge was much influenced by the evidence of the individuals who said they had delete, removed or disposed of client contact details and waited for their clients to contact them. It seems that they kept their mobile phone numbers. It was clear that the clients would have had little difficulty finding and contacting their former advisers as they were mainly living in the same local communities so no Internet social networks were required. The clients also had good factual reasons to transfer their work away from Towry so there was no need for the advisers to exercise any persuasion on them. They had made their decisions before they went through the new client care procedures prescribed by their regulator.

Any case is limited by its facts, but the stories here show the virtues of having good client relationships and your own mobile phone number. If your clients contact you and demand service you can talk to them if you have no non-dealing covenant. Otherwise you are sitting it out, unless the clients have the wits to demand your former employer release them and brook no denial. It is pretty sad that employers demand such covenants but equally they have a business to run and sustain. Here the loss of business was on such a large scale that Towry must have felt obliged to try and recover their losses on the acquisition.

I don't know whether there will be an appeal. It seems unlikely that the evaluation of the evidence by the judge can be changed.  For more information read the judgement.


  1. Very useful for all us employers. Thank you for summarising it Barbara

  2. De-legalisation of the restrictive comments would massively improve competition in the IP services industry as well as address some of the concerns raised by those who responded to the Hargreaves report.

    It is odd that such anti-competitive practices are allowed in a pro-competitive nation. It is understandable that employers desire such restrictions, but on the other and it is the goodwill of the individual practitioner that keeps a client with the firm in the first place. If the firm is at risk of losing a client when such a practitioner leaves then the firm itself clearly has little to offer the client.

    Just imagine the situation in many other walks of life when your favourite 'agency-supplied/employed' nanny, cleaner, taxi driver, hairdresser, window cleaner, sports coach, child's tutor, etc etc, moves on. Why should you be forced to use the useless, hapless, miserable, lazy, over-priced, under-experienced, unfriendly etc etc replacement forced upon you?

    I see no difference between such service providers and those providing professional services. Ultimately, covenants do not prevent the transfer of major clients. There is just a managed delay.

    As a user of external patent attorneys, I will always go with the individual who I have assessed as competent and trust. If the judges don't like that then it is time for them to wise up and start acting on behalf of society instead of nicely-argued legal principles.

  3. The reason why there is such little law is that most companies will not enforce or simply cannot enforce even non-dealing clauses in the face of client ange at their audacity.

    I know of one firm (500+) that has no restrictive covenants at all as a matter of policy so they can say they act in the interests of thier clients in ALL situations.

    Would be useful to flag good practice to clients. As part of their procurment of services they could insist that any individuals who work on their matters have their restrictve covenents waived or no business.

    I use it as a selling point to clients and they like it. No one owns a client simple as that.

  4. I wrote this article because of personal experience - there is enforcement by firms - not all of course but its a big issue for leavers. The bitterness of these disputes is horrific enough to make you work solo so you never have to face one again.
    Circumstances are very variable though and if a large law firm runs a bid on the basis of its firm's brand and abilities they hardly want one partner to walk away with the profits

  5. "brand and abilities":

    Any 'brand' of value is generated by the attorneys doing the work, so if the attorney leaves, the brand is diluted.

    If Coke start changing their recipe while relying on their brand to keep hold of customers then they will quickly lose out, just as they did. Markets where old brand names are relied upon to make sales exist in the clothes and car industry for example. There is nothing of the former business or quality left that was responsible for the generation of the brand's goodwill, but they are used solely because the still exist in the consumers memory.

  6. It isn't the attorneys doing the work who are the brand for a law firm, although the work they do can enhance or diminish the perception of the brand by their clients. It is the lawyers as a whole body and the impression of their skill care and approach based on the firm's history that are the brand. That's why good firms mean it when they say their biggest asset is their people and why they take such care in recruiting and managing them.

    Anyone who has tried to sell their own service while at different firms will know the truth of this. Certainly i got a different hearing when bearing a magic circle brand than I did offering similar services with the brand of a less well-known firm!