The Enforced Covenant

Despite the oft repeated myth of recruitment consultants that restrictive covenants are seldom enforced or are unenforceable, the reported cases tend to tell a different story. Another such case emerged from the Chancery Division in March - often they are in Queen's Bench.K3 stood behind him and was prepared to undertake to the court that

David Donaldson QC the judge

It concerned Mr Huggett, a sales manager in the software for the fresh produce industry.  He does not get a good press for credibility in the report, but tellingly his new employer was prepare to undertake that

(1) until 2 January 2015 it will not permit or encourage the Defendant to act in breach of the Clause 20 covenants against solicitation and dealing and disclosure or use of confidential information (2) it will pay to Prophet any award of damages or costs ordered by the court arising out of this matters, if not previously satisfied by Mr Huggett.

It was to no avail, the former employer Prophet got its injunction to enforce the broader Clause 19 covenant preventing Mr Huggett working in a competing business for one year, despite considering the hardship  involved and the possibility that damages could be an alternative remedy under the Shelfer principles, that are now increasingly discussed post Enforcement Directive in relation to IP matters and which have recently been considered by the Supreme Court in Coventry v Lawrence another nuisance case. In this case the discretion was not exercised.

The covenant was interpreted generously. As drafted, a proviso said it would only operate to prevent the employee being involved in a business selling the Prophet products, which indeed he would not. As enforced it prohibited Mr Hugget from being involved in the provision of business process computer software designed for the fresh produce industry. The judge would have been happier with adding or similar to the original wording but Mr H's counsel does not seem to have been able to disagree with the Prophet amendment.

The court was persuaded that this covenant was reasonably necessary to protect trade secrets or confidential information. Technically a business  cannot be prevented from competition by an ex-employee.  Note that partners (not paying NICs) are not employees but owners and don't have that protection. To most of us the effect of this covenant was a non-compete clause. The trade secrets were just details of a producer on the market for such software. Nevertheless it was held reasonable. The fact that Mr Huggett had downloaded a large quantity of Prophet data did not help the credibility of his arguments that the databases were of little significance. The judge concluded that the risk was real, not fanciful, but that it did not greatly exceed the low threshold. Even so Mr Huggett cannot now work for a year to protect these nebulous secrets.

No doubt he wishes he could have mediated a compromise rather than encountering the black and white result of a court judgement. 

Don't Hold Me Back

Dead Wood shackled in NZ by Sarah McMillan

One of the biggest obstacles to leaving your firm and going SOLO is the restrictive covenants in your existing employment contract. Equally if you are taking on staff these contractual terms matter if your firm's book of business is not going to walk out the door. Case law is infrequent so I took note when  Michael Scutt tweeted about his blog on the Farnsworth case.

In this case Mr Lacy had been promoted during the course of his employment but had not signed the new contract that he had been given. He sought to argue that the restrictive covenant, which was for 6 months and prevented him working for a competitor and soliciting defined customers, did not bind him because the contract lay in a draw unsigned.

The obvious lesson for the employers amongst you is not to crack open the celebratory champagne or pay the new salary until the contract is signed.

As always, this case is very much on its own facts. The problem arose out of the take over of Pooles of Wigan as reported here.  The Judge was (rather against his inclination ) deciding a preliminary issue as to whether Mr Lacy was bound by his contract and must suffer a few more months of an injunction that was already in place. He does. The Judge ending up relying on the evidence that Mr Lacy had applied for private medical insurance (PMI) for his family, a benefit to which the new contract entitled him.

The law applicable to the case is basic contract law (paragraphs 19 to 31). The judge had to decide whether the offer in the revised contract had been accepted.  The Claimant enforcing the contract carried the burden of proof. There needed to be "an unequivocal act implying acceptance" and in accordance with the Solectron test this must be "only referable" to his acceptance of the new terms.

While the Claimant started out with five possibilities: revised salary; provision of a better motor car;  enrollment in a profit related incentive plan; movement to a defined contribution pension scheme, and the application for PMI. Only the last was only referable to the contract. Sadly litigants often forget that winning on four points and losing one is still a loss.

Of course if you can't work for a competitor you might be able to set one up, but be wary of any reasonable solicitation covenants as even the legal advice may be expensive and inconclusive.

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)

Mr Chandler's script for talking to clients before he left was from  Russell Jones & Walker and he told them he could not say that he would definitely stay with Towry because he did not yet know enough about their investment proposition. He also stressed that he had restrictive covenants, which he took very seriously, and that, if he did leave, he would be prohibited from contacting them. He said nothing to suggest that clients should call him if he left. 

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.