Client relationships are the core value of an adviser business which invests years in building relationships. Inevitably, there are significant risks for the business when an adviser leaves and seeks to take client contacts to a competitor or set up on their own firm. This is a particular concern in the current climate where competition for work is fierce.
It is quite normal for employment contracts and self-employed consultancy agreements to contain post-termination restrictions that prohibit poaching of clients. However, it is not unusual for individuals and businesses to assume that these are unenforceable and not worth the paper they are written on.
The starting point from a legal perspective is that post-termination restrictions will be not be enforceable for public policy reasons as they act as a restraint of trade. However, courts will enforce restrictions if, on balance, they are reasonable, accurate and go no further than necessary to protect “legitimate business interests”.
The courts’ approach to enforcing such restrictions tends to go in trends and the following financial services cases demonstrate where courts have been willing to enforce restrictions in practice and that getting the drafting right at the outset can be critical to enforceability.
The length of the restrictions must be reasonable to protect interests. Businesses often want to put in place restrictions for as long as possible.
Ultimately, this may not have the effect of being a real deterrent as the longer the restriction, the harder it is to justify enforceability and this approach can backfire.
Generally speaking, courts will not uphold restrictions for longer than 12 months and will need clear evidence of why a particular length of time is required.
Wholesale restrictions on competition (which are more restrictive than poaching) are usually shorter in recognition of the fact that courts are unwilling to enforce them for long periods of time due to their onerous nature.
In the case of Beckett Investment Management Group Limited v Hall in 2007 the court upheld restrictions against two independent financial advisers where a strict reading of the clause was not as precise as it should have been. The IFAs were employed by the holding company (Company A) although it was a subsidiary companies (Companies B and C) that provided all the services to clients.
The wording of the restriction prevented soliciting and dealing with clients of Company A but in reality it was Companies B and C that provided the services that the IFAs were competing with and had the relationship with clients.
Initially, the High Court found there was no breach as a result or legitimate interests to protect for Company A. However, the Court of Appeal upheld the restrictions, which may be indicative of a greater willingness of the courts to allow businesses to protect their client relationships.
In Thomas v Farr plc, the Court of Appeal upheld a 12-month restriction on competition against a managing director of an insurance broker. This is unusual and was due to the fact that he had sensitive confidential information which would help a competitor to undercut his former employer and that staff below him were more likely to actually solicit clients and not him, meaning that a more limited pure non-poaching provision could have been ineffective.
In another (unreported) case, IFA firm Cartlidge Morland was successful in its application for an injunction against a former director to prevent him approaching clients on the basis that there was a restrictive covenant in place in his employment contract.
It has also been well reported that national firm Towry has brought a claim against several former Edward Jones advisers and competitor Raymond James Investment Services for the alleged solicitation of 388 of its clients.
It is Towry’s case that there was a 12-month restriction in the advisers’ employment contracts prohibiting them from soliciting clients and that their contact details represented confidential information belonging to Towry.
Part of the defendants’ response is that Towry ceased to have any “legitimate business interests” to protect once the integration of Edward Jones into Towry had been completed. Judgment is expected some time in the autumn.
The case of Berry Birch and Noble Financial Planning Limited v Berwick and Others in 2005 highlights that courts will not always uphold covenants.
Here, five agents moved from Berry Birch to another provider of financial advice and Berry Birch sought an injunction based on express and implied confidentiality obligations and breaches of their post-termination restrictions.
Although the nonpoaching provisions were drafted in a fairly standard way, they were not upheld as they were too wide, covered clients who never became clients of Berry Birch, with whom the agents had never come into contact and the geographical restriction across the whole of the UK was unreasonably wide as Berry Birch’s business was mainly in the Midlands and Cardiff.
There can be no firm guarantees that restrictions will be enforceable further down the line as this will depend on the particular circumstances. However, investing the time and money in putting in place carefully considered and appropriately drafted restrictions at the outset increases the chances that a court will uphold them to protect your business interests in the future.
They will also act as a much stronger deterrent to individuals and make obtaining an interim injunction more likely, if necessary.
Carefully drafted restrictions that seek to protect a legitimate interest of the business will place a firm in the strongest position possible before engaging in a fight in this area.
Some practical points to consider when putting in place covenants include:
- Do not have widely drafted provisions that impose a blanket ban but think about what business interests you are looking to protect.
- Ensure that restrictions go no further than necessary to protect your business interests, in particular:
- Consider carefully how long you need restrictions to be in place. For example, how long will it really take for information to no longer be confidential or be valuable to a competitor? Remember a court will require evidence of this.
- Consider whether there is a geographical limit as broader restrictions may be harder to justify and enforce.
- Do not have a one-size-
- fits-all approach as it will be hard to justify why a senior adviser’s restrictions are the same as those for the office junior.
- Limit the clauses appropriately, for example, consider limiting covenants to clients that the individual had a relationship with or access to confidential information about.
- Include dealing with clients as well as directly soliciting clients. Although the dealing restriction maybe harder to enforce, in practice it can be difficult to have solid evidence of “who called who” if only solicitation is prohibited.
- Consider whether it is appropriate to provide for the employee to be on garden leave during any notice period as this can be easier to enforce and will restrain the ability to work for a competitor during that period. Any length of time for subsequent restrictions should be reduced by time spent on garden leave.
- Consider whether the manner of departure could be a breach of contract as this will have an impact on enforceability. For example, paying out someone’s notice period when the contract does not allow for this would be a breach of contract leaving post-termination restrictions unenforceable. Also, if the employee can claim that they were forced to resign (that is, constructively dismissed), they may try to argue that restrictions fall away and cannot be relied on.
- If you are looking to introduce restrictions during the relationship, some form of consideration will need to be given to this, such as a pay rise/bonus or commission payment, so it can be enforced.
- Ensure confidential information and client lists are secure and make it clear that such information is confidential and owned by the company.
- Include restrictions up front in employment contracts as it is often be too late to negotiate these when the employee is looking to leave.
- Act quickly if you think there is a breach of restrictions. Often, the only way of protecting the business is to get an injunction and courts will only grant one where there is potential for real harm. Any delay may imply that the concerns are not significant enough to warrant an injunction.
- Check that a new recruit will not be in breach of their restrictions with an old employer. If they are and the new employer is aware of this, it could be accused of inducing the employee to breach their contract and could become a party to any future litigation.