In the current market, with fierce competition between competitors and where a more stable economy is encouraging investment in lateral hires, the need to protect your business and client relationships is becoming increasingly important.
Restrictive covenants can be used to try to limit any potential damage to a business by a departing adviser. While the starting point for any restrictive covenant is that they are unenforceable for public policy reasons as a restraint of trade, they will be enforced if the business can demonstrate that they are reasonably necessary to protect its legitimate business interests.
Non-competition clauses have been described as “the most powerful weapon in the employer’s armoury”, as they have the potential to greatly restrict former employees’ activities. As such, they have traditionally been harder to enforce than other types of restrictions, such as non-solicitation and non-dealing covenants.
In recognition of this, they are usually drafted so as to be shorter in length. However, in the case of Merlin Financial Consultants Limited v Cooper 2014, the High Court has upheld a 12-month non-competition restrictive covenant in an agreement between a financial adviser and his employer.
The facts of the case are as follows. Having worked in the financial services industry for 23 years prior to joining Merlin Financial Consultants Ltd in 2008, Jonathan Cooper had accumulated an extensive client portfolio. In addition to issuing Cooper with a contract of employment at the outset of his employment, Merlin therefore entered into a “goodwill agreement” with him. It was the covenant in this agreement which was the subject of the High Court’s decision.
Under the agreement, Merlin purchased the goodwill of Cooper’s client base and the right to receive future income from it. The restriction contained in the agreement prevented Cooper from engaging in any capacity or providing any type of advice to any other business which supplied goods and/or services which were competitive with those offered by Merlin and this applied across the whole of the UK. The restriction
was to last for four years after the date of the agreement and for 12 months following termination of Cooper’s employment.
In 2012, Cooper left Merlin to set up his own financial services company. Prior to his termination date, Cooper made it clear that he intended to continue to work for “his” clients after leaving and his solicitors subsequently wrote to Merlin challenging the validity of the restrictive covenants in the goodwill agreement. Thereafter Merlin brought a claim for breach of contract, claiming damages for the loss of business for two years following Cooper’s departure.
It was decided by the High Court that the non-competition restriction in the goodwill agreement was enforceable against Cooper. The Court found that the goodwill agreement was freely entered into between two parties of comparable bargaining power. It pointed out that in such cases, the court will be slow to intervene to prevent the enforceability of what has been freely agreed, but that if the restraint goes further than is reasonably necessary to protect a legitimate business interest, it will be held unenforceable.
In reaching its decision, the court reviewed previous cases concerning advisers and noted in particular two cases which focused on the fact that strong relationships between advisers and client were particularly prevalent in the industry (Beckett Investment Management Group Ltd v Hall 2007 and Croesus Financial Services Ltd v Bradshaw and another 2013).
It therefore took into account the fact that Cooper had a strong relationship with his client base. Rejecting Cooper’s argument that the non-competition covenant was too widely drafted on the basis that it was UK wide (whereas the majority of Merlin’s clients were in London and the South-east) the court pointed to previous case law from 1988 which establishes that the financial services industry is considered to be a single geographical market. The court noted that in today’s world, in the age of electronic communication, this observation must be truer
than ever. So , what, apart from the obvious enforceability point, should we take away from this case?
First and foremost is the point that courts will generally be more willing to enforce restrictions contained in business agreements rather than in contracts of employment. This point should be borne in mind when drafting and advising on both types of agreement, from the perspective of the business and the adviser.
The second point is a more practical point in relation to enforcement of covenants. While employers will often seek an injunction to prevent an employee breaching a restrictive covenant, this is not necessarily the best course of action. Where, as in this case, there is very little an employer can do to prevent clients taking their business to the departing employee’s new employer, damages may be the most effective remedy.
Matthew Huddleston is partner at Foot Anstey