19 September 2005
4 December 2013
4 November 2013
22 April 2013
Joining a competitor? The potential consequences of insurance brokers soliciting their former clients
12 July 2013
25 March 2013
These days neither partners nor assistants join a firm for life. Partners often move for more money or because their area of practice is not seen as core, or because they are unhappy with the way their firm is being managed. Employed solicitors tend to move to boost their chances of achieving partnership or because they feel they are not receiving an appropriate level of training and guidance. At every level, law firms are increasingly taking on lateral hires.
How do restrictive covenants in a partnership deed or an employment agreement fit in? Not long ago it was regarded as unnecessary and unethical to require a lawyer to enter into an agreement which might restrict clients from following them from one firm to another. Gradually, though, we are beginning to see the introduction of non-solicitation clauses. And now non-dealing restrictive covenants are frequently imposed on partners and associates alike.
The general principle is well known. Restrictive covenants are a restraint of trade and therefore, on the grounds of public policy, they are void and unenforceable unless they go no further than is reasonably necessary to protect a legitimate business interest.
Partners v employees
Post-termination restrictions are much more likely to be enforced by the courts against partners than against employees. The courts are often willing to challenge the enforceability of restrictive covenants in employment contracts on the grounds that the employee has an unequal bargaining position against the employer. Partners entering into restrictive covenants contained in a partnership deed, on the other hand, are regarded as having equal bargaining power with existing partners, however unrealistic this may be in practice when one partner may be joining a partnership containing hundreds of partners. The fiction is that partners, particularly the partners in firms of solicitors, are in a good position to judge what restrictions are reasonable in such a commercial agreement.
A partner who leaves a firm is in a stronger position to take clients with them to a new firm than an employee would be. The economic damage that a partner can cause is inherently greater. The courts are likely to regard measures to safeguard the firm's client base and goodwill as reasonable. For all these reasons, partners tend to be bound by more onerous restrictions than employees.
While case law suggests that enforcing a covenant against an employee may be difficult, sometimes feelings run high. In one case, a partner moved from one firm of solicitors to another together with his team of assistants and secretaries. The first firm was distraught and instructed a very large law firm, known for its aggressive litigation department, to protect its interests; that firm promptly sent letters threatening injunctions to the partner, the assistants and even the secretaries in an attempt to prevent them from joining their new firm.
Seeking an injunction is notoriously expensive. It is not uncommon for an employer or partnership to incur six-figure legal costs. There is also a risk that compensation will be payable to the partner, employee or their new partnership if at trial the court concludes that injunctive relief should not have been granted.
Rather than seek an injunction, a firm may claim damages from a departing lawyer, and sometimes also from the firm that the lawyer is going to join (for inducing breach). Damages can be hard to prove and can cause embarrassment by revealing how valuable certain staff are and the extent of the loss a firm will suffer as a result of a lawyer's departure.
An outsider's view
Firms that enforce restrictive covenants may be perceived as being weak in the marketplace: they are so desperate to hang on to certain employees that they will go to court to delay the day when the lawyer can join another firm. What firm would wish to be known for keeping its staff by the threat of enforcing restrictive covenants?
The successful attack by US-based firms on the London market has been well documented. US firms opening in London and recruiting partners and assistant solicitors here often find lengthy notice periods, restrictive covenants and garden leave clauses which are often unfamiliar and difficult to understand. US lawyers tend to regard restrictive covenants prohibiting lawyers from accepting instructions from clients that wish to instruct them as immoral and unprincipled.
The client's view
It sometimes seems extraordinary to clients that they can be prevented from using the lawyer of their choice. There is an argument that non-dealing restrictive covenants entered into by lawyers are contrary to Rule 1(c) of the Solicitors' Practice Rules. A solicitor should not do anything which "compromises or impairs… a person's freedom to instruct a solicitor of his or her choice". While solicitors are not obliged to accept instructions, it could be argued that a non-dealing clause prevents a client from having the freedom to instruct a solicitor should they move elsewhere and therefore "comprises or impairs" that client's freedom.
The practice of law is a people business. Professional relationships between a firm and its commercial clients are often built on longstanding personal relationships. Clients are often extremely unhappy at the prospect of their own firm of solicitors seeking to prevent them from continuing to instruct a partner or assistant who has chosen to move. Sometimes a client in this position will threaten to move its work elsewhere.
In reality, restrictive non-dealing covenants are rarely enforced against lawyers. Sometimes a deal is reached whereby the parties recognise commercial realities and agree to appropriate client carve-outs, confidentiality, handover and internal and external announcements.
The best approach for law firms is to protect themselves by ensuring that appropriate restrictions are included in partnership deeds, but also by thinking long and hard about the implications of enforcing those restrictions. Rarely will a firm suffer serious damage because an assistant solicitor leaves and the justification for including draconian restrictive covenants in employment contracts is questionable.
Longer notice periods with garden leave clauses can give a firm a degree of control over its client base which would not normally involve going to court. They also give the firm an opportunity to persuade key clients and other team members not to leave without attracting the costs, aggravation and publicity associated with litigation.
Partner Ronnie Fox and lawyer Aron Pope are employment and partnership specilaists at Fox Williams