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Law at Work — February 2014: reasonableness and extent of restrictive covenants did not apply to actions as a minority shareholder
28 February 2014
As many business purchasers have found to their cost, the value of any service firm within the City of London is heavily dependent on the continued loyalty of its specialist workforce, their combined expertise and their influence over the client connection they service.
Such businesses are highly susceptible to financially damaging ‘team moves’, whereby employees in the same group resign in concert with a view to joining or establishing a competing firm and taking their existing employer’s clientele with them.
This has been a common phenomenon in, for example, the inter-dealer broking, insurance and financial services fields. In this scenario, reliance on the traditional and limited means of business protection – the enforcement of post-termination restrictive covenants in the employment contracts protecting goodwill – may be ineffective in preventing serious economic loss to the hapless employer.
For example, the restrictions on more junior defecting employees in the team may be limited and these team members may readily be able to establish a bridgehead servicing the former employer’s clients until the restrictions on the more senior members of the team expire. The simultaneous loss of a specialist workforce en masse may cripple the employer’s capacity to service its client base and undermine its regulatory licence. Often the defectors have such factors well in mind in the pre-planning of their move.
UBS’s wealth management division has suffered from such team moves. After an initial defection of staff in 2006 to Cheviot, in May 2008 it experienced a mass move of 75 of the remaining staff to Vestra Wealth. This was the subject of a recent application by UBS for springboard relief.
Since the 1980s, the High Court has regularly used its injunctive powers to bar disloyal employees from dealing with clients of their former employer where there was evidence that they were doing so by misusing their former employer’s confidential information to gain a springboard advantage.
Uncertainty has existed over whether such injunctive restraints on competition should be ordered where the disloyalty has involved other breaches of fidelity commonly encountered in team move scenarios, such as employees soliciting other employees to leave their employment or employees soliciting clients during employment to transfer their custom after employment has terminated.
Whether springboard relief should be available in cases where the disloyalty is that of senior managers failing to disclose their knowledge of, or involvement in, planned poaching raids on the company’s existing staff or client base has also been raised by recent developments in the fiduciary obligation to disclose wrongdoing (in the British Midland Tool and Item Software cases).
In his interim judgment in UBS v Vestra & Ors (2008) (QB), Openshaw J considered that springboard injunctive relief was not confined to claims for breach of confidence during employment – as suggested in Balston v Headline Filters (1987) – but was available to prevent further serious economic loss to a previous employer caused by former staff members deriving an unfair headstart from their own serious breaches of fidelity (confirming Midas v Opus (1999)) or of fiduciary duty, or, where they were acting in concert with others, of such breaches by any others.
Breaches of fidelity
Vestra Wealth was a start-up founded by David Scott after his resignation from UBS that began trading in September 2007 after his restrictive covenants expired. In May 2008, he presented letters of resignation to UBS from 52 of its employees, all of whom were to join him at Vestra. Subsequently a further 23 employees resigned.
Scott claimed he had personally and separately dealt with each of the defectors and that each separately decided to join Vestra without any encouragement from any other defecting member of UBS’s staff. UBS alleged breaches of fidelity and fiduciary duty by defecting senior managers, relying on internal telephone recordings and other evidence.
Without making any final findings on the conflicting evidence, the judge felt it inherently unlikely that whole departments should move en masse without extensive discussion between staff beforehand. The judge was persuaded by UBS counsel Alistair McGregor QC’s argument that there must have been working within UBS internal recruiting officers, acting in breach of fidelity or fiduciary duty. It was difficult to see how else the mass defection could have been coordinated. Senior manager defectors were not entitled to remain silent when they knew of planned poaching raids upon UBS’s existing staff or client base facilitated from within UBS – the more so when they themselves were party to these plots and plans.
In the circumstances, the judge ordered that, pending a speedy trial, clients who had moved to Vestra should not be serviced by former staff of UBS in breach of their continuing restrictive covenants and that the defendants should be restrained from soliciting further UBS staff and clients. n
Julian Wilson is a barrister at 11KBW specialising in business protection