Legal opinion: When are non-solicitation clauses enforceable?

Towry EJ Limited v Raymond James & Others, which dealt with restrictive covenants in the financial services sector, was the longest trial in the High Court last year.

The decision was handed down in February 2012 and, in her 400 page judgment, Mrs Justice Cox exonerated the defendants of allegations of breach of their restrictive covenants, misuse of confidential information and conspiracy that had been brought by financial advisory firm Towry. This is an important decision on the use of restrictive covenants as a tool to tie in key employees and has sparked considerable debate in the financial services sector about who “owns” a client.

The claim was initially brought following Towry’s acquisition of another advisory firm, Edward Jones, in late 2009. Seven Edward Jones advisers left to join rival firm Raymond James and a large number of their clients followed. Towry claimed that the advisers had “solicited” the clients and were therefore in breach of their restrictive covenants. The defendants argued that the clients had moved of their own volition and, since there was no restriction in their contracts on “dealing” with clients and no evidence of solicitation, there was no breach of the restrictive covenants.

The Raymond James decision has highlighted the issue of what a departing employee can and cannot do with respect to their clients or customers. In this case, the advisers had enforceable non-solicitation restrictions in their contracts. They complied with those restrictions and the clients still transferred their business.

The judge held that “solicitation” will generally occur where an employee “directly or indirectly requests, persuades or encourages clients of their former employer to transfer their business to their new employer”. As far as it goes, this makes good sense. However, how does an employer go about showing that an employee has solicited former clients in breach of a non-solicitation clause? Can this solicitation be inferred only from the fact that a “tidal wave” of clients transferred with the departing employees to the new employer where there is no evidence of requesting, persuasion or encouragement by those employees? The judge thought not, at least on the facts of this case. Towry had based its entire claim on inference. While that may be enough in the early stages of proceedings, something more than inference is going to be needed once a matter gets to trial. In this case, Towry produced not a shred of evidence of solicitation and, given the compelling evidence that the clients would have moved “come what may”, it was unsurprising that the case failed.

Towry also argued that a non-solicitation restriction is essentially the same as a non-dealing restriction, an argument that was roundly rejected by the judge. The lesson for employees is that a non-solicitation restriction on its own will give little protection to the former employer where the adviser has strong relationships with their clients and the clients want to follow the adviser wherever they go. It seems an obvious point, but if an employer wants to stop its employees from dealing with their clients, it needs to have a properly drafted “non-dealing” restriction. Although there is a serious question mark over the wider validity of non-dealing restrictions, given that they override the client’s right of choice, they have been enforced by the courts to date.

Finally, the case is a reminder of the importance of knowing what post-termination restrictions apply to potential new recruits and taking time to ensure that they are not breached. The fact that Raymond James had consistently taken and followed legal advice was described by the judge as being a “striking feature” of the case and a major factor in the claims being thrown out.

The lesson is clear – take legal advice early and follow that advice. If you do that you will be in the driving seat in any litigation that follows.

Alex Denny is head of the London employment group at international law firm Faegre Baker Daniels, which successfully defended Raymond James in this case.

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