Swiss investment bank UBS recently grabbed some headlines with the interim injunction that it won against competing start-up wealth manager, Vestra. Some 75 UBS employees had been persuaded to leave and join Vestra instead. These were key investment managers working on much of UBS’s core business in the UK.
So what are the implications of this case when employees are planning to leave and set up in competition?
Q What was the point of an injunction if the employees had already left?
A In this case, the judge granted what is called a ‘springboard’ injunction. The idea of a springboard injunction is to prevent employees taking advantage of previous breaches of contract. In this case, the court has granted an interim injunction preventing the ex-employees from dealing with ex-UBS customers and from seeking to persuade any other staff to leave.
Q What is wrong with employees agreeing together to leave and set up in competition?
A There is some case law which says that it is generally permissible for a number of employees to decide to leave their employer in concert and set up in competition. However, what the UBS judgment makes clear is that there are limits to this principle. What was key to the UBS case was the sheer scale of the operation and the fact it was undertaken by very senior employees and that it was done in secret. The judge said that he believed that the departing employees were acting as “recruiting sergeants” for Vestra while still employed by UBS, and were seeking to “torpedo” the UBS UK business. He said he believed there was a degree of plotting that amounted to an unlawful conspiracy. While the facts of this case may be extreme, it does mean that employees will now have to be much more careful if they are planning to leave as a group.
Q Is it then possible to prevent employees leaving and competing?
A Not generally. It is permissible for an employee to form an intention to join a competitor and even to take some steps preparatory to competition while they are still employed by their old employer. What is unlawful is actually engaging in competing activities while still employed. This is where the Vestra employees went wrong. They were clearly acting against their employer’s interests while they were still employed.
Q Can an employer’s position be improved by contractual provisions?
A Yes. It has long been acknowledged that restrictive covenants can be used by employers to prevent employees making use of confidential information, taking customers and soliciting remaining employees to leave. Some employers are now seeking to introduce covenants specifically to prevent groups of ex-employees working in competition together. These covenants have not yet been tested but, in principle, if they are sufficiently focused they will probably be upheld by courts. The courts seek to strike a balance between the interests of employees using their skills and abilities and the interests of an employer in protecting its business. Accordingly, covenants which are too extensive may be struck down. Nonetheless, an employer will be in a much better position if there are well-drafted covenants.
Q So what can an employer do to prevent employees leaving and competing?
A Even if there are no restrictive covenants, an employer will have some options as the UBS case demonstrates. A letter reminding employees who are leaving about their obligations, such as engaging in competitive acitivities against their current employer, may help. It is also useful for employers to conduct an exit interview and ask staff specifically what they intend to do. One of the factors which worked against the employees in the UBS case was the extent to which they kept their activities secret. If an employee is not honest with their employer, it is likely to count very heavily against them. If there is evidence of wrongdoing, a springboard injunction may be granted either before or after employees leave.
Q Is it really worthwhile pursuing employees through the courts?
A As the UBS case illustrates, taking injunction proceedings can be extremely effective. In practice, the effect of an interim injunction is normally either that the ex-staff abandon their enterprise altogether, or it forces them to the negotiating table. In the UBS case, it is reported that at least one of the senior employees has changed his mind as a result and is now reverting to UBS. However, injunctions cost a substantial amount of money and entail the investment of significant management time. It is only where the commercial damage being done to the business makes this investment worthwhile that an injunction application should be contemplated.
By Paul Lambdin, partner, Stevens & Bolton