Non-solicitation covenants: the good, the bad and the clever…

April 27, 2012

Restrictive covenant-related case law has developed yet again following the recent High Court decisions in Baldwin (Ashby) Limited v Andrew Maidstone and Towry EJ Ltd v Bennett and others. But it is a subject that never tires Employment Litigation lawyers as the outcome will almost always turn on the facts: what actually happened in practice?

Baldwin (Ashby) Limited v Andrew Maidstone

The case involved the sale and purchase of a company, whereby Mr Maidstone sold his accountancy practice to Baldwin (Ashby) Limited (“Baldwins”). The Share Purchase Agreement contained a non-solicitation covenant, imposing a 3 year covenant on Mr Maidstone in preventing him from “canvassing, soliciting or endeavouring to entice away” clients of the company or persons who in the two years prior to completion had been a client of the company. The Judge held this to be enforceable and Mr Maidstone’s blatant disregard for it in breach. In fact the judge called him “clever, devious and arrogant” and “dishonest”.

In a vendor and purchase scenario, the purpose of the covenant is to protect the goodwill of the company - the courts can therefore take a less restrictive view than they do in employment context as to whether they are enforceable. However, even in an employment context, it is likely the actions of Mr Maidstone’s actions would have amounted to a breach of a suitably drafted (and shorter) non-solicitation covenant.

Intention to solicit

A year after the sale of his business to Baldwins, Mr Maidstone began working for them. A month later (December 2008), he was found to have met ‘secretly’ with partners of another firm of accountants with a view to working for them. Mr Maidstone agreed with them he would receive 20% of all fees charged to new clients introduced by him to the firm. He resigned from Baldwins in October 2009, omitting to disclose his true reasons for leaving. The Judge held that the terms of the agreement reached with the new firm, the crux of the agreement being that Mr Maidstone would be required to “introduce clients” – thus requiring him to ‘do something’, together with the cover-up demonstrated that there was an intention to solicit clients.

Acts of solicitation

The Judge then considered the facts relating to seven clients to establish whether there had been solicitation by Mr Maidstone. Mr Maidstone’s case was the clients had contacted him. However, on the evidence, the Judge found that Mr Maidstone had “actively encouraged” the clients to move and had demonstrated “specific and targeted behaviour”, even if he had not necessarily initiated contact.

Factors that the Judge took into account to reach this decision were:

• Mr Maidstone (not the client) informing the new firm of a client wishing to join;

• arranging meetings with the clients;

• evidence of payment of 20% commission on the clients’ fees;

• Mr Maidstone’s failure to disclose key evidence; and

• Mr Maidstone’s influence in the drafting of the witness statements for the clients that gave evidence.

The case demonstrates that just because the covenantor has not initiated contact, does not mean he escapes the non-solicit rule: the court will look at the evidence in the round and the intention of the parties.

Towry EJ Ltd v Bennett and others

As in Baldwins, the Judge in this case made clear that solicitation does not just mean the employee initiates contact. However, the facts of this case were unusual.

Towry EJ Ltd (“Towry”) was the product of a buy out of Edward Jones Ltd, for whom the seven individuals worked. Edward Jones Ltd was a financial advisory company. It had offices throughout the UK, its target audience being individual investors in local communities. Its appeal, therefore, was that the financial advisor would be a member of the investors’ local community. The appeal to the advisors was the autonomy granted by Edward Jones for them to build their client portfolio from home, without the usual ‘micro management’ from a big company.

Following the buy out by Towry, the business model (and the investment structures for clients) changed. Many advisers of Edward Jones chose not to stay on with Towry, including the seven individuals in this case. Towry’s complaint was, however, that all seven took up employment with a competitor, Raymond James, and solicited clients in breach of their covenants.

Towry’s case for solicitation was based on inferences they drew from the evidence, rather than the evidence itself demonstrating solicitation.

No evidence to support solicitation – ‘inferences’ not enough

The Judge concluded that there was no evidence that supported Towry’s claim of solicitation by any of the seven defendants. The Judge held that the clients had chosen to move their investment to Raymond James in the wake of their respective advisor’s departure from Edward Jones Ltd.

The findings of fact across each scenario for each defendant were essentially the same:

• The defendants understood the effect of the non-solicitation covenant and were careful with what he/she could and could not do/say;

• Raymond James had taken care to advise each defendant on the effect of the covenant during the recruitment process and were alert to the risk of solicitation in the nature of the work; and

• The clients were not satisfied with the client service provided by Towry (including the closure of local offices), nor the investment structure it offered.

However, the Judge found that ultimately, the reason for the clients’ decision to leave was down to the closeness of the relationships between the clients and their advisor. The strong tie of trust, loyalty and confidence was of the upmost important to the clients and was found to be overwhelmingly evident in each of the defendants’ cases.

Practical tips

There are a number of practical points employers can take from Towry:

• The judgment reinforced the importance of good, contemporaneous notes of meetings and calls as evidence of what has really occurred.

• Taking early legal advice and having prepared scripts for recruitment meetings with applicants to make them aware of the effect of the non-solicitation covenant and consequences of breaching it, demonstrated Raymond James’ alertness to the risks and a desire to keep itself separate from any such breaches.

• Other measures such as requiring clients to fill in forms detailing their reasons for moving to Raymond James also assisted in demonstrating their care to prevent solicitation.

As gloomy as it may sound, employers should always work on the basis that their recruitment policies and procedures (or any other policies) may end up under the scrutiny of the court. Raymond James certainly did, and came up smelling of roses.


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