Protecting your business: dealing, solicitation and inference

The decision in Towry EJ Limited v Barry Bennett and others has caused a lot of comment in the IFA community, largely because of the way Towry, and Andrew Fisher its chief executive, divides opinion amongst them. However, the real issue is what the case tells us about the ability of employers to protect their business from departing employees.

Briefly, Towry and Edward Jones both operated in the financial services field. In November 2009, Towry bought Edward Jones. Seven employees left Towry to join Raymond James. They had restrictions prohibiting them from soliciting clients. Although Towry had no evidence that the employees had solicited clients, when they were followed by a large number of their clients Towry sued them, arguing that the number of clients following them proved that they had been soliciting in breach of contract. The High Court (Mrs Justice Cox) refused to draw this inference and Towry’s claim failed. The court suggested that Towry underestimated the level of loyalty clients had to their financial advisers.

It is tempting to dismiss this as yet another case showing how hard it is to enforce restrictions, but three points come out of it:

The outcome would have been different if there had been a restriction on dealing with clients; there would then have been no need to prove solicitation, only that that the ex-employees dealt with the clients.

A case can in principle be based entirely on inference, it was just that here the evidence was not strong enough to persuade the court.

Having described as “shrewd” the observation in Paul Goulding QC’s textbook Employee Competition that “[t]he concept of solicitation is not easy to define”, Mrs Justice Cox goes on to conclude that it involves a direct or indirect request, persuasion or encouragement to clients to transfer their business. As lawyers can debate endlessly what is and is not solicitation, this observation, whilst helpful, does not end the debate. If It does not, for example, produce any clear answer to the question whether a Christmas card is solicitation (I fear the answer will still be that it all depends).

In fact, the courts seem increasingly willing to protect a business against former employees, provided the employer has followed a few simple rules:

• Put express restrictions in the contract which are tailored to the particular business.
• Identify what interests you need to protect. The courts will only enforce a restriction which does no more than is reasonably necessary to protect the employer’s legitimate business interests. Legitimate business interests include confidential information, relationships with clients and the “stability of the workforce” (i.e. it’s bad if lots of employees encourage each other to leave).
• Consider the different types of restrictions available: Towry’s problem was that the contracts of employment, which it had inherited from Edward Jones, did not have any provision prohibiting dealings with clients after the employees’ departure. Restrictions available include non-competition, non-solicitation, non-dealing and non-enticement of staff. The court balances the extent to which a restriction impedes the employee’s ability to work against the employer’s need for protection. It is much easier to prove a breach of a non-dealing restriction than a non-solicitation restriction. Conversely, it is much easier to persuade a court to enforce a non-solicitation restriction than a non-competition restriction because it is much less onerous.
• Consider the scope of the restriction: if the interest you are protecting is the relationship an employee has built up with clients in the course of his employment, a restriction which extends to clients with whom he does not have a relationship will be too wide and unenforceable. If confidential information goes out of date after three months a six month non-competition clause will be longer than is necessary to protect it and unenforceable.
• If you suspect you have a problem involve lawyers quickly: if you delay for too long after finding evidence of a breach you will lose the right to obtain an injunction which is usually the only effective remedy; we are talking here about a delay of days, not weeks.

If this all sounds too complicated and legalistic, you could always do what some of the banks do: defer bonuses or other compensation over several years and ensure you have the right not to pay it out if the employee misbehaves before payment is finally made, even if the employee has moved on to new employment in the meantime. Except, of course, those compensation schemes can be really complicated.