It’s that time of year again when many of us think about the things we can change to make our lives better: exercising a bit more, eating and drinking a little less, or pursuing a new interest are all common goals which can hopefully be achieved with sufficient dedication. Some will want to go further, though, and will be thinking of making the move to a different firm, with expectations of higher pay, greater job satisfaction, or a better work-life balance.
If you fall into the latter category then it’s a good idea to check your restrictive covenants, so you can get a feel for how challenging the move might be. Many partners who are looking to change firms are surprised by the broad reach of partners’ restrictive covenants, especially when compared with the restrictions normally imposed on employees – and this is the case whether it is a traditional partnership (under the Partnership Act 1890) where the individual is truly a “partner”, or a limited liability partnership (“LLP”) where individuals are given the title of “partner” but in fact have the legal status of a “member”. In this alert, we will use the term “partner” for both, but where an individual is a “salaried partner” (i.e. he or she is paid a salary rather than a share of the firm’s profits), then, generally speaking, he or she ought to have an employment contract and be treated as an employee for the purposes of any restrictive covenants.
Most firms include post-termination restrictive covenants in their partnership and LLP agreements, but if they haven’t been drafted carefully or are used inappropriately, they could be unenforceable.
The basic starting position is that restrictive covenants are void on grounds of public policy as they are in restraint of trade, but the law will allow them provided:
- They are necessary to protect one or more of the firm’s “legitimate business interests”, which normally means its trade secrets or confidential information, its client or supplier connections, or the stability of its workforce; and
- They go no further than is reasonably necessary between the parties to protect those interests.
It’s a common misconception that restrictive covenants can be used merely to prevent competition – they can’t, as that’s not a legitimate business interest, but in some cases the courts recognise that the only way a business can effectively protect its legitimate interests is to stop the individual who leaves from working in competition with the business for a limited period of time and/or within a defined geographic area. This type of covenant is generally known as a “non-compete” restriction, and such a covenant may be permitted where less onerous restrictions (such as those which prohibit the misuse of trade secrets and confidential information, and prevent the former partner from soliciting or dealing with particular clients for a limited period) will be insufficient as they cannot be policed effectively for some reason. Some firms take this a step further and also name specific major competitors in the restriction.
Garden leave also needs to be considered, as many firms will exercise their right in the partnership agreement to restrict a departing partner’s activities during their notice period (e.g. by preventing them from having contact with certain clients, or from working at all). Although time spent on garden leave might expressly be set off against the duration of the partner’s restrictive covenants, this is not always the case, and it could result in the partner having a considerable aggregate period during which they’re unable to work as normal.
While the lack of an enforceable “non-compete” restriction will make it easier for a partner to move between firms, the common restrictions against soliciting and/or dealing with clients could still present a sizeable obstacle.
Where such restrictions are placed on an employee then, ideally, they should only relate to clients with whom the employee had material contact in the course of working for the firm during a limited period before leaving, or about whom he or she had confidential information. If the restrictions attempt to cover all of the firm’s clients, regardless of the employee’s previous dealings with them, then they’re likely to be too wide and therefore unenforceable.
However, the Courts have developed a different approach to equity partners in a firm, underpinned by the Privy Council’s decision in Bridge v Deacons [1984] AC 705. Mr Bridge was an equity partner in Deacons, a law firm in Hong Kong. He was head of the IP and Trade Mark department, which dealt with about 10% of the firm’s clients and generated about 4.5% of its turnover. He had no dealings with, and little exposure to, clients of the firm’s other departments.
The Deacons partnership agreement contained a restrictive covenant which prevented Mr Bridge from acting as a solicitor in Hong Kong for five years for any client of the firm or any person who had been a client of the firm during the three years before he left – although this did not apply if he went to work in-house or for the government. The restriction was not confined just to clients with whom Mr Bridge had dealt while at Deacons. Notwithstanding this restrictive covenant, Mr Bridge left to set up his own practice and began acting for former clients of Deacons. Deacons applied successfully for an injunction to restrain him from doing so.
The arguments which Mr Bridge used to oppose the injunction included the following:
- The scope of the restrictive covenant was too wide, as it prevented him from acting for 90% of the firm’s clients with whom he had had no connection or dealings.
- The five year duration of the covenant was too long.
The Privy Council decided that the restrictive covenant was reasonable and therefore enforceable. In its view:
- Although divided along department lines, Deacons was a single practice in which all of the partners had an interest, owned all of the assets and shared the profits and losses according to their respective profit-sharing ratios.
- The firm was entitled to protect its legitimate interests by imposing a restrictive covenant on outgoing partners and, having regard to the value of the firm’s business and Mr Bridge’s position as an equity partner, the scope and duration of the covenant were not unreasonable.
- Every partner was bound by the restrictive covenant and benefited from it in relation to the activities of his fellow partners.
- Mr Bridge had had the benefit of the firm’s goodwill while he had been a partner, and the firm now wished to protect it. This protection was in the public interest as it secured the continuity of solicitors’ practices, which would be of benefit to clients.
- The partners had equal bargaining power when entering into the partnership agreement and were therefore to be regarded as the best judges of what was reasonable in a commercial bargain. The fact that the partners concerned were lawyers was also a relevant consideration.
Relying on Bridge v Deacons, it is still common nearly 40 year later for partners to be subject to restrictive covenants which apply to all of a firm’s current or recent clients, and which last for up to two years from the point of departure or even longer – covenants which no one would now think of including in an employment contract.
Are such broad restrictions likely to be enforceable, or would a Court now take a very different view? Many of the factors taken into account in Bridge v Deacons will still apply to partners today, but as firms have grown in size and their management structures have evolved, it is harder to say that there is real equality of bargaining power for someone who is joining a firm and is required to adhere to the restrictive covenants in its existing partnership agreement, or that it is reasonable to prevent a departing partner from soliciting or dealing with clients with whom they have never had any connection, just because one of the other several hundred partners in the firm has.
There has been little recent authority in this area, which is no doubt largely due to a reluctance on the part of firms, and the partners involved, to litigate cases involving their clients. Most disputes will be resolved by negotiation and a commercial deal between the parties, especially where the firm seeking to enforce non-dealing restrictions in relation to particular clients wants to retain the clients’ instructions in other practice areas and therefore can’t afford to upset them. Where disputes do develop into legal proceedings, they are often subject to arbitration and will never become public knowledge, unless there is an injunction application before the Court, as happened in Pricewaterhousecoopers LLP v Carmichael [2019] EWHC 824 (Comm). In that case the High Court applied Bridge v Deacons in granting a temporary injunction to uphold a six month non-compete restriction (which followed a garden leave period of over nine months), pending an arbitration hearing.
This is a complex area and any partner contemplating a move should take specialist advice at an early stage – and hopefully by doing so will avoid having more free time than they really wanted in their work-life balance or to pursue new interests.
If you are a partner considering a move and would like to discuss your restrictive covenants or have any questions arising from this alert, please contact David Fisher, who specialises in partnership and employment law.
