In the current economic climate many businesses are braced against 'talent raids' by competitors – and a series of recent decisions by the House of Lords in Mainstream and the High Court in Kynixa has shown that tough post-termination employment restrictions to protect business interests from talent poachers are now much more likely to be upheld by the courts. Smartlaw explains.
Every employee owes a duty of good faith and fidelity to his or her employer. Broadly speaking this means that employees are free to seek new positions with competitors, but they must not take steps, such as soliciting from the client or employee base or promoting a competitor's business, which would breach those broad obligations.
In addition, express post-termination restrictions in an employment contract can head off such competitive attacks even after an individual has left employment, though to be enforceable the restrictions must protect only legitimate business interests (employees and/or clients) and have no wider scope (eg, they should be time-limited) than is necessary so to do.
Where an employee appears to have acted in breach of these obligations, their original employer may have grounds to seek an injunction to prevent any further breach and damages to make good any financial loss. And there may also be grounds to apply for similar remedies against the new employer.
Mainstream
In Mainstream Properties Limited v Young, a Mr de Winter stood accused of inducing breach of contract and Mainstream sought damages. Finance had been provided by de Winter for a property acquisition by a joint venture in which two Mainstream employees were involved. The employees diverted the acquisition opportunity away from Mainstream and into the joint venture. Whilst de Winter knew that the employees were contractually bound to Mainstream, he did not think their actions breached their contractual obligations. Mainstream sued de Winter for damages saying that he had induced the breaches.
The House of Lords held that de Winter was not liable because he had not intended to cause damage to Mainstream's business interests. The decision thus makes clear that an essential element of guilt in this context is that the wrong-doer should specifically intend to interfere with the contract; it is not enough simply to show that he knew of the existence of the contract term which has allegedly been breached.
Kynixa
Kynixa was a joint venture company, established in 2001, with three key employees – Hynes, Preston and Smith – two of whom, Hynes and Preston, were also shareholders. A shareholders agreement sought to prevent the soliciting of employees and clients for up to 12 months after a shareholder had ended his or her "connection" with Kynixa.
In November 2006 Hynes told Kynixa's two founders that he was considering leaving. The three of them continued to discuss Hynes's departure right up until February 2007; when asked what he intended to do next Hynes said that he had no specific plans.
The company's two founders feared that Preston might follow Hynes. She told them that she too was uncertain about her future with the company having recently met a former colleague who had invited her to return to her old employer.
In reality Hynes, Preston and Smith were all negotiating a move to Scion Management Limited, a subsidiary of Paribas and one of Kynixa's competitors. In April and May 2007 the three left. At the end of May 2007 Kynixa discovered that all three were now employed by Scion. Claims were brought for breach of the duty of fidelity which, in the case of Hynes and Preston, included breaches of their duties as shareholders and of the post-termination restrictions contained in the shareholders agreements.
It was a bad day in court for the defendants. Not only did the High Court uphold Kynixa's claims, it also refused the defendants leave to appeal. Hynes was ordered to pay £250,000 as an interim sum towards costs, and Preston £100,000 with costs to be assessed. Kynixa's total costs are estimated to be in the region of £1 million.
All three employees had breached their duty of fidelity because they had deliberately mislead their employer when asked direct questions about what was going on. This was also a breach of the fiduciary duty owed by Hynes and Preston as shareholders. In effect, they all ought to have disclosed, when asked, that negotiations were taking place with Scion.
The court took the following factors into account:
- Hynes and Preston were senior employees;
- Kynixa operated in a small and competitive market;
- Kynixa's client agreements were for fixed terms of up to 2 years; and
- as shareholders, Hynes and Preston would gain financially from their shareholdings.
Against this background the 12-month post-termination restrictions were held by the court to be the only way Kynixa could protect its sensitive business information because non-disclosure of trade secrets could only have been assured by restricting the post-termination activities of the three defendants.
UBS
UBS Wealth Management lost 75 of its employees to Vestra Wealth. On one day alone a Mr Scott, the former employee who established Vestra, hand-delivered 52 letters of resignation. The case thus centred on a UBS claim that four key individuals, led by Scott, had acted as "recruiting sergeants" for Vestra as part of a plan to unlawfully poach staff and clients.
The employees joined UBS as part of its 2004 acquisition of two stockbroking firms, Laing & Cruickshank and Scott, Goodman & Harris. During their time at UBS they were paid large salaries and substantial bonuses. Their UBS contracts of employment contained restrictions seeking to prevent them from trading in competition and from soliciting staff and clients, both during employment and for some time thereafter.
Email evidence for the defence sought to argue that all of the departing employees decided to leave because they shared a raft of concerns about how UBS was handling its wealth management business. But the email correspondence was held by the court to be "unconvincing" and merely repeating "the party line".
UBS obtained an interim 'springboard' injunction, pending full trial, and Vestra was stopped from any further solicitation. The court also noted that:
- ..."loyalty, fidelity and diligence from its staff" can be expected by every business as "part of the bargain for which they [the employees] are paid". In this context, the judge added, and as has long been established by case law, the more senior the employee, the higher the degree of fidelity required; and
- whilst the public interest requires that individuals be allowed to deploy their talents to generate profits and employment for themselves and others, and whilst Mr Scott was entitled to start up his own new business and attract clients and former colleagues to it, this should have been done within the confines of the contractual obligations owed by employees to their current employer.
What can you do?
As an employer seeking to protect yourself against poachers outside the organisation and unscrupulous entrepreneurs within, there's plenty you can do to make the most of this improved legal landscape.
When an employment relationship begins, carefully draft the terms of the employment contract to restrict the activities of the employee during the notice period and after employment has come to an end. These restrictions should preclude soliciting (or doing business with) clients or prospective clients and should also prevent the employee from starting a new business in competition. And remember: it is crucial that post-termination restrictions are tailored to the precise facts of your business and its employment relationships.
The term "confidential Information" must be carefully defined in any employment contract and should go beyond the common law duty because once employment has ended the common law protects only information which can be described as a "trade secret", setting the bar too high for most normal purposes.
Consider requiring employees to work out their notice period on 'gardening leave'. This is an effective way of ensuring that they stay out of the operational arena during the potentially sensitive denouement of their employment relationship with you.
Once an employee has given notice, you have many issues to consider as an employer. Find out as much as possible about his plans and the organisation he is joining. If his contract with you empowers and requires contact with clients whom you now wish to protect, put him on gardening leave. If instead he works out his notice, keep your eyes and ears open for any changes in behaviour. Alarm bells should ring if he starts to include personal contact information (such as a mobile phone number) on business cards and emails. Use of IT systems can be monitored to ensure that he is not downloading client details or other sensitive information for use after he has left.
If the employee's destination is known to you, consider writing to the new employer outlining the employee's existing contractual obligations. Although the Mainstream judgement has made it harder to prove inducement to breach, making this kind of contact will help create a stronger argument that any subsequent breach was deliberately induced because you can show that the new employer was fully aware of the scope of the employee's contractual obligations to you. Any claim of deliberate inducement – for which you may seek injunctive relief or damages or both – would be in addition to action taken against the employee for breach of contract. Unless both the employee and the new employer are targeted you may find yourself with an inadequate remedy, especially if damages are awarded against an employee who cannot afford to pay them.
Even after an employee has left you should continue to monitor their activities, the conduct of the competitor and the effect of the employee's departure on your own business in much the same way as you did during the notice period.
As soon as you become aware of any potential breach of contract, or any action designed to induce a breach, you should act as soon as possible to enforce and restrain – the courts will be more willing to grant protection the earlier you strike. But before you do anything, be certain that those post-termination restrictions are indeed enforceable in the opinion of your legal advisers.
Recruitment
If, on the other hand, you want to recruit a team or individual, you must now tread far more carefully or else risk ending up on the wrong end of an injunction and a claim for damages and costs.
Life has become very difficult for any company seeking to poach a whole team. It must now be able to demonstrate that it was the individual members of the team who were approached, not the team en masse, and that no conspiracy has taken place. No employee from the 'target' organisation, and in particular no team leader or senior employee, should be involved in your recruitment process. Nor, if they themselves intend to work for you, should they assist by providing the names of their team members.
If you are recruiting a team make sure that head-hunters are appointed and check that they do the following:
- make only individual approaches,
- make only individual offers which are not contingent upon any other team members accepting or rejecting an offer which pre-dates their own, and
- deliver resignation letters as soon as offers have been accepted.
Looking at this from the point of view of an individual employee; it is clear that anyone who expresses uncertainty about their plans when asked a straight question by an employer will be in breach of their duty of fidelity if they are being deliberately dishonest about their intentions. Meanwhile, any company seeking to poach an individual should make clear to her that she should not provide misleading answers when her current employer asks her a direct question.
The cases we have highlighted do not alter the position that an employer seeking to rely on post-termination restrictions must be able to show that it is seeking to protect legitimate business interests, and that in so doing it is relying upon restrictions that are reasonable in duration and scope. Nonetheless, it is clear that the courts are now more willing than ever before to assist such employers and to provide injunctive relief.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
