Restraints aren’t worth the paper they’re written on… and other Urban Myths…
As employment lawyers, we often advise clients about employment restraints. Very often we have to start by correcting some common urban myths…
Urban myth 1 is, “Employment restraints aren’t worth the paper they’re written on.”
Urban myth 2 is, “You can’t protect your business against an ex employee, so don’t waste your time trying.”
The value of a well drafted employment restraint was evident in a recent decision by the Supreme Court of New South Wales in Pryse v Clark [2017] NSWSC 185.
Background
An arm of the global law firm, Herbert Smith Freehills Global LLP and its 165 partners sought an injunction against 8 former partners of the law firm, who had worked in their Sydney office.
The former partners left the law firm to join another global law firm that planned to open a new office in Sydney. The new law firm would directly compete in providing legal services for finance, real estate and projects in Sydney.
Upon first joining the partnership of Herbert Smith Freehills, the former partners had signed a partnership agreements which contained restraint clauses which operated for 6 months from the date of resignation.
The restraints were:
Not to solicit (approach) clients of the law firm;
Not to solicit (approach) employees of the law firm; and
Not to compete against the law firm for a certain period of time in a certain geographic area.
The restraints were carefully worded to protect the interests of the law firm, as you might expect.
The Law of Restraints of Trade
A restraint clause may be unenforceable against the partner/employee because it is against public policy as it restricts competition in the market.
However it may be enforceable by the partnership/employer if it affords no more protection than was reasonably necessary for the legitimate interests of the partnership/employer.
The Case that Failed
The law firm was not granted an interlocutory injunction against its former law firm partners to stop them from competing. But that is not the point we want to make.
The Value of the Restraint Clause
What is telling is that the former law firm partners did not dispute the enforceability of (substantially) the first 2 restraints – that is, the restraints to not solicit clients and employees of the law firm.
The former law firm partners would have realised that the courts can and often will enforce restraints that are appropriately worded.
Protecting Your Business
As far as we can tell, those former partners will be able to join and work for the new law firm, but for the period of the restraint they will not be able to solicit business from the restrained clients or solicit employees of the old law firm to leave.
Herbert Smith Freehills will have valuable time to re-engage with and try to secure its clients without competition from the partners who left.
We expect that opportunity only arose because of well worded restraint clauses that were tailored to its business interests.
What protection does your business have if a key partner, director or employee leaves? A well worded restraint clause can be the difference between keeping and losing the clients that are the heartbeat of your business.
For adice about how to protect the key clients of your business, contact our employment lawyers today.