For many companies, relationships with their clients are their most precious assets. Retaining clients is far more cost effective than finding new ones, and is essential for establishing a stable cash flow. In the case of a larger company purchasing a smaller one, it is often the smaller business’ client list which is one of the primary items of interest for the purchaser. This was certainly the case when the accounting firm PKF was purchased by a larger accountancy practice, BDO Group, in 2012.
Brian Sully, accountant at large
One of the chartered accountants who worked for PKF was Brian Sully. As part of the PKF/BDO merger, Mr Sully brought his team and most of his 320 clients to BDO. As a condition of the merger, Mr Sully was required to enter into a shareholders’ agreement and an employment agreement with BDO, both of which contained restraints on Mr Sully’s ability to work in competition with BDO after the termination of his employment.
Following the merger, Mr Sully became dissatisfied with his working arrangements at BDO and decided to leave to establish his own private accountancy practice.As required by his BDO employment agreement, he provided BDO with three months’ notice of resignation, with the intention that his employment would end on 19 April 2015.
After tendering his resignation, Mr Sully informed his team that he was leaving to establish his own practice, although he did not discuss with any person in his team the prospect of him employing them in his new practice. He also did not seek to induce, solicit or canvass any of his clients to leave BDO.
Despite this, BDO was concerned to ensure that Mr Sully would not encourage his clients to leave BDO and follow him to his new practice, and two days before Mr Sully was due to finish employment, it commenced proceedings in the Supreme Court of Queensland, seeking an injunction against Mr Sully to ensure he complied with the restraint obligations imposed on him by the shareholders’ agreement and the employment agreement.
Questions for the Court
As a starting point, courts will always consider contractual post- employment restraints on competition to be unenforceable on public policy grounds (under the free market theory that competition should always be encouraged). Post-employment restraints on competition will be only be enforceable to the extent that the restraint is reasonably necessary to protect the legitimate business interests of the former employer. In considering BDO’s application for an injunction against Mr Sully, Justice Flanagan addressed four questions.1
What is BDO’s legitimate interest sought to be protected by the restraints?
The shareholders’ agreement which Mr Sully entered into specified his general commitments to BDO, including the responsibility to protect and maintain the financial viability of BDO. Justice Flanagan found that the legitimate interests of BDO sought to be protected by the restraint clauses included both the goodwill of BDO and BDO’s established client connections.
Are the restraints between the parties reasonable?
Mr Sully had expressly acknowledged the reasonableness of both restraints in both the shareholders’ agreement and in his employment agreement. He had received draft copies of both agreements two months prior to their execution, and had not raised any issues with the duration or scope of the restraints. He had, however, raised concerns about another clause requiring him to retire at age 60. There was no suggestion that the parties were on unequal bargaining terms.
What is a reasonable period of restraint?
The restraints in the shareholders’ agreement ranged from 18 months to six months. The restraints in the employment agreement ranged from 18 months to three months.
Mr Sully’s three month notice period was relevant to determining an appropriate period of restraint. Justice Flanagan noted that the notice period always had the potential to be used to enable other staff to familiarise themselves with an outgoing accountant’s client base before their termination took effect.
The Court found that a period of 12 months would be sufficient to permit BDO’s staff to establish a rapport with all of Mr Sully’s clients. This period took into account the fact that the majority of the work required to be done for Mr Sully’s clients was compliance work which followed an annual cycle, and some clients were contacted less frequently than others.
In Justice Flanagan’s opinion, the fact that Mr Sully’s sub-team would remain employed by BDO was a factor that made the enforcement of a restraint period exceeding 12 months unreasonable. This was especially the case for Mr Sully, as he did very little of the actual accountancy work for his clients and he relied heavily on his team to maintain contact with them.
Should the injunction be granted?
The Court granted BDO an injunction which restrained Mr Sully for a period of 12 months after he left BDO, from:
- engaging in any activity which involves providing accounting services to any person who was a client of BDO at any time within the 24 months prior to his leaving BDO; and
- inducing, soliciting or canvassing, approaching or even accepting any approach from any person who was a client of BDO at any time during the 24 months prior to his leaving BDO, to obtain the custom of that person in a business or activity which is in competition with the accounting services provided by BDO.
Bottom line for employers
Can you rely on restraint clauses in your employment agreements to prevent your former employees from poaching your clients? The answer is a heavily qualified “yes” - it will always be necessary to show that your business has a legitimate interest which requires protection, and that the restraints are reasonable in the circumstances.
At the very least, the following lessons should be heeded from Justice Flanagan’s decision:
- it will be persuasive, although not determinative, if an employee has acknowledged the reasonableness of the restraint clauses;
- the notice of termination period in your employment contract will be relevant in determining the appropriate period of restraint;
- the nature of an employee’s work will have an impact on the reasonableness of the duration of a restraint. As an example, because Mr Sully’s work was annual in nature, it would take at least one annual tax return cycle after Mr Sully had ceased employment for BDO to have any prospect of developing a relationship with a particular client; and
- the amount of client contact which an employee has may be relevant to determining the reasonableness of a restraint. In the case of Mr Sully, because he did little accountancy work himself, the fact that his team remained employed by BDO was a relevant factor.