Post termination non-solicitation restrictions frequently appear in contracts of employment. However, employers should be aware that the protection that they afford can be inadequate, particularly where the client may view their close relationship as being with the employee, rather than the employer, as it is necessary in each case to prove that solicitation of the client has taken place. The gap can be fi lled by the imposition of a non-dealing clause, which eliminates the requirement to prove whether the former employee has initiated contact with the client and whether in the circumstances, such contact amounted to solicitation. This distinction was highlighted in the recent judgment in Towry EJ Ltd v Bennett and others  EWHC 224 (QB).
In October 2009, Edward Jones Limited was acquired by the Towry Law Group and its name was changed to Towry EJ Limited. Its business was the provision of fi nancial advice to investors and as part of its strategy the fi nancial advisers were encouraged to develop personal relationships with their clients by networking in the local community. At the time, the contracts of employment germane to the fi nancial advisers who would become Defendants in this litigation contained a fairly standard post termination restrictive covenant that prohibited the direct or indirect solicitation of any business, orders or custom from Towry’s existing clients for a period of 12 months.
Following the acquisition, the employees of the acquired business realised that Towry intended to operate a different strategy that was based upon fewer local offi ces and less emphasis on personal relationships with individual clients. The seven individual Defendants left their employment with Towry and joined the corporate Defendant, Raymond James Investment Services Limited. From February 2010 to July 2011, Towry was concerned to receive a large number of requests from their clients to transfer their business to Raymond James Investment Services Ltd, amounting to a loss that was estimated by it to be worth approximately £6m. It brought a claim in the High Court claiming amongst other things, that the Defendants had breached their post termination restriction whereby they would not solicit clients of Towry for a period of 12 months. There was no issue as to the validity of the clause, which was not exorbitant in its purported ambit. And on the face of it Towry had reasonable cause for complaint having regard to the rapid and substantial shift in business.
The matter was heard by Mrs Justice Cox DBE in June and July 2011 and judgment was handed down on 14th February 2012. Whilst Towry succeeded in resisting an allegation that they had not acted in repudiatory breach of the employment contracts, Towry did not succeed in persuading the Judge that any of the individual Defendants had solicited the large number of clients who had transferred their business to Raymond James Investment Services Ltd.
As a matter of principle, the Court held that a contractual nonsolicitation clause of this kind meant that ex-employees must not directly or indirectly request, persuade or encourage clients of their former employer to transfer their business to their new employer.
It was legitimate for employers to prevent their former employees from exerting infl uence of this kind over their clients. The question in the case before the Court (and by extension, in any case of this kind) was whether Towry demonstrated on all of the evidence that an individual Defendant’s communication with its clients contained a material element of persuasion with a view to gaining the benefi t of the business of those clients. It was noted that the fact that the client was the fi rst to initiate contact was not determinative of whether or not there had been solicitation in respect of that contact.
Distilled, Towry’s case in relation to solicitation was heavily dependent upon the inference that it invited the Court to draw from the fact that nearly 400 clients had put in transfer requests following the Defendants’ move to Raymond James Investment Services Limited. Nevertheless, despite the sheer volume of requests, the inference that could legitimately be drawn from the number of requests was insuffi cient in itself to persuade the Judge that it had discharged the burden of proof. What was required in this case was some cogent proof of how it was that the transfer requests came into being, rather than evidence of the fact that the completion and processing of the transfer requests took place at later meetings between the clients and the Defendants. This evidence as to the earlier causation was not adduced.
The case demonstrates the key distinction between a nonsolicitation and a non-dealing clause. If the individual Defendants had agreed to be bound by a non-dealing clause, they would almost certainly have lost the case as each transfer within the period of the restriction would have been a breach of contract. The Court was understandably reluctant to accept a case based on inference which would have effectively imposed a non-dealing provision on the parties, where none had previously existed.
It’s also a cautionary tale to those seeking to enforce a nonsolicitation clause; they must have proof of the key element of persuasion with a view to gaining the benefi t of the business of its former clients. Cox J did not rule out the possibility of a case based wholly on inference satisfying the burden placed on the employer, but this case demonstrates the dangers of relying on broad inferences, even where the bigger picture might suggest they are well founded.