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An Agencycalleden Fuse8 Feature

are restrictive covenants worth the paper they’re printed on?

By The Drum | Administrator

August 3, 2007 | 7 min read

News Analysis

For companies operating in a tight geographical market, where local competition is intense and where the sector is crowded, losing members of staff to a rival can often result in the loss of that person’s established client relationships and contact portfolio.

The recent departure of four key staff from An Agency Called England to Leeds competitors Fuse 8 has resulted in an ongoing corrosive dispute, now being conducted through the High Court that remains unresolved.

Any PR or media marketing company would be concerned to lose four personnel to a competitor, and a prudent legal adviser would recommend that a restrictive covenant be put in place at the outset when hiring staff. But the current circumstances between An Agency Called England and Fuse 8 highlight an almost insoluble difficulty facing any companies that operate in a thriving, but compact, business environment. An injunction may prevent an employee working, but legal disputes can escalate exponentially, and if the matter goes to a hearing, barristers fees can bring the bill to a quarter of a million pounds after only a few days. There has to be a better way.

A typical restrictive covenant would prevent an employee working within ten miles of his former company. How practical is that in a city such as Leeds, Liverpool or indeed any UK business city? There may be plenty of congenial towns within a ten mile radius, but you and your people need to be in the hub. Such a contract may prevent hairdressers putting each other out of business, but in the creative industries – where personnel, their expertise and their established relationships are inextricably bound together – companies may be caught between the proverbial rock and hard place, with the uncomfortable reality that perhaps the best solution to this thorniest of business problems, may in fact be that time honoured handshake and gentlemen’s agreement.

Fuse 8 and An Agency Called England have found themselves in circumstances which no doubt neither of them would have chosen. In theory, an agreement signed by new staff can prevent them taking their contacts and expertise with them when they go, but that can sometimes be the contractual equivalent of throwing your toys out of the pram, rather than a realistic solution.

“My attitude has always been, if you can’t look after your staff, they are going to leave, and if you can’t look after your customers, they are going to leave,” said a Fuse 8 insider.

“If someone is going to leave and take a customer with them, you can’t put shackles around a customer’s ankles and say they can’t leave. The only restrictive covenants we have put on people are standard three month arrangements, where you have that time to put someone in place to take over that relationship and manage it properly.”

Other than that, they argue, if your client prefers to work with someone else, in practical terms, there may be very little point in trying to prevent it.

“You have to reflect on yourself as a company. If you can’t provide what an individual needs, people move on.”

An unavoidable result of enforcing a restrictive covenant is likely to be, first of all, the potential souring of a long established client relationship, and thereafter expensive litigation if the leaving party does not accept the restriction, which could lead to injunctions, court hearings and barrister’s fees that could run into six figures very quickly.

“You tell me the common sense in that. You create a situation which is not conducive to a productive environment. Does this really give anybody any benefits? It leaves a bad taste in the clients’ mouths,” the Fuison 8 insider continues.

Chris Booth, national head of employment at Pinsent Masons in Leeds, says that the only way to protect the interests of all parties is to ensure post employment covenants are put in place at the start of the employment relationship: “Any service sector organisation that invests in its people -and its people are its product- should view restrictive covenants for its senior staff as essential,” he says.

“If your people have the ability to move from your organisation to a competitor, or if they were setting up on their own in the same line of business, then, if you don’t have a restrictive covenant, you are very limited indeed in what you can do when one of those individuals leaves, to protect your business interests.”

Yet, when you welcome new, desired staff to your firm at the beginning of a bright and promising relationship, it may not seem like the most appropriate time to discuss restricting their future employment in the event that they leave you. But not all relationships remain sweet. Booth says that the purpose of a restrictive covenant is simply to plan for the contingency that you do not want, however painful the prospect may appear at first. Without one, your options are limited.

“If you don’t have express restrictive covenants, you have to fall back on to the general law of confidentiality, which is very limited in scope. It means as an ex-employee, you will not use or disclose the confidential information of your former employer to their disadvantage. That duty not to disclose confidential information provides you with very, very limited protection.”

Some companies do not have a great deal of faith in the effectiveness of such agreements, and have claimed that they are often not worth the paper they are written on. This can be true, says Booth, if the agreement has been poorly drafted. But there is no excuse for watching your horse bolt before securing the barn door. “Have your staff sign an agreement when they join your firm,” is his advice.

“If you don’t think about it at the outset, it is too late. At least you have the option to seek an injunction to restrain them. It doesn’t necessarily mean you will seek an injunction, but unless you have an express restrictive covenant, and it is drafted well, then you don’t even have that option in the first place.”

However, even if a company has its employees secured to a well-drafted agreement, the thorny question of enforcing that agreement will come up all too often if your business in based in a community where the employment situation resembles musical chairs.

Over at Fuse 8, and no doubt at An Agency Called England, it is clear that the practicalities of operating a restrictive employment covenant are not only hard to enforce, but may not represent a favourable solution in a tight business community. Fusion 8’s spokesman said that the ideal solution, whilst a remnant from the 18th century, may work just as well in today’s environment.

“I just wish the guy had picked the phone up at the very beginning and asked if we could have a gentlemen’s agreement,” he said. Prevention may be better than cure.

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