Viewpoint: Employing a competitor
Wednesday 18 January 1995
The most valuable weapon of the employer in a people business is commercial strategy, with the emphasis strongly on prevention rather than cure. That commercial strategy should comprise three main elements: 5 Structuring the team servicing the client in such a way as to minimise the risk of an all-out defection; 5 Avoiding having a single dominant member as the leader of the team. Unpalatable as it may seem, having a second "prima donna in waiting" eager to assume the mantle of leader may prove your best investment; 5 Listening to the client and making him feel, in so far as is commercially expedient, that his concerns are being addressed. This lesson in particular has been hammered home by the Saatchi affair. The chief executive of Mirror Group Newspapers, a client of Saatchi, has said: "The board of Saatchi ignored the concerns of Mirror Group Newspapers about the departure of Maurice Saatchi ..." Another commentator from within the advertising industry has reported: "The depressing thing for the advertising business is that, once again, clients seem to be considered last of all."
The commercial strategy must, additionally, maximise the possibility of the employer learning of any actual or prospective competitive activity at the earliest opportunity, thus enabling the employer to consolidate the position with his clients. Employees planning to leave and set up in competition invariably cannot resist the temptation of gaining what they regard as a legitimate head start. Typically, employees will copy (or occasionally memorise) confidential information such as client lists, clientrequirements, trade secrets or the company's strategic business plans. In addition, employees who are plotting their escape tend to sound out clients' attitudes to their plans. Employees often think that these preparations are "fair game", largely becaus e, like exceeding the speed limit, "everyone does it". In fact, these activities are not permissible and can provide the employer with just the ammunition he needs to obtain an interlocutory injunction to prevent the former employee from, for example, de aling with a particular client for a limited period even when there is nothing in the employee's contract to stop him for competing after his employment ends. This type of injunction, known as a "Springboard injunction", is designed to stop an employee f rom profiting from his ill-gotten advantage.
A vital backup to the commercial strategy is the legal framework of the employment contract itself. As an absolute minimum, contracts of all team members should include the following: 5 An express statement of the employee's duty of fidelity, including anegative obligation not to injure the employer's business; 5 Clear reporting procedures, including an absolute obligation on the employee to report straightaway any matter that might materially and adversely affect his employer's interests; 5 A prohibition on some or all outside activities; 5 Agreed notice periods, which, following a recent case, should arguably be the same for each team member; 5 A right by the employer to send the employee on "garden leave", ie retain the employee's services but cut off his contact with clients, once notice has been given; 5 A right for the employer to make a payment in lieu of notice; 5 An express confidentiality clause operating both during and after employment; and 5 Individually tailored restrictive covenants torestrict a former employee's ability to deal with and provide a competitive service to clients of the former employer.
Having to resort to enforcing restrictive covenants in a contract can be seen as a defeat on the part of the employer; certainly the employer risks being seen to be "dictating" to the client who he or she can or cannot deal with. However, the existence of such covenants and the threat of their enforcement provides an extremely useful negotiating tool which can lead to a commercial solution, probably the only alternative to what will otherwise be long-term warfare in the Saatchi case.
Finally, employers who have heeded the message above and have taken the trouble to plan their commercial strategy and draw up proper contracts still need to be very careful not to lose the commercial advantage they have gained. If an employer commits a fundamental breach of an employment contract, for example if he wrongfully dismisses the employee or freezes him out by making his life unbearable so that the employee is forced to resign (known as constructive dismissal) then the employer will not be able to rely on the restrictive covenants in the employment contract. In some cases, this can also preclude the employer from obtaining an injunction based on breaches of contract prior to termination. We can expect such arguments to be run by the defendants in the Saatchi litigation.
Kate Brearley is head of the employment and pensions group at the City solicitors Stephenson Harwood and co-author of `Employment Covenants and Confidential Information, Law, Practice and Technique' (Butterworths 1993). Sarah Linton is an assistant solicitor in Stephenson Harwood's Employment Group.
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