Major survey shows City is divided on the use and enforceability of restrictive covenants

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20 March 2012

A major survey of 116 financial sector-based businesses launched today by international law firm Faegre Baker Daniels LLP looks at the use of restrictive covenants in the financial services sector.

Whilst there are many in the City who might dismiss restrictive covenants, the survey – conducted by specialist legal research consultancy Jures – found that 83% of respondents included them in their employment contracts and four out of ten (42%) supported the view that breaches and alleged breaches do get challenged.

However, and surprisingly, 59% of respondents adopted a blanket – or ‘industry standard’ – approach to restrictive covenants. And only 27% referred to their restrictive covenants as being subject to negotiation or amendment. In other words, most respondents were using an off-the-shelf approach.

The research is timely in light of the recent High Court defeat suffered by wealth management firm Towry in its poaching claim against Raymond James. Towry claimed that Raymond James and seven financial advisers who joined Raymond James had solicited its clients. However, Towry failed to distinguish between the non-solicitation clauses in the seven advisers’ contracts and the stronger non-dealing clauses it had imposed on other advisers. The result was a resounding victory for Raymond James and the advisers.

Alex Denny, partner and head of employment in the London office of Faegre Baker Daniels, which acted for Raymond James and the advisers in the Towry case, said: “Restrictive covenants certainly have their drawbacks. They can be expensive to enforce and, if they are not carefully drafted, will have no legal benefit – as the Raymond James case illustrates.

“That said, the courts have shown themselves increasingly willing to enforce covenants where these are necessary to protect a legitimate business interest of the former employer. Our survey shows that restrictive covenants are here to stay but that companies are becoming increasingly creative in their efforts to hold onto key clients and employees.”

The other main findings of the survey are:

Who owns the client: One of the lessons in the Raymond James case is that a non-solicitation restriction on its own will give little protection to the former employer. If an employer wants to stop its employees from dealing with their clients, it needs to have a non-dealing restriction. This gives rise to wider issues around the enforceability of non-dealing restrictions and their potentially onerous impact on client choice in a regulatory context.

The art of drafting: To protect their interests, employers need to draft their covenants correctly at the outset and keep them under review.

The art of creativity: Restrictive covenants are not the only way to tie in staff. Increasingly, financial services firms are using more creative devices, such as gardening leave clauses and deferred remuneration.

The art of difference: Different approaches are used in different areas of the financial services industry with varying degrees of success. Interviews with leading industry figures reveal insights and tips from the decision-makers.


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