Legal

UBS Court Victory to Protect Business May Carry Heavy Cost

Ronnie Fox and Anita Rai, 8 August 2008

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UBS won a notable court victory against UK startup wealth firm Vestra in preventing the new firm from taking its clients. But the victory may come at a heavy price. Legal experts on employment law Ronnie Fox and Anita Rai take a look.

UBS has secured an interim injunction against Vestra Wealth Management, preventing Vestra from approaching UBS staff and employees. The question is will UBS win the war? The full trial is due to begin on 2 October 2008.

Mr Justice Openshaw said that UBS had a formidable case that there was unlawful plan to poach staff and clients from UBS.

Today employment contracts almost invariably contain restrictive covenants. The more senior the individual, the more stringent the restrictive covenants tend to be. They purport to prevent employees leaving their employer and going straight to a competitor, from poaching clients or from soliciting fellow employees. Some go further and seek to prevent an employee from working for former clients or from employing former staff. But are tightly drawn restrictive covenants always enforceable?

The law is easy to state and hard to apply. Restrictive covenants are void as unlawful restraints of trade unless they seek to protect a legitimate business interest and go no further than is reasonable to do so. The onus is on the employer to prove this. Restrictive covenants are usually of a limited duration, commonly 6-12 months although with more senior employees, they can be valid for up to 24 months.

They should be limited by geographical remit, however, and in certain industries such as hedge funds, they are commonly drafted to be effective throughout the world. This seems excessive but dependent upon the facts, these covenants may well be upheld. Non-compete covenants should define the precise nature of the business that is being protected. Non-solicitation covenants should describe the type of customer or client that the employee cannot solicit, and should state that the employee must have had dealings with those customers or clients in the preceding 12 to 24 months before termination.

A more effective covenant to prevent employees taking customers or clients is a “non-dealing” covenant. This type of covenant does not care whether there was enticement or not. It simply states that employees cannot deal with customers or clients of the company that they are leaving, for a period of time following departure.

Non-solicitation of employee clauses tend to state that the departing employee cannot entice or solicit away fellow employees. A possible way around this is for the employee to say that he or she was not enticed to leave, as indeed was the case in the UBS claim. Here, 75 employees left practically at the same time but they tried to suggest a number of different reasons for their departure, such as concerns with technology, management and bureaucracy. Mr Justice Openshaw saw through this and was firmly of the view that it was no coincidence that so many employees were leaving UBS to join Vestra at the same time. He said that it was “inherently unlikely that nearly the whole department would leave UBS en masse without extensive discussions between staff beforehand”.  He also believed that departments within UBS were “deceiving” with plots and plans for many months.

In the UBS case, it is quite apparent that there has been a flagrant breach of the restrictive covenants on the part of the four senior advisers who left UBS to set up Vestra, namely, Duncan Carmichael-Jack, David Guild, Neil Pedley and Paul Pollard.  They were all planning to join Vestra after their gardening leave expired on 11 August 2008.  They may well still do this.

Battles and wars cause collateral damage. The victims in a scrap of this kind are often the clients. High net worth individuals usually seek stability and longstanding relationships with their professional advisors. What will they think of the unseemly fight over their business, and specifically attempts by UBS to prevent them instructing the individuals in whom they have confidence? Why were the Vestra team not able to negotiate terms for their departure in the same way as the Cheviot team? 

If UBS wins at trial, how many clients and employees will they keep in the long run? Perhaps theirs will be a Pyrrhic victory?

* Anita Rai and Ronnie Fox specialize in employment and partnership law at City law firm Fox (www.foxlawyers.com).

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