JUMPING SHIP? JUST BE CAREFUL THE WATERS ARE CLEAR…

On 1 September 2016 eight partners in the Australian law firm Herbert Smith Freehills (HSF Australia) gave notice of their intention to retire as partners from HSF Australia. Their intention was, after a six month notice period, to become partners in the law firm White & Case and begin rendering services in the Sydney and Melbourne offices of the new firm. White & Case Australia is an arm of an international law firm that HSF Australia considers to be a major competitor both in Australia and globally particularly in respect of finance, real estate and projects work.

On 1 September 2016 eight partners in the Australian law firm Herbert Smith Freehills (HSF Australia) gave notice of their intention to retire as partners from HSF Australia. Their intention was, after a six month notice period, to become partners in the law firm White & Case and begin rendering services in the Sydney and Melbourne offices of the new firm. White & Case Australia is an arm of an international law firm that HSF Australia considers to be a major competitor both in Australia and globally particularly in respect of finance, real estate and projects work.

After their resignation each of the partners were required to work at HSF Australia until their six-month notice period expired, hand over existing clients and refer any new clients to the remaining partners. HSF Australia however also sought interlocutory relief in the Supreme Court of NSW to prevent the partners from working at White & Case for a further six months pursuant to the restraints of trade provisions contained within the partnership agreements which they signed when they joined HSF Australia and HSF Global. HSF Australia submitted that the restraints of trade contained in the partnership agreements protected three legitimate interests, namely, goodwill, confidential information and workforce stability.

The defecting partners disagreed – arguing that the additional six month period forced a career break which would stifle competition in the legal market. After offering undertakings to the Court which in substance tendered compliance with some of the restraints of trade, the partners argued that the restraints of trade should be held void as against public policy because they went further than was necessary to protect the legitimate interests of HSF Australia. While the partners accepted in principle that each of the three interests identified by HSF Australia could be the legitimate subject of protection by restraints of trade, they submitted that HSF Australia’s legitimate interest was protected adequately by non contentious restraints and by the professional obligations imposed on the partners as legal practitioners by virtue of their profession.

In an interlocutory judgment made on 1 March 2017 Justice McDougall ordered injunctive relief partially restraining the partners pursuant to the restraints of trade in their partnership agreements with HSF Australia. His Honour accepted that the enforcement of the restraints of trade would likely have adverse financial consequences on the Partners but found that such consequences and the risk of enforcement of the restraints of trade by HSF Australia would have been apparent to the partners at the time of their simultaneous resignations. His Honour also noted that the parties to the agreement were clearly commercially and legally sophisticated individuals and that the partners must be regarded as having been capable of assessing their own interests in analysing the legal structure whereby their respective rights, interests and obligations were to be governed. Accordingly the court should be very slow to substitute its own commercial judgment for that of the partners. Of more importance was that the restraints of trade would prevent the partners from working in their chosen area of expertise so that when the restraints expired it would take them longer to re-establish themselves, and that for the duration of the restraints their specialist services would be denied to the marketplace.

After noting that the arguments as to the validity of the disputed restraints of trade clauses were at best ‘finely balanced’ and that it was difficult to see how a refusal to enforce the disputed clauses could operate to the disadvantage of HSF Australia, his Honour granted a partial interim injunction allowing the partners to join White & Case, but stopping them from poaching HSF Australia clients and employees. The ultimate outcome remains to be seen when the matter is back in court in July at which time HSF Australia will need to persuade the Court that it legitimately needs the six-month ban to protect its business interests.

Interestingly, his Honour highlighted the need to have anti-poaching provisions in the restraints of trade to prevent ‘restless young lawyers’ at HSF Australia from jumping ship to White & Case and noted that it was entirely foreseeable that some junior lawyers would see the arrival of the ‘new kid on the block’ as an opportunity to advance their careers ‘perhaps more rapidly than they could do at HSF Australia.’

Indeed a recent article in the Australia Financial Review notes that since the resignation of the Partners, 34 lawyers and a number of support staff have also resigned to join White & Case.
No doubt there will be more litigation to come.

If you would like to understand restraints of trade better, please don’t hesitate to contact our employment disputes team – Walter McCallum, Flo Mitchell and Kate Sambrook.