Team moves – Alec Harvey and Richard Nicolle discuss the risks

Team moves in London’s legal market are on the rise, particularly among US law firms establishing new offices or practice groups.

The potential benefits of a team move are not limited to critical mass – the new employer may gain a significant competitive headstart by acquiring a ready-made team, client relationships and increased market credibility.

Even where single partners are targeted, they are frequently asked whether they require support from existing team members and acquiring junior lawyers, who often service the daily needs of clients, can enhance the ability to leverage client relationships.

While many issues in a team move could also arise in an individual hire, the potential to inflict serious and irreparable damage to an employer’s business is exacerbated, inevitably heightening tensions between competitors. Partners involved in the potential hire of colleagues also risk breaching their legal obligations to their existing firm. Further, some employee obligations – particularly fiduciary duties – only arise in a team move context. Team moves therefore inherently involve the risk of dispute – something well worth consideration by prospective employers who risk becoming co-defendants in proceedings.

For brevity, references have been made in this article to ‘employees’, but in most respects the same arguments will apply to partners.

Main Restrictions

Crucial in assessing any legal redress is the employer’s consideration of the obligations and restrictions on employees, during and after termination of their employment:

Express duties

Employment contracts often contain a duty of good faith and fidelity. While entering into competition may breach this duty, unless expressly stated, mere preparatory steps are unlikely to do so. However, employees may have express duties to disclose and/or avoid conflicts of interest, and to always act in their employer’s best interests. The latter may be breached if an employee encourages their colleagues to leave, or fails to inform the existing employer about the potential move.

Employees may also have express confidentiality obligations. Their applicability generally depends on the type of ‘information’ concerned. ‘Information’ is primarily divided into: trade secrets; ‘mere’ confidential information; skill and knowledge; and publicly available information. If, say, an employee takes professional journals that are in the public domain, the employer will not be able to assert any proprietary interest over them. However, if the employee removes precedent documents, these would most likely constitute at least ‘mere’ confidential information, if drafted during the course of employment. To combat uncertainty, employers often include express confidentiality clauses in employment contracts, which apply during employment and sometimes for a period of time thereafter.

In the legal industry, potential hires are often asked to produce detailed business plans. The question can then arise whether inclusion of client details, billings and hourly/recovery rates represent confidential information. The provision of such information breaches a partner’s fiduciary duties and general confidentiality obligations. However, these points are rarely litigated. This may be because firms are both victims and beneficiaries of such practices, thus taking issue could seem hypocritical. Further, it may be difficult to demonstrate actual loss sustained.

Employees should be aware of their restrictive covenants, for example: non-compete; non-solicitation/non-dealing (with clients/customers); and non-poaching of colleagues. The main issue is enforceability, ie whether covenants protect a legitimate business interest and are reasonable. Notice periods and garden leave may also impact on an employee’s ability to participate in a team move.

Implied duties

The most relevant implied obligations are the duty of fidelity, which applies to all employees, and fiduciary duties, which apply to directors and certain senior employees, depending on the nature of their role and responsibilities.

The duty of fidelity includes the duty not to compete or disclose/misuse confidential information and to disclose other employees’ misconduct.

Fiduciary duties are more onerous and provide greater scope for argument that a senior individual in a team move has breached those duties. For example, actively helping to poach a team could lead to a conflict of interest, which should be disclosed. Fiduciaries are also under a duty to disclose their own misconduct. While they will not be in breach by simply failing to disclose their intention to seek alternative employment, any actions which breach the duty of fidelity may increase the risk faced by fiduciaries failing to disclose their own actions.

If a senior employee continues building client relationships at their existing employer and fails to disclose their interest in the new employer, the existing employer may have a damages claim for losses arising from the move and an account of profits for the benefit gained by the new employer. A senior employee will, almost inevitably, be in breach of contract if they discuss team moves with a competitor and the new employer could be liable for inducing a breach of contract and/or for conspiracy.

Instructing a Recruitment Consultant

Instructing a recruitment consultant can be invaluable in creating a barrier from allegations of inducement, particularly if the instruction is well-framed. Key points to consider:

1. Avoid instructing the recruiter to obtain confidential information or to hire the desired team – use a broader description to identify them.
2. Avoid language which might suggest the instruction is to encourage the prospective employee to breach their contractual and/or implied fiduciary duties.
3. Remind employees of likely duties and anticipate potential liabilities.
4. Ensure team members are approached separately by the recruiter.
5. Avoid internal written communication about the move – in the event of a dispute, any communications may be admissible as evidence.

Failing to adopt a well-structured approach to team moves is risky. Team members may breach their duties of fidelity and fiduciary duties, and the new employer could be liable for inducing a breach of contract or conspiracy to injure the existing employer’s business.

Seeking both practical and legal advice is key to ensuring a good understanding of the legal positioning at each stage and managing negotiations to secure a smoothly executed team move.