Be aware of the law if you are setting up on your own

WHETHER or not the recession has come to an end is still up for debate but it is clear that, for some, the phoenix is already rising from the ashes. The latest stats indicate that the number of new applications for FSA authorisations in London over the last quarter equalled the number of cancellations, so the tide may finally be turning. Many of these applications are for boutique investment banks, hedge funds and the like who are hoping to take advantage of the opportunities offered by an improving market by leveraging the relationships they developed while employed in the institutional banking sector.

Others who have escaped the axe and feel that rewards will be harder to come by in the new world order might be looking to move now with their existing team to a smaller, less visible, home. However, those looking to set up in competition with a former employer need to beware of the risks before embarking on this precarious course.

So can you compete with a former employer without risking the sort of costly and high profile litigation currently pending between Tullett Prebon and BGC Partners following the move of a team from one to the other? Team moves are one of the most fraught areas of employment law, as they usually involve numerous interconnected breaches of fiduciary duty by directors, breaches of the duty of good faith by employees, inducing breach of contract by the new firm – not to mention conspiracy.

A team move needs to be carefully planned, usually involving well-briefed headhunters. Employees must ensure that there is no electronic paper trail or other evidence of breaches of obligation, and in particular no emails must be sent on the former employer’s systems, including internet-based email such as Hotmail (which still leaves a footprint). Phone records may be disclosable and even home computers are not safe from the prying eyes of the courts. The only communication you can be certain will not be disclosed is the advice you receive from your solicitor under the rules of legal professional privilege.

Should any evidence exist of a coordinated team move, it may well lead to an injunction or the award of substantial damages, or, worse still, an award of all profits made by the new firm, not to mention the legal costs and stress involved. Clearly it would be devastating to set up a successful business only to find a year down the line you have effectively worked for the benefit of your former employer, now a bitter enemy.

Despite the risks, however, team moves do happen but usually it is the lack of evidence or the lack of will for a legal battle which prevents a case getting to court. You should expect as a minimum a legal shot across the bow in the form of a solicitor’s letter threatening proceedings. For those who do make it safely to a new home, it is not the end of the legal minefield – you will need to consider the extent to which you can take advantage of those contacts with clients developed at significant cost to your former employer. The fact that your client prefers to do business with you does not help you if restrictive covenants, which you probably signed without a second thought some years earlier, prohibit you from doing business with them for a period of six or 12 months.

If the covenants are well drafted and they do not cover too long a period or too wide a geographic area, or areas of work in which you were not involved, then you will need to proceed very carefully if you are to avoid getting involved in costly litigation. Apart from injunctions, you could be liable to compensate your former employer for the losses suffered by the client leaving them. Make sure in particular that you do nothing to solicit the client before the end of your employment as this could also lead to an award of an account of profits.

Whether restrictive covenants are upheld by the courts is dependant on the specifics of the case, including the drafting of the clause, the position of the employee and the overall fairness of the restriction. Even if a covenant is too wide, however, a former employer may threaten litigation as a way of distracting ex-employees from establishing a business by weighing it down with costs at an early stage. It is important not to ignore these threats as the courts don’t look kindly on someone who ignores legal correspondence, with the result that a dispute that should have been resolved ends up consuming court resources. It is worth noting that recent decisions have generally tended to favour the ex-employer.

There are numerous things to worry about when setting up business on your own. Obligations to previous employers are an important consideration which need to be taken seriously even if they do not scupper your plans entirely. Like a game of chess, your first move is all important: before starting to play you will need to know what position you are in, and take advice on any restrictions – so that when you do make your first move it is an educated and carefully planned one.
Richard Linskell is a partner at Speechly Bircham