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Case sheds further light on poaching clients

Case sheds further light on poaching clients

Columnist
— 1 minute read
Can departing employees contact their employer's clients? If so, is there a limit to what they can say to those clients?
A key staff member resigns. Many of your clients have close and important connections to her. Can departing employees contact their employer's clients? If so, is there a limit to what they can say to those clients? What do you need to do to protect your goodwill and client base from poaching by former employees?

The Federal Court's decision in AMP Services Ltd v Manning (2006) held that when Angela Manning left her employer, Arrive Pty Ltd, and contacted her clients to tell them she was leaving, she was breaching her duty to her employer. This was because even though she had resigned, she was technically still an employee at the time she spoke to them. Manning was a top performer for Arrive Wealth Management Ltd (a member of the AMP group). She had a lengthy written employment agreement with the employer. On January 20, 2004, she resigned from Arrive to join Goldman Sachs JBWere (GSJBW).

She claimed senior management agreed to her resignation having immediate effect, whereas Arrive insisted she had been placed on garden leave for the length of her four-week notice period. The fact the parties were unclear on this point is an indictment of their respective handling of the situation. The terms of her departure should have been crystal clear.

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Anyway, straight after her resignation (that is, during the four-week notice period in which Arrive maintained she was still an employee) she started to contact clients and advise of her departure. Garden leave is where the employer requires the employee to serve out their notice period at home. They are still technically employed and hence subject to all the usual constraints and duties of an employee, but they do not have access to files and clients. If their contract does not particularly allow garden leave, the removal of an employee from their daily duties could constitute constructive dismissal by the employer. This ends the employment immediately regardless of any notice period that might apply to the resignation.

The judge held that Manning had remained an employee of Arrive for four weeks after her resignation. She told one client she had resigned from Arrive and was going to another company, GSJBW (an Arrive competitor). Although she could not solicit their business because of contractual obligations in her Arrive agreement, she gave them her contact number. She said someone from Arrive would be in touch with them to talk about their future business.

The principles relating to this area are:

Former employees are free to compete but they are not free to remove their employer's property, for example, client lists, the contract of employment contains an implied promise of fidelity, which is broken if the employee takes preliminary steps to establish a competing business, such as by canvassing the employer's customers to bring their business over to the new enterprise, while still employed by the employer, and an employee may incur fiduciary duties relating to the protection of interests of the employer, which can be protected through equity court orders.

Here is the list of duties every employee owes to their employer regardless of whether they are set out in a written agreement, although they can be expressly cut out by the employment agreement: the duty to act in the best interests of the employer, the duty to protect the employer's business, the duty not to favour the worker's interests over those of the employer, the duty not to entice business away from the employer, the duty to act in respect of other employees in the best interests of the employer, and the duty not to entice employees away from the employer.

In Manning's case, the Federal Court held that: merely advising a client that the employee had resigned would not breach any duty, and informing a client where the employee was going would not breach any duty.

But the court also held that instead of only contacting her longstanding clients out of courtesy to tell them something they truly needed to know, Manning "approached clients to entice them to deal with her once she went to GSJBW" and her calls to clients were more than mere "courtesy" calls to notify them she would no longer be handling their affairs.

The result was a victory for Arrive, the employer, who got judgment but only for one month's profits in Manning's case, because, the judge said, the clients would have gone with Manning anyway. The decision is being appealed by both parties. AMP is claiming the judge erred in just about every decision he made during the case. But appeals are like that; barristers generally appeal everything and anything they possibly can. Remember that you can only appeal on matters of law, so any decisions the trial judge, Justice Ray Finkelstein, made on matters of fact are not able to be appealed. The appeal on the issue of whether the clients would have gone anyway will be particularly interesting; not only by setting the measure of damages for these types of cases in the future, but also to see whether the learned appeals court judges accept the strength of the bond between client and individual adviser as opposed to the bond between client and financial services company. Do clients use and stay with AMP because of AMP's perceived strength and expertise or because they like their particular AMP adviser?

Apparently Manning is also appealing. Because she was held liable, even if only for a very small amount of money in contrast to the huge amount originally claimed by AMP, she is required to pay AMP's legal costs, which no doubt are substantial. She has appealed on the grounds she should not have to do so.

The moral of this story, regardless of the outcome, is that well-drafted employment agreements entered at the time the employee joins the business and good quality legal advice at the time of resignations are an investment for the respective parties, not a cost, because of the massive litigation expenses they can save in the long run.

 

Case sheds further light on poaching clients
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