England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE CHANI 97/0104/B

(MR JUSTICE HARMAN )

Royal Courts of Justice

Strand

London WC2

Friday, 7 February 1997

B e f o r e:

LORD JUSTICE LEGGATT

LORD JUSTICE POTTER

LORD JUSTICE JUDGE

- - - - - -

WALLACE BOGAN & CO

PLAINTIFF/RESPONDENT

- v -

COVE & ORS

DEFENDANTS/APPELLANTS

- - - - - -

(Computer Aided Transcript of the Palantype Notes of

Smith Bernal Reporting Limited, 180 Fleet Street,

London EC4A 2HD

Tel: 0171 831 3183

Official Shorthand Writers to the Court)

- - - - - -

MR S BLOCH and MR J LEWIS (Instructed by Messrs Baileys, Shaw & Gillett, London SW6 7QL) appeared on behalf of the Appellant

MR M HARTMAN (Instructed by Messrs Wallace Bogan & Co, London E3 3AB) appeared on behalf of the Respondent

- - - - - -

J U D G M E N T

(As approved by the Court )

©Crown Copyright

Friday, 7 February 1997

J U D G M E N T

LORD JUSTICE LEGGATT: The defendants, Sarah Cove, Amanda Dench, Hayder Al-Hassan and Miles & Partners, appeal against the order of Harman J on 21 January 1997. It was in the form of an injunction by the terms of which from 21 January 1997 the defendants and each of them, whether by themselves or by their servants, agents or otherwise were restrained for twelve months, or until after judgment or until further order discharging the injunction (whichever is the sooner) from canvassing or soliciting by letter or by any other means whatsoever those clients who at 24 December 1996 were currently instructing or had not withdrawn instructions in relation to any ongoing matter with the plaintiff, and whose cases had been in the conduct of any of the individual defendants.

The respondent firm is called Wallace Bogan & Company. The firm practises as solicitors at an address in Bow Road in East London. The individual defendants are three solicitors who formerly were employed by the firm. The fourth defendant is a new firm of solicitors which has been set up by the individual defendants, together with two other solicitors. They now practise from an address in Middlesex Street. The injunction restrained the defendants from canvassing or soliciting clients who were clients of the firm that employed them until Christmas Eve when the four weeks' notice which they had previously given expired. They had hitherto been employed by the firm for periods of between two and five years. After they gave their notice, they were sent on what is nowadays sometimes called "garden leave", that is to say, during the period of their notice they remained in the employment of the firm, but they were not required to attend the office. The contracts by which there were respectively employed were unremarkable, save for the total absence of any covenant or other term relating to what duties they might perform after the termination of their employment.

The notice having terminated on Christmas Day, we are told that the new firm came into being on Christmas Day. After that, having scrupulously refrained from communication with any clients of the respondent firm hitherto, the defendants set about sending letters to those clients with whom they had had dealings whilst in the employment of the respondent firm. As I have indicated, there was no express contractual reason why they should not have done so. I will read the body of what we understand to have been a typical letter of 30 December 1996 sent by one of the defendants, Miss Cove, to a lady who presumably had been a client of the respondent firm during Miss Cove's employment by it. She said:

"I am writing to confirm that I have now left Wallace Bogan & Co. and I have set up in practice as of 25 December 1996. My partners are ... [and she sets out their names] all of whom you may be familiar with. We will be specialising in family, housing, crime and mental health law.

I apologise that I was not permitted to inform you in advance of my departure from Wallace Bogan & Co. No discourtesy was intended by this and I hope that you were not unduly inconvenienced.

Wallace Bogan & Co. will continue to practice from 94 Bow Road, London E3 3AB and if you wish your case can continue to be handled by a fee earner there.

You are of course free to instruct any solicitor of your choice. I confirm that I would be happy to act for you if you so wish. If you do wish to transfer your case to Miles & Partners please contact us as soon as possible at the above address."

It should be said that the three employees who left together evidently apprehended that Mr Bogan who, in substance, is the respondent firm, intended in the foreseeable future to run down the business of the firm. The letters that have been sent have resulted, it appears, in many of the clients of the respondent firm leaving that firm and transferring their instructions to the new firm of Miles & Partners.

The judge held that there is a serious issue to be tried, namely whether there is to be implied into a contract of service between a solicitor and a firm of solicitors employing him, an obligation after the contract is terminated not to canvas or solicit active customers of the employing firm with whom it had dealt for a period of time. It is clear from a passage at page 1 of the transcript of his judgment that by "active" clients the judge meant such as had "current and ongoing business with the plaintiff firm as at 24 December 1996." It is common ground that an express covenant to that effect would be enforceable if no wider than is necessary for the protection of the employer's business. But if such a covenant could be implied, it would in general save the need for the employer to prescribe the duration of a covenant or to identify the class of clients concerned, excess in either of which would render the covenant unenforceable; and in this particular case it would save the respondent firm from the consequence of having failed to exact from the appellants on joining the firm an undertaking such as they refused to sign after they had announced their intention to leave.

On reading the papers in this appeal, it seemed to us that it would be helpful if we could dispose of the case on the point of law argued before the judge. Since the facts are agreed, it is suitable for determination without a full trial of the action, especially in view of the fact that the interlocutory injunction granted by the Judge would be likely to have expired before the trial could take place. Such a course will finally determine the entire claim. We have afforded to Mr Hartman on behalf of the respondent firm an opportunity to be heard on this question, while Mr Bloch for the appellants readily assented to the course proposed. We understood Mr Hartman to consent to our dealing with the matter under RSC Ord.14A provided that we were prepared to take account of his submission (as we have) that the appellants, though employees of the respondent firm, are properly to be regarded as having been, as he contends, in a position analogous with that of agents. Since this appeared to be a legal argument in support of Mr Hartman's submissions, it constituted no impediment to our determination under Ord.14A the question of law raised, and we have accordingly taken that course.

The judge cited passages from the speech of Lord Parker of Waddington in Herbert Morris Ltd v. Saxelby [l916] 1 AC 688 at page 710. But they related to the enforceability of express covenants. The judge reflected that solicitors are persons who, unlike ordinary businessmen and unlike many (though not all) professionals, the law regards with what he called "special ferocity", and he referred to the presumption of undue influence. At page 9 of the transcript of his judgment he said:

"The point I am seeking to emphasise is that solicitors are regarded by the law as having a more onerous obligation imposed upon them because of the special position which they occupy in relation to the client. That is a factor which needs to be weighed in considering what terms one should imply into a contract between a solicitor and a firm of solicitors where there is a master and servant relationship between the two."

The judge then cited Faccenda Chicken Ltd v. Fowler [1987] Ch 117 as authority for the proposition that no term was to be implied which imposed upon the defendant in that case an obligation binding upon him after his employment ceased not to use or disclose confidential information short of a trade secret. He said at page 13 that:

"... trade connection, where that is an important factor, is as much capable of protection by the law as trade secrets, properly so-called..."

After referring to the contents of a file maintained by a solicitor for his client as being "confidential in the completest sense", the judge observed that "the name on the file ... is not itself confidential but is a trade connection which has great value to the employer".

The judge concluded at page 15 of the transcript that:

"It seems to me in this case that the damage which would be done to the plaintiff firm by allowing conduct which I confess I think is reprehensible in the sense of going out and canvassing those to whom you were introduced while at your ex-employer's premises and whose connection is his property, is one which [is] more appropriately restrained than leaving it unrestrained.

It seems to me that the damage caused by the soliciting is likely to be far greater in amount, though unquantifiable, than is likely to be caused by preventing canvassing by the defendants."

Mr Hartman appeared to accept as correct the approach indicated by the Faccenda Chicken case. In the pages cited by him in his written argument, Neill LJ set out what he termed "relevant principles of law" derived from "cases dealing with the law of confidence in the context of the relationship between employer and employee". They included these:

(1) At page 135G: "Where the parties are, or have been linked by a contract of employment, the obligations of the employee are to be determined by the contract between him and his employer."

(2) At page 136B: "...except in special circumstances, there is no general restriction on an ex-employee canvassing or doing business with customers of his former employer: Robb v. Green [1895] 2 QB 315 and Wessex Dairies Ltd v. Smith [1935] 2 KB 80."

(3) At page 137D: "... information will only be protected if it can properly be classed as a trade secret or as material which, while not properly to be described as a trade secret, is in all the circumstances of such a highly confidential nature as to require the same protection as a trade secret eo nomine."

The reference in the speech of Lord Parker of Waddington in Herbert Morris Ltd v. Saxelby (supra) at page 709 to a restrictive covenant not being enforced "unless the protection sought is reasonably necessary...to prevent some personal influence over customers being abused in order to entice them away" was to the enforcement of an express covenant.

At considerable length Mr Hartman submitted that the personal influence which a solicitor acquires over his clients arises from the confidentiality in which information is imparted to the solicitor. That results in a relationship different from a mere trade connection, and constitutes an interest in respect of which a solicitor employer is entitled to be protected by an implied term of the contract of employment. When a solicitor ex-employee sends a letter to a client of his former firm, he is making use of a confidential relationship which has arisen out of the solicitor's employment. But in my judgment, the confidential nature of the relationship between a solicitor and client is separate from the question whether canvassing is impliedly to be prohibited after determination of the employment. The confidential nature of the relationship explains why the client may wish to continue dealing with the individual solicitor who has advised him hitherto, and it also explains why the solicitor is peculiarly well equipped to provide such advice, without having to take time to familiarise himself with the client's affairs. The confidential information in the solicitor's file belongs to the client. That is why, when a solicitor's retainer is terminated and his bill has been paid, the file is passed to any new solicitor who is instructed. But that is not in issue. The essential question is: whether the solicitor is entitled to canvass clients of the firm. In so doing, the solicitor is indeed taking advantage of a professional connection with clients. But that connection is no different in principle from the trade connection that, for instance, a milk roundsman may acquire with his employer's customers. Clients and customers alike represent the employers' goodwill which the employers are entitled to protect by an express covenant in reasonable restraint of trade, but which is not protected for them by an implied term if they do not bother to exact an express covenant.

Mr Hartman referred to the test of necessity described by Lord Wilberforce in Liverpool City Council v. Irwin [1979] AC 239 and argued that, since the need for a covenant against canvassing is obvious, it fulfilled that test and so should be implied. But the desirability from the employer's point of view of including such a covenant in the contract of employment falls far short of rendering the covenant necessary in the sense contemplated by Lord Wilberforce at page 265F. The nature of the contract could not conceivably be said implicity to require such a covenant to be read into it. Mr Hartman also argued that, because the relationship between the appellants and the respondent firm was analogous with agency, they should be restrained from making a profit by the use of information gained during the employment. But I do not for my part understand how reliance on a supposed analogy with agency could have the effect of imposing on an ex-employee any covenant not otherwise to be implied in his contract of employment.

Mr Hartman's excursus into cases about confidential information and the relationship of principal and agent is, in my judgment, of no assistance here. This case falls to be determined in accordance with the first principle I have cited from the Faccenda Chicken case by reference to the contract of employment. The term that is to be implied not to canvas the employer's customers during employment is part of the duty of good faith and fidelity. But when the employment ceases so does that duty. The implied duty not to misuse confidential information endures after the employment has ended, but only if it amounts to a trade secret. Otherwise to govern what is to happen after termination of a contract an employer is dependent on express terms. In default, terms could only be implied in the traditional way, that is, by applying the test of the officious bystander or of business efficacy; and neither test, nor any other such as is contemplated by the Liverpool City Council case, would bind an employee when the employment was over. It is axiomatic that the general law affords no protection to an employer against an ex-employee soliciting the employer's customers.

Mr Hartman submits in his written argument that:

"... no firm would put its goodwill at risk by allowing cases to be handled by employees who quickly would be able to exercise personal influence over clients and upon cessation be entitled to solicit those clients."

That precept makes it clear that any sensible firm of solicitors will exact from its employees before the employment begins a restrictive covenant forbidding such solicitation after it has ended. There is in my judgment no warrant for treating solicitors in this context differently from any other professional or trades person. In the eye of the law all are equal. That solicitors have no different expectations of each other is evident from clause 3.15 of the Guide to the Professional Conduct of Solicitors 1996 (published by the Law Society) which explains that:

"It is not in itself misconduct for a solicitor, whether a partner or employee, to write to clients after leaving that firm, inviting their instructions."

Subject to any express covenant he may have made, that allows the ex-employee freedom to compete, and it affords to the clients concerned freedom to choose. As solicitors should know better than anyone, the respondent firm could quite simply have protected itself by express covenant, but it failed to do so.

In my judgment, therefore, the respondent firm has failed to establish the point of law without which its action cannot succeed. In the absence of an express covenant there was no contractual restraint against canvassing or soliciting clients of the respondent firm, and equity does not supply the shortcoming. I would allow the appeal, discharge the injunction, dismiss the action under RSC Ord.14A, and order an inquiry into damages sustained by the appellants by reason of the injunction. But since their damages are likely to have been slight, there is a modest opportunity for the appellants now to show a generosity becoming in solicitors.

LORD JUSTICE POTTER: I agree. The principles applicable to post-employment solicitation by a former employee are well established and of general application. The authorities are mostly to be found in the field of express covenants against solicitation. Since these are, in intention and effect, covenants against competition, they are prima facie in restraint of trade and will therefore will only be upheld if they are reasonable in the interests of the parties: see Petrofina (Great Britain) Limited v. Martin [1966] Ch 146 per Lord Denning MR at 169 and Diplock LJ at 180.

In such a case the burden is on the employer to satisfy the Court that the covenant under challenge is reasonably necessary to protect some proprietary interest of the employer which, in this context, may be broadly categorised under two heads. First, the employer's customer or client connection; second, his trade secrets or confidential information in the nature of a trade secret.

Since the employer plainly has an interest in retaining customers who are current or recent, an express non-solicitation covenant which is limited to customers with whom the ex-employee has had contact in the course of his employment and which is limited in time, is likely to be justifiable under the first head. However, the question of justification will always depend on the precise terms of the covenant, and evidence as to the nature of the business and the extent or reality of the customer connection.

Here the parties did not contract on the basis of an express covenant, and the plaintiffs could only succeed on the basis of an implied covenant. For that purpose, however, it is necessary for a plaintiff employer to do more than demonstrate an interest to protect his customer connection. As stated in the Faccenda Chicken case, except in special circumstances, there is no general restriction on an ex-employee canvassing or doing business with the customers of his former employer. The employer can only succeed on the basis of an implied term if he can show improper use of confidential information tantamount to a trade secret. For the reasons given by Leggatt LJ, there was no such improper use demonstrated in this case.

The position is well expounded in Chitty on Contracts General Principles, at paragraphs 16-085 to 16-086, in particular at page 830. Following the observation that an express covenant can afford wider protection than the general law in a number of respects, it is stated that:

"Covenants can protect an employer not only against use by ex-employees of confidential information but also, in appropriate cases, against the ex-employee drawing away the employer's customer, against which, without more, the general law affords no protection."

That statement seems to me to be correct and it is one of which the plaintiffs fell foul in this case, there being no special or exceptional circumstances enabling them to overcome it.

The judge found such circumstances to exist in the status of the parties, namely that they were, as solicitors, unlike ordinary businessmen and many professionals, "regarded by law as having more onerous obligations imposed upon them than ordinary persons carrying on business because of the special position which they occupy in relation to clients". By that, it is clear he meant that a solution is in a position to have particular influence over the clients with whom he or she deals.

That, in itself, does not seem to me a good reason for putting solicitors into a separate category of employee, to whom more stringent rules in relation to post-employment solicitation should be applied. First, the cases are replete with examples of other trades and professions where a former employee has acquired substantial influence over the former employer's customers or clients. Solicitors are far from unique in that respect. Second, solicitors may be expected to be more, rather than less, aware of the necessity to cater for such matters by express covenant. Third, there is no reason to suppose that the trade connection of a firm of solicitors is more valuable to them than trade connections in many other fields of business or professional activity. Fourth, as Lord Justice Leggatt has indicated, the relevant rule of professional conduct governing the conduct of a solicitor after leaving a firm of which he or she was an employee, affords a clear guide as to the view of solicitors in general that there is no misconduct involved in simply writing to former clients inviting their instructions.

I too would allow the appeal.

LORD JUSTICE JUDGE: I agree with both judgments. The letters sent by the defendants to the clients of the plaintiffs after the termination of their employment advertised the new address at which they were in practice as solicitors and canvassed the business. In the absence of any express condition not otherwise doomed to be struck down as an improper restraint of trade, the basis for the relief sought by the plaintiffs was that the conduct constituted a breach of an implied term in the defendants' contracts of employment with them, alternatively, breach of what was described as a "co-existing fiduciary duty".

Ultimately, the argument on behalf of the plaintiffs stripped to essentials was that, even in the absence of an appropriate express covenant, without the express consent of his former employers, a solicitor leaving his employment with one firm is never entitled to inform any former clients of his departure or new place of practice. Mr Hartman's argument focused on the professional status of a solicitor which he contrasted with a trade or business.

Professional obligations are imposed on solicitors arising from their duties as officers of the Court. However, this case has nothing to do with those well-known obligations. Solicitors also owe a duty of confidentiality to their clients. This, however, is the privilege of the clients. Solicitors are required to comply with the Practice Rules of the profession; that is precisely what these defendants did. The guidance relating to the departure of a solicitor from a firm expressly provides that:

"A solicitor may inform clients that he or she is shortly to leave a firm."

It plainly follows that they may pass on similar information after leaving it. When the course adopted by a solicitor (although damaging to the interests of his former employer) does not conflict with the obligations owed to the Court, or amount to breach of the confidentiality or any other duty owed to an individual client and is not contrary to the rules of the profession, it must be examined on the basis of normal contractual principles relating to the use or misuse of trade secrets and information gathered during the normal course of employment in a business.

The plaintiffs are in truth seeking no more and no less than the protection of their economic or business interests from competition. This litigation has nothing whatsoever to do with the professional status of solicitors. In this context, bearing in mind in particular the suspicion with which covenants in restraint of trade are viewed, the plaintiffs have failed to demonstrate that the contracts of employment included the implied terms or co-existing duties for which they have argued. Therefore, the defendants did not act in breach of any legal obligation owed by them to the plaintiffs.

I agree with the orders proposed by Lord Justice Leggatt.

ORDER: Appeal allowed with costs here and below; injunction discharged; the action stands dismissed under RSC Ord.14A; order for an inquiry into damages; leave to appeal to the House of Lords refused.