LLPs & Partnerships - Team moves and compensation

Siobhan Bishop: Welcome to the third podcast in our series on LLPs and partnerships. This podcast, with Jonathan Chamberlain, a partner in our Employment, Labour & Equalities team at Gowling WLG, discusses international team moves and getting compensation for the damage caused. These issues will be relevant to all sectors operating business through an LLP structure or partnership as well as individuals who need to understand their rights and obligations if they want to exit such a structure.

So, firstly, Jonathan when someone is looking to leave an LLP or partnership and possibly take their team with them what kind of things are these people concerned about?

Jonathan Chamberlain: There's the kind of things that they are concerned about and the kind of things that they should be concerned about. People approach this with assumptions about what the law is and those assumptions can, in my experience, differ radically from what the law actually is. So, the base set of assumptions that people work with are that the post termination restraints, the so-called restrictive covenants that you find in an LLP deed, don't work; everybody knows that, it's common knowledge. Similarly, it's common knowledge that nobody ever fights these things and they hate it, it's never worth it, nobody wants to wash their dirty laundry in public. And even if that is the case, then there are easy dodges. You can always get round these kind of things because everybody always does, don't they? But by far the biggest single principle of assumed law is that, "I haven't done anything wrong". I am a good person, what I want to do is right and there are always excuses as to why you can take these particular clients, because the company didn't really care about them anyway and I brought them in and they're mine and it's my relationship and I went to school with them and I'm friendly with them on LinkedIn etc., etc., etc. These are my staff and if I'm gone, they won't have any work to do and, of course, they will want to come with me and the company didn't really rate them anyway etc., etc., etc. People make what are frankly excuses for breaches of their legal obligations. I'm not judging whether they are wrong from a moral perspective at all but in terms of what their black and white legal obligations are and their assumptions about what their legal obligations are, there is a frequently a very large gap.

Siobhan: Okay, so if that is what the individual and perhaps the whole team is thinking, what can the business actually do, what is the actual position?

Jonathan: Well, the first point to note is that the assumption that restrictive covenants, post termination restraints, non-competes, don't work is simply wrong. They frequently do work. There are a couple of hurdles that the company has to clear, they are well known. The covenant must protect a legitimate proprietary business interest and it must go no further than is reasonably necessary to do so. Once the company has cleared those hurdles, those legal hurdles, then the gateway is open to them to actually make these things stick. Also, what people who are planning a team move often don't realise is that it is almost certain that any team move is going to involve a breach of duty. Those conversations by the water cooler, those hints, those understandings are almost certainly always a breach of one's duty as a member of the LLP.

Now, it is becoming increasingly more common for wronged LLPs not to rush to Court and then get an injunction, as they always used to do, but instead to try and seek to get compensation. This is a new trend. It always used to be said that you've got a window of opportunity of a few weeks to stop this and, after that, forget it. Well, thanks to changes in the law, development in case law that we will be coming onto later, that's no longer the rule, as it were. LLPs are increasingly willing to use the tools at their disposal and to seek compensation, substantial compensation, when a team leaves and a chunk of business goes with it.

Another thing to bear in mind is that Judges were not born yesterday. So, one of the things that people assume, just to go back to what I was saying a moment ago, is that we won't get caught. We haven't used the company email server, we're speaking in code. Well, even if there's no hard black and white evidence in front of a Judge, then they are willing to put together the picture by drawing inferences from what people's behaviours have been. So, if everybody resigns simultaneously, then a Judge is clearly going to twig that something odd has been happening here, to pick a crude but obvious example. Finally, discovery is a hugely powerful weapon. Disclosure, as the Americans call it. That you have to produce to the Court, in the course of litigation, to the other side, the evidence that will enable them to pin their case on you. Even if you get away with it in the first few weeks and there isn't enough evidence to go and get an injunction, then in the course of the claim for damages, which we spoke about a moment ago and which we are going to come onto later, then you will have to turn over the texts, the emails from the private accounts, the business plans, all the things that you used and put together to make this happen. For substantial LLPs, for a team move to be successful, somebody, somewhere will have had to put together a spreadsheet indicating to the receiving organisation why this was a good deal. That spreadsheet will turn up in the course of litigation. So, companies and LLPs are not powerless or supine in the face of this.

Siobhan: So what other kind of information can be uncovered with discovery and how can that be helpful as well?

Jonathan: Discovery is such a powerful tool and there are some more things that it is worth noting. One can, for example, apply for early discovery. There is a choreography to litigation, a series of stages that one goes through and discovery has its place in that, early on, pre the middle. But it is possible to accelerate that; to say to the Court look we need to see this stuff early. It is possible to do it in the course of or before applying for an injunction, if the need is pressing enough, that does not very often happen but it can be done. Another thing worth noting is that you can apply for discovery against a third party. It's expensive, it's time consuming but again it can be done. So, if someone else holds the records, if someone else has the evidence here, you can go to them and say disgorge the documents. And the final point to come back to, and it is to some extent repeating what I said earlier, discovery is comprehensive. With the proliferation of electronic records, not just documents, but emails, but text, but WhatsApp, but Facebook, but even some people use the communications tools on their games consoles to try and evade detection. All of these things can be caught by the discovery process and all of them can be managed. There are hugely powerful software tools that exist to unearth the information and people are surprised, shocked, horrified at what can come out.

Siobhan: Okay, so that's very sobering. But one of the main questions a business would want to know is how much they can actually get in terms of damages?

Jonathan: Well, how much is, obviously for the lawyer, who can't count, an impossible question to answer. But we can talk about the principles. There are lots of ways, lots of legal routes to financial compensation. I think the principle three are ordinary damages, what are called Wrotham Park damages, that is what I want to concentrate on today, then finally the idea of the account of profits. Ordinary damages were, in this context, frankly, not much practical use. They are the damages that you see in any breach of contract case, an LLP agreement is after all simply a contract, and they are those flowing naturally, arising naturally, from the loss. Now, if a big chunk of business has walked out with the team, then causation establishing that the loss of profits going on for future years can be attributed to this breach, as opposed to a new service offering, dissatisfaction with the existing service offering etc., etc., can be really, really hard to prove. Which is why there used to be so few claims for damages. It was never really worth it. An injunction to stop the team move from happening, to slow it down, was always the preferred method. However, we now have this concept of Wrotham Park damages. Wrotham Park was the name of the case and it is nothing to do with LLPs and it is actually nothing to do with post termination restrictions, restrictive covenants in LLP or even employment contracts. It's actually a case in real estate, it's a land law case, and it's about the breach of a restrictive covenant, interestingly the same terminology, over land and how do you account for damages caused by breach of that restrictive covenant? Effectively what the Court said, and I paraphrase here, is that you can ascribe a capital value to that breach and that value is well how much would the wrongdoer, the person who breached the covenant, have had to pay to the person who has the benefit of that covenant to get a release. In land law, that clearly has a market price. The conceptual leap is that now, in the context of LLP agreements and employment contracts and directors and fiduciary duties, which we will be coming onto in a moment, then it has a market price here too and the Court can work out what that market price is. Now, how that is actually done in practice is, at the moment, very much more an art than a science, there isn't a lot of developed case law in this area. But what we are seeing is that more claims are being brought on this basis and more claims are being settled on this basis. Cash is changing hands.

The final one that I wanted to talk about was the idea of the account of profits. Now a member of an LLP almost certainly owes fiduciary duties to other members of the LLP. Fiduciary duties are, if you like, super duties, over and above those set out in the contract. A director of a company owes fiduciary duties to shareholders, a trustee owes fiduciary duties to beneficiaries. The significance of this term is that, if you can establish if someone is a fiduciary, then a remedy that is available for breach of fiduciary duty is an account of the profits that the fiduciary, the former fiduciary, has made from their breach. Now immediately you can see the significance of that in a team move context. Because if the business goes with the team, as frequently happens, as is frankly the purpose of the team move, then the LLP, the partnership that has lost the team, can say, well you may have got the team, you may have got the clients, I want the money back. I want the profits that you make from that business because they belong to me because of your breach of duty and the breach of duty is almost certainly that somebody inside will have been the ringleader, they will have been the recruiting sergeant and it is their duty to alert their partnership to the fact that a team move may be taking place, that a competitor is after this chunk of business. They are supposed to sound the alarm, they're not supposed to organise it and deliver it on behalf of the competitor. That is why I said right at the start of this that any team move is almost certainly going to involve a breach of duty, it may well be a fiduciary duty and it opens the way to this alternative remedy.

Siobhan: So if there is an international team move how does that affect the equation and what kind of ways can you go about bringing a claim in those circumstances?

Jonathan: International partnerships are becoming more common as firms look to service global clients and they use a variety of structures to do so. So, we see that some accountants and law firms adopt the model of a kind of holding entity, a Swiss Verein, an English LLP and sometimes partners who are members of the local LLPs can also be members of this holding entity, it varies enormously from partnership to partnership, but members will owe duties to the partnership in their home country and, possibly, the holding entity as well and this is where it can get really very, very complicated. The basic LLP agreement should contain a provision as to governing law and that provision, if properly drafted, should say that it governs disputes, not just about the agreement itself, but also those arising in connection with it and that clause should, on the face of it, catch the kind of issues that come up from a team move, the tortious issues, the breach of duty, the inducements of breach of duty, those kinds of things which are not referable back to the black and white of the contract, but are inherent in the duties that an LLP member owes. However, the Rome Convention, which is an EU treaty, governs transnational issues, claims, like this and that is much more complicated and not at all clear. So, although the basic starting point is that, in this commercial context, which an LLP agreement is, then the parties are free to agree the governing law and we are starting off with, say English law, it can develop from there. The basic principle, under the convention, is that the applicable law for torts is the law of the country in which the damage occurs. And that is irrespective of the country in which the event giving rise to the damage occurred or where the indirect consequences of that might be. That's Article 4 of the second Rome Convention for the detailed mind.

Now, if you are looking at a cross border move, then that suggests if it is orchestrated out of London and the Italian partners, who are being poached, have some of their profits paid back through the London partnership, you are talking then about a revenue stream which is generated in Italy but the loss of which is ultimately felt in London. So that is where, one might say, the damage occurs. But you can see a perfectly respectable argument for saying that the damage occurs in Italy. Well, never mind, because on the face of it we've agreed, in the LLP agreement, that the governing law is English law anyway so we don't have to start fighting this under Italian law, whatever that is, and I don't know. But there is another article of the Rome Convention, Article 6, which states that the law applicable to a non contractual obligation arising out of unfair competition, and that's clearly what we're talking about here, shall be the law of the country where the competitive relations or the collective interests of consumers, I love this sort of treaty language, are or are likely to be affected. Well, in our scenario, you can see a very strong argument for saying that that's happening in Italy, because that's where the clients are being hit. And the Explanatory Memorandum to the second Rome Convention talks about impeding competing supplies by enticing away a competitor's staff. Article 6, where this provision is contained, is mandatory, which is to say that you can't contract out of it. So, even though in the English LLP agreement we've said that all this is covered by English law, if this applies, then actually it's Italian law. There's a further complication. Article 6(2), a little sub-clause of this, says that in the situation where the act of unfair competition effects exclusively the interests of a specific competitor, which in the context of a team move it's quite likely to, then we're back on Article 4, which is the one that says it's where the damage occurs and in that one, of course, we're back to the contract, although we are now not back to the contract, possibly, because we've gone through Article 6. Look, you see what I mean, this is horrendously complicated okay and that's just the 'Noddy guide' that I've given you. So, really this stuff is very, very difficult and requires careful thought and planning on both sides.

Siobhan: And finally, what would be your top recommendations to a business facing a team move?

Jonathan: Well, I think I would give some dos and don'ts to both the remaining business and the people leaving and they actually look pretty similar. I would say to everybody take this seriously, take it particularly seriously if you're thinking of moving. Your obligations mean something, they have consequences, those consequences could involve you paying out a lot of money and therefore, and this is my second point, do factor that into your business plan. You're going to need somewhere allowing to account for potential costs and compensation in moving and if that means the numbers no longer make sense, then you may want to think about staying put and finding another solution to whatever your business problem is at that stage. You can easily see how you can flip that advice if you're talking to the company that's facing the total loss of the team. Take this seriously, don't assume that there is nothing you can do, you can do things. But don't then rely on the lawyers and the Courts to rescue your business for you. What I always say to businesses in these circumstances is, look, this is going to cost you whatever it is going to cost you, tens of thousands, hundreds of thousands. Are you going to be able to protect your business more by spending that on me?  I sincerely hope that is the answer, but it frequently isn't. You would do much better by handing over that cash to your marketing director and getting out into the market and protecting and rebuilding your business that way. Don't let anger cloud your judgement at that point.

As to the don'ts I would say to everybody involved, first and foremost don't destroy the evidence. I was speaking earlier in this podcast about discovery and how much information can be found and how damaging it can be and sometimes people hear that and think heck, I must destroy everything involved. If you do that, two things are likely to happen. Firstly the Court will draw adverse inferences, if it suspects that evidence has been destroyed, and they will be more likely to impose remedies on you which may effectively be punishments and sanctions than if you had come clean. And secondly destroying evidence is a contempt of Court and can, ultimately, end up in a jail cell, and I've seen people come very close to that, it's not a hollow threat. Commercially, the most important don't is don't let this affect the clients. If you're losing people, offer the existing clients a positive alternative, don't drag them into this battle, they will hate you for it. And that equally applies to the people who are going and sometimes they make the mistake of thinking that the clients are on their side, that they're their clients and that's the whole rationale of the team move. Very few people are your clients, are yours, belong to you, in the sense that they are willing to become pawns in your chess game of litigation, it almost never works out like that.

Siobhan: Thank you very much Jonathan. As we mentioned at the beginning, this is the third of our series of three podcasts on LLPs and partnerships. The first one covered the employment status of partners and LLP members and how to manage those risks and the second podcast covers the risks and options when someone leaves the partnership or LLP. Both of those other podcasts are available now and you can listen to them on our website and in the meantime we hope you found this podcast useful and if you have any questions on this topic please do not hesitate to contact Jonathan and he would be delighted to help you. Thank you.