High Court grants injunction against stockbroker to enforce 12-month garden leave
High Court grants injunction against stockbroker to enforce 12-month garden leave
Where notice is given to terminate employment, the employer may want to stop the employee from performing their regular duties immediately, but also retain the employee for their notice period. Typically this requires the employee to stay at home, to keep them away from a competitor for as long as possible. This is known as placing the employee on garden leave.
Placing an employee on garden leave may keep the employee out of the marketplace long enough for any information they have to go out of date, or enable the employee's successor to establish themselves, particularly with customers, so as to protect goodwill. If an employer wants to put an employee on garden leave, it is helpful to be able to rely on express contractual provisions. It is likely that a court will only enforce a garden leave provision by way of an injunction if it is used to protect the employer's legitimate interests, such as confidential information.
In the case reported below, the High Court considered whether to grant an injunction to enforce a contractual garden leave clause for the duration of a stockbroker's 12-month notice period.
JM Finn & Co Ltd (JM Finn) is a stockbroking firm. It employed Mr Holliday as an investment adviser in 1999, to work with and assist an independent contractor. As the contractor's assistant, Mr Holliday became increasingly "embedded" with the contractor's clients, with JM Finn's encouragement. He also established his own client relationships. When the contractor retired in 2007, JM Finn paid for the goodwill in respect of his clients.
Mr Holliday's initial employment contract contained a three-month notice provision, a garden leave clause and six-month non-solicitation and non-competition covenants. In 2008, Mr Holliday signed revised terms of employment. Under the revised terms, Mr Holliday's annual salary increased from £40,000 to £120,000, his notice period increased to 12 months and the garden leave clause provided:
"At any time after you or the firm have given notice of termination, the firm may, at its discretion ... require you to attend at or remain away from the place of business of the firm or assign other duties to you or withdraw any powers vested in you".
The revised terms also contained specific non-solicitation covenants that would apply during garden leave.
In April 2013, JM Finn introduced a new operating system, which had teething problems. Mr Holliday objected to using the new software and after three months decided that he could not continue to use it. He received a job offer from another stockbroking firm and resigned in July 2013. JM Finn reminded Mr Holliday that he was obliged to give 12 months' notice. He was placed on garden leave with immediate effect and told not to initiate contact with any client, prospective client or investment manager at the firm.
As soon as Mr Holliday resigned, JM Finn's attention turned to its clients. In an attempt to preserve the firm's relationships with the clients with whom Mr Holliday had worked, JM Finn wrote to those clients, informing them of Mr Holliday's departure and introducing them to a new investment manager.
Before his exit interview with JM Finn, Mr Holliday argued that his client base had largely come from the independent contractor with whom he worked at the start of his employment. He claimed that they were not JM Finn's clients, but his friends and acquaintances. He also asserted that the restrictions imposed on him would keep him out of the marketplace for too long and that his clients would scatter.
In email correspondence, Mr Holliday asked that briefing notes, made by one of JM Finn's employees to keep brokers abreast of market knowledge, be forwarded to him. JM Finn denied him this request as it would have enabled Mr Holliday to compete with JM Finn in the future. Mr Holliday stated that he considered this to be in repudiatory breach of his contract, which he accepted such as to terminate his employment with immediate effect. He informed JM Finn that he would begin employment with his new firm in August 2013.
JM Finn applied for an injunction to enforce the restrictions contained in Mr Holliday's contract. The High Court granted the interim injunction, which, pending trial, prohibited Mr Holliday from:
- Providing information about JM Finn's clients to, or working for, any stockbroking firm.
- Soliciting, approaching, dealing with, accepting custom from and enticing away any of JM Finn's clients or potential clients. These mirrored the express restrictive covenants contained in Mr Holliday's employment contract.
Despite the injunction, Mr Holliday sought to divert a business opportunity from JM Finn to his new employer. He also attempted to undermine JM Finn's attempts to foster new relationships between investment managers and clients.
The High Court heard the full trial.
The High Court (Mrs Justice Simler) found in favour of JM Finn and extended the injunction until the expiry of Mr Holliday's 12-month notice period in July 2014. This was considered to be no more than was reasonably necessary to protect JM Finn's legitimate business interest in connecting with its clients.
The court rejected Mr Holliday's argument that he had been constructively dismissed. This issue is not considered in detail in this report. It turned on whether JM Finn breached the implied term of trust and confidence by not sending Mr Holliday the briefing notes. The court stated that the constructive dismissal argument needed to be considered in the context of a disaffected employee who had already given notice to terminate his employment. The court was concerned that the argument was deployed simply to avoid the notice period and garden leave.
The court then considered whether to extend the injunction. Simler J stated that where an employer has placed an employee on garden leave and seeks an injunction to stop the employee from joining a competitor, the decision to grant an injunction will be influenced by the restraint of trade doctrine. The fact that the employee agreed to the contract is not the only or primary factor. However, Simler J did take account of the fact that Mr Holliday agreed to a mutual 12-month notice period, that he had sought legal advice on it and that he did not argue for a shorter notice period. It was also accompanied by a tripling of his salary. The court considered it relevant that the independent contractor, with whom Mr Holliday had worked for eight years, also agreed to a 12-month restriction.
The court held that garden leave in this context must be justified on similar grounds as a restrictive covenant, because long periods of garden leave are capable of abuse. The employer must therefore prove that the injunction extends no further than is reasonably necessary to protect its legitimate business interest. In this case, the interest was maintaining a connection with clients.
Evidence was given about the range of factors that help an investment manager forge a relationship with a client. Demonstrating integrity, reliability and good performance inevitably takes time. Formal contact with clients occurs only occasionally and forcing early communication may prove counter-productive. Simler J found that to have any prospect of retaining Mr Holliday's client base, JM Finn would need a reasonable period in which to establish relationships between the clients and new investment managers. The court found that there was a strong risk that Mr Holliday would be able to "woo" many of the clients if he was allowed access to them in the short-term future.
The court also considered whether a 12-month injunction would cause disproportionate harm to Mr Holliday. The court found that he would suffer no financial loss, as he was to be paid his full salary and benefits. It was not suggested that he would lose his new job. The court did not believe that his skills would diminish over the course of the notice period, as he would have time to maintain his market knowledge while on garden leave.
Finally, the court rejected Mr Holliday's suggestion that the injunction would cause disadvantage to the clients, because they could use other stockbrokers before transferring to Mr Holliday at the end of his notice period. Indeed, the fact that Mr Holliday believed his clients would remain loyal to him was a reason why JM Finn should have an opportunity to retain those clients. The court also rejected the argument that being placed on garden leave causes reputational damage, as it is a common practice and does not reflect negatively on the employee.
Restraint of trade cases are always highly context-specific. What is a reasonable period of restraint in one case will not always be reasonable in another, even if the two cases might have some ostensible similarities. However, examples of restraints which courts have found to be reasonable are helpful for employment lawyers.
In this case, the High Court found that 12 months was a reasonable period of time for a stockbroking firm to establish itself with its clients. The court repeatedly found the employee to be an unreliable witness. He had also tried to divert a business opportunity from his former employer to his new employer. Although the court did not emphasise that this breached the interim injunction, such behaviour would almost certainly have influenced the judge's decision to find against him. Nevertheless, the case is an example of the High Court finding a long period of garden leave to be reasonable in the circumstances.