Partnership agreements and employment agreements in use by accounting firms sometimes contain provisions stating that, after leaving the firm, the former partner or employee is restricted from competing with the firm. Provisions of this sort are often unenforceable – especially if they are aimed at impeding normal business competition. However, a well drafted provision can be a barrier to a departing member approaching clients to bring them along.
Agreements that have the effect of restricting an individual’s ability to earn a living are initially viewed under Canadian law as being void as against public policy. However, they are sometimes enforced if the employer can provide justification.
It is not enough for a firm to state that it wants to protect its competitive positon. It must show that it faces unfair competition. Specifically, the firm needs to demonstrate that it has a legitimate proprietary interest in need of protection and that the restrictive covenant is unambiguous and is minimally restrictive in protecting that interest. For accounting firms, the propriety interest at issue usually involves existing clientele being approached by a former partner or employee who has acquired influence over the clients through dealings with them.
A clause that states that a former member of an accounting firm cannot set up a practice in competition with that firm will likely be unenforceable – even if the clause is limited in time, location, and scope of prohibited activity. A court is almost certain to consider this to be too great a restraint on individual’s entitlement to practice in the profession for which he or she has qualified.
A clause that states that a former member cannot accept as a client anyone who was a client of the firm will also probably be unenforceable. An accounting firm does not have a legitimate proprietary interest in its clientele. Clients for professional services are not owned by anyone.
What the firm may be able to do is to place restrictions on a departing member from unfairly soliciting business from existing clients. The firm might justify such restrictions on grounds of proprietary interest, or on the basis of the former member’s fiduciary relationship with the firm. The firm could for instance claim proprietary rights to preclude that person from directly contacting every name on its client list, or from contacting clients whose identity was known to the person because of membership in the firm. It could also claim a breach of trust or fiduciary duty by former members who developed a professional relationship with certain clients as a consequence of their work as a trusted member of the firm.
However, the question of who approaches who is important. A restriction on soliciting clients is not the same thing as a prohibition on accepting clients. Clients’ autonomy to do what they want is practical constraint in these cases. It would be difficult to argue that a client’s choice to retain a relationship with a trusted professional advisor ought not to be respected.
One other tool available to a firm arises if the former member is entitled to a future stream of payments, such as those sometimes due to a retired partner. The courts are much more likely to uphold a clause which states that such payments may be cut off if a former member competes with the firm.
Consideration for Departing Members
If you have a non-solicitation restriction and want to bring clients with you, you should probably get legal advice before proceeding.
If there is no contract restricting solicitation, you should still exercise care. You should avoid offering inducements to clients to break their contract of engagement with the former firm. You should not make use of client information obtained while at the firm unless is was information properly available to you – that is, information that the client intended for you to have access to. Do not bring any client confidential file material with you unless the client has provided a written authorization for you to do so, and even then, take care that you are only bringing client-owned documents and not documents belonging to the firm.
James Lane’s practice includes defence of accountants, engineers and other professionals in civil claims and discipline proceedings as well as insurance defence under other specialty line coverages.