Tuesday, December 3, 2013

Reflecting on Garden-Leave and the English Approach

Last month, the Illinois Bar Journal published a feature article I wrote called "Non-Traditional Non-Competes: Designing Non-Competition Agreements to Hold Up in Court."

The stated premise of my article was fairly straightforward and uncontroversial: non-competes are tough to enforce, and attorneys should think creatively about how to make them more reasonable and reflective of an arms-length transaction. I described three basic templates attorneys could consider using to make agreements more enforceable. These templates, which generally adopt a garden-leave approach to enforcement, would all but eliminate any line of attack concerning lack of consideration and undue hardship.

The unstated premise was more nuanced: by paying employees not to compete, employers will avoid more litigation and challenges to enforceability. Since non-compete litigation itself costs money and infrequently results in monetary judgments, the net economic benefit to a garden-leave approach isn't quite as bad as it might seem when first thinking about it.

I started the article with a discussion of the famous case from the English Court of Appeal, Evening Standard v. Henderson, in which a London-area paper successfully prohibited an employee from working for another employer during his garden-leave (or extended notice) period. The other day, I read another English decision, JM Finn & Co. Ltd. v. Holliday, which granted injunctive relief (just as in Henderson) to keep an an investment manager on the sidelines during his one-year notice period after he indicated he was leaving to join another brokerage firm. The decision can be found here.

The mechanics of garden-leave can be somewhat confusing. The general approach is that an employer, like JM Finn, has the ability to enforce what's called a "notice period" when it receives a resignation letter, like Holliday provided to it. At that point, the employer continues paying the employee to sit out and importantly (at least in the United States) the employee continues to owe duties of loyalty and fidelity to his then-employer (even though he is not actively working). As I discuss in my article, it's best that the employer not retain any discretion to conscript the employee into performing any type of work during the notice period.

Garden-leave is prevalent in the financial services sector, but as I point out in my bar journal article, it has received almost no attention in U.S. courts. Maybe this proves my point. If these clauses are in use, shouldn't they result in less litigation (meaning, fewer searchable cases) and reduced attorneys' fees?

No comments:

Post a Comment