HSF tells court clients ‘vulnerable’ following partner defection
On day one of the legal contest between HSF and the eight partners who quit to establish the Australian arm of competitor White & Case, Peter Brereton SC has suggested that restraining the defectors is critical to the firm’s business.
Mr Brereton, who is counsel representing the entire roll call of HSF Australia’s 166 partners and the HSF Global LLP, indicated that ties with two HSF clients had become “vulnerable” since the eight-partner resignation in September last year.
Mr Brereton later told the NSW Supreme Court, “If there is no injunction, they’re pitching for work, operating actively in the market place – that’s the very thing that’s prospectively damaging to my client in terms of goodwill, maintaining staff and confidence.”
While the vulnerable clients were not identified in oral submissions, the court heard that for the sake of preserving certain key relationships, six of the eight former partners were retained on a consultancy basis to provide ongoing services to HSF clients. This arrangement is understood to continue into the proposed restrictive period that HSF is asking the court to enforce.
From 2 March to 1 September 2017, HSF wants the court to enforce restraint provisions, which it says the ex-partners are bound to as per two partnership agreements with HSF Australia and the Global LLP.
The specific restraint provisions and definitions attached to them mean that the ex-HSF squad, whose combined practice value is worth an estimated $30 million, cannot set up White & Case’s new Australian offices in Sydney and Melbourne as originally planned.
In effect, HSF’s partnership restraints prevent the White & Case hires from engaging with the rival firm no less than one year after their formal resignation from the HSF partnership.
Mr Brereton added that it was “foolish” to suggest that the former partners, each highly experienced and sophisticated commercial lawyers, had not envisaged they might be held to their HSF partnership contract and its 12-month restrictive period.
He went on to describe the imposition of a six-month restriction period, on top of the six-month restraint served post-resignation from the HSF partnership, as nothing more than a long holiday for the eight lawyers subject to the action.
“After taking the rewards of partnership, they complain about the price to pay for the benefits of the partnership,” Mr Brereton told the court on Monday.
“None of them are destitute or anything close to it. They have all been well remunerated as partners of HSF, both prior to and since they have given notice of their retirement,” Mr Brereton said.
Barrister Bret Walker SC hit back, arguing that existing restraint of trade policy under the law sat against a framework that he described as a “web of undertakings”. He said that parties are often moved to resolve circumstances like this one by entering into other contractual undertakings.
“The law does not countenance any greater restraint on trade, and especially competitive conduct, than is appropriate and adequate to protect legitimate interests,” Mr Walker said.
“It is impossible to proceed by regarding the stifling of competition as a legitimate interest, nor for that matter the protection of former employer or firm from competition,” he said.
Court documents show that the ex-HSF partners had proposed to enter into undertakings to overcome some of the partnership agreement provisions, but that those undertakings had so far been rejected as unsatisfactory by HSF. Mr Walker indicated that all eight ex-partners intend to continue to uphold those undertakings in any case.
The barrister went on to argue that HSF’s position on restraint of trade had dangerously strayed into territory with an instrumentalist view that saw restraint provisions used a deterrent to make others think twice about themselves joining another firm. Mr Walker suggested that the utility of restraint provisions against partners of big law firms in this way was wrong.
In the wake of an eight-partner exodus to White & Case, HSF Australia argued that provision for a six-month restraint of trade was essential for the firm to clear the air and preserve key client relationships.
Earlier in the day, Mr Brereton said the partners' co-ordinated and en masse defection exposed the firm's business to greater risk.
“Herbert Smith Freehills has had very goodwill before any of these people were partners and as a consequence of things done by other people,” he said of top lawyers Andrew Clark, Joanne Draper, Jared Muller, Tim Power, Joel Rennie, Alan Rosengarten, Josh Sgro and Brendan Quinn.
“[The provisions] prevent the departing partners, the ex-HSF partners, from what is effectively expropriating the goodwill of HSF for nothing,” Mr Brereton said.
Mr Brereton told the court at the Monday hearing that by banning the former partners from working for White & Case for another six months, the firm would have adequate time to take measures to protect itself from possible a fallout.
“It is reasonable to restrict outgoing partners’ dealings with the marketplace for a short period to provide some clear air, to protect the name and standing of the firm,” Mr Brereton said.
Mr Walker, counsel for the ex-partners, went on to tell the court that HSF’s ability to find partners to replace the outgoing ones was akin to the speed with which a shark replaces its teeth. This rapid talent replacement, he argued, proved that HSF’s general restraint policies intended to caution others contemplating the same rather than for other legitimate restraint purposes.
“There is no evidence whereby HSF cry ‘stinking fish’ and ‘woe is us’ – we don’t have the people to support our clients, they say nothing of the kind,” Mr Walker said.
“It’s not about trouble in the hen house as it were, it’s about anti-poaching. The question is: do the embargo stipulations go beyond the necessary and accepted anti-poaching rules?”
HSF Australia claim that in the wake of the eight-partner resignation, 34 of the firm’s lawyers plus additional support staff followed suit. The firm has also raised possible disruption to its workforce as one of the legitimate interests that require protection under the restraint provisions.
Court documents indicate that the new White & Case hires intend to commence work as partners with their new global firm from March this year, subject to the court’s ruling.
The interlocutory hearing took place on 27-28 February before NSW Supreme Court Justice Robert McDougall. The judge has reserved judgment on the matter for a later date.