Judgment in on Australia’s BigLaw partnership fracas
A decision on the legal dispute that saw the spectacular fallout between the entire partnership of Herbert Smith Freehills and eight former members who quit for rival firm White & Case has been handed down.
It was the courtroom showdown that had chins in the legal fraternity wagging for weeks leading up to hearing.
The 166-member stronghold of Herbert Smith Freehills Australia’s partnership was chasing an interlocutory order to restrain eight of its former members from joining rival ranks on 1 March, with the monolithic HSF Global LPP also listed as the 167th plaintiff to proceedings.
Today, judgment day, was the date that the ex-HSF lawyers anticipated they would be free to take on new roles as partners of White & Case Australia. The plan was for the crack team of leading lawyers, who had carved a serious reputation in the finance, real estate and projects practice (FREP) area, to begin rendering services in the Sydney and Melbourne offices of their new firm.
But HSF was not prepared to allow the eight former members, majority of whom had hatched their legal careers in the top-tier nest, to depart for a recognised competitor without committing to the restraints and in accordance to every definition of its Australian Partnership Record and the Global LLP Members’ Agreement.
This morning Justice Robert McDougall handed down his decision about what restraints the lawyers continued to owe to the partnership they had resigned from six months prior.
The NSW Supreme Court judge ruled in favour of HSF, however did not enforce the three contested clauses of the HSF partnership agreement.
“The plaintiffs (HSF) have made good some, but not for the whole of their claims for interlocutory injunctive relief,” Justice McDougall said.
Clauses 13.3-6 and 13.10-11 of the local partnership record were valid and enforceable, the judge found. His decision however also ordered that clauses 13.7-9 of the partnership agreement overreached the principles of restraint of trade, with Justice McDougall remarking that it was difficult to see how they strengthened HSF’s interests other than competition.
HSF’s proposed territorial prohibition preventing the White & Case hires from rendering services in Sydney and Melbourne CBDs formed part of three contested provisions in the HSF partnership agreement that the judge refused to accept.
“The harm to the plaintiffs in refusing to enforce the disputed clauses is unlikely to be of any significance,” Justice McDougall said.
“On the other hand, the harm to the defendants would be significant even though they must have foreseen and accepted the risk of that harm when they made the decision to retire and join White & Case,” he said.
The effect of the court order is that HSF’s restraint of trade provisions for outgoing partners will not be replaced by undertakings that the eight former lawyers have offered to commit to.
HSF had sought an order to uphold and enforce 14 provisions contained in its local and global partnership agreements.
They argued that the restraints, some of which the eight defendants told the court they were prepared to make undertakings for, were entirely valid and reasonable to protect the legitimate interests of HSF Australia and the HSF Global LLP.
During the hearing, former HSF partners Brendan Quinn, Tim Power, Andrew Clark and Josh Sgro sat in the public gallery to the judge’s left. The Melbourne-based lawyers were also present on the first hearing day, entering court room 8C just after a directions hearing had ended.
The other four defendants, Joanne Draper, Jared Muller, Alan Rosengarten and Sydney-based Joel Rennie, were believed not to have sat in on this week’s proceedings.
On other side of the room sat HSF partner Michael Pryse, one of the firm’s star commercial litigators, perched forward and taking careful notes on a blue A4 notepad during the hearing. A number of affidavits tendered by Mr Pryse complemented HSF’s motion to restrain his former partners from rendering legal services in competition with HSF for another six months, until 1 September 2017.
HSF partner Rebecca Maslen-Stannage was also present in the public gallery during the hearing and at the time Justice McDougall delivered his judgment.
At the bar table, a series of verbal smackdowns were levelled by counsel from both sides during the previous days’ courtroom drama.
Senior counsel for HSF, Peter Brereton SC, suggested that the approach adopted by his learned friend was so wrong that his submissions were “infected”.
On Monday Mr Brereton told the court that considering the adequacy of the partnership restraints, in light of the circumstances of the staff exodus from HSF to White & Case, was only useful to the extent that it pinpointed the date the agreement was entered into and the dates of the relevant restraint period.
“That error [of approach] infects all the submissions that my learned friend has advanced in relation to the validity of thee restraints. I will be focusing at the time of entering into these restraints,” Mr Brereton told the court.
Bret Walker, senior counsel for the new White & Case hires, later described the thrust of Mr Brereton’s approach as one that was narrowly “orthodox”. He said that by focusing on the ability of the restraints to protect HSF’s goodwill, workforce stability and confidential business, HSF was avoiding the fact that the former partners were prepared to enter undertakings and abide to what they considered to be reasonable restraints.
Mr Brereton referred to the team of eight defectors as sophisticated commercial lawyers, handsomely paid, and who had brought this bitter unravelling from their former partnership onto themselves.
At various times during the one-and-a-half day hearing, the barrister noted that the eight former partners clearly understood the terms of the partnership they were members of and that it involved benefits as well as responsibilities.
Those responsibilities, Mr Brereton argued, included an understanding that restraints critical to protecting HSF’s business interests would apply to the partners in the event that they choose to retire.
With respect to the applicable time period that those restraint clauses applied, Mr Brereton added that HSF partners in Australia were subject to a much shorter restraint period than their UK counterparts.
“The fact that we have highly sophisticated persons who come together mutually in partnership is highly relevant, it may not be absolutely decisive but we say it is of significant importance,” Mr Brereton told the court on the last day of hearings.
“They have the opportunity together to exploit the goodwill of the firm, none of the [defendants] have paid for the opportunity when they joined the partnership, and so these measures are legitimate to protect the goodwill of the firm,” Mr Brereton said.
On Monday the court heard that six of the eight defendants were being retained by HSF in a consultancy capacity as a measure to stabilise potential negative repercussions with clients in light of their departure.
During the hearing, Justice McDougall put to HSF’s counsel that given the corporate consultancy agreements HSF had offered six of the eight defendants in December, the firm’s considerable faith in the defectors’ professional obligations and ability to respect obligations seemed clear.
Earlier on Tuesday, Justice McDougall also queried Mr Walker, counsel for the ex-HSF partners. The judge posed the question to Mr Walker why in a case where qualified, experienced and highly competent legal practitioners had entered into a partnership agreement, he should not regard them to be the “best judges of their own interests”.
Counsel for the ex-HSF partners told the court that for any lawyer involved in entering such promises to join a law firm partnership, they must ask themselves whether those stipulations were adequate.
But while Mr Walker did concede that such persons would have had an acute awareness of their own self-interests as they entered into terms of a partnership agreement, he argued that did not remove the hallmarks of “overreach” and “excess” evident in the relevant restraints.
Delivering judgment on the interlocutory application, Justice McDougall queried why responsibility should fall to the court to substitute its judgement “looking back”, for the judgement of the lawyers “looking forward”.
The judge was critical of the ex-partners’ arguments about what restraints they had agreed to at the time they joined the HSF partnership.
“The […] proposition that the defendants, having been judges of their best interests is powerful,” Justice McDougall said.
“It could not have been unforeseeable at those times that partners [entered into the partnership agreement] that a group of partners might leave simultaneously for the purpose of setting up shop elsewhere,” he said.
During the hearing counsel for the ex-HSF partners took specific issue with clauses 13.7, 13.8 and 13.9 of the local partnership record, which he said had been framed “to avoid the ugly appearance of what, in substance, they actually conveyed.”
Mr Walker told the court that these three “excessive” provisions in particular suffered the “vice of seeming to be more of a terrible warning of dissatisfying those who wish to leave.”
The barrister characterised the three provisions as having the effect of acting as a blanket provision and failing to align with the spirit of the common law.
“There is nothing stopping those who are dissatisfied from looking for another place to work,” Mr Walker told the court.
He later said, “It goes far too far and an infringement of the common law policy to throw logs in the way of competition for its own sake that is its own selfish return.”
In making an order in favour of HSF, Justice McDougall noted the difficulty and complexity involved in assessing the validity of the restraints in the partnership agreement. With respect to assessing ‘balance of convenience’ as the test applied to the three disputed provisions, the judge said his conclusion was finely balanced.
“The defendants must have been taken to have accepted the risk of enforcement. What they are now seeking to say is that they should not be held to the consequences of their decision,” Justice McDougall said.
“I have difficulty seeing why the court should relieve them of their consequences in what must have been a careful decision,” he said.
While the judge accepted that the order would have a negative financial impact on the eight defectors, he said that the lawyers must have been alive to that when they made their decision to retire, “virtually together”, to take up partnership with White & Case.
“[The partners] could not have rationally assumed that HSF would not act in its interests in seeking to enforce its restraints, especially given the circumstances of their departure,” Justice McDougall said.