Getting Social. How Do Restrictive Covenants Fare?


SocialMediaManagement

It is axiomatic that the only true assets of any accounting firm are its clients and its people.  These relationships are typically protected through a legal agreement between the firm and its people.  Known as restrictive covenants (colloquially, called “non-competes”), under these contracts former partners and employees are prohibited from soliciting or serving firm clients, and soliciting or hiring firm employees.  Restrictive covenants are becoming increasingly more significant in the accounting industry because of the growing mobility of and competition for a scarce workforce; and partner and employee “fallout” following a merger. The ever expanding popularity of social media only contributes to the uncertainty surrounding the enforceability and effectiveness of post-employment restrictions.

Restrictive Covenant Refresher

As already noted, restrictive covenants prohibit the “poaching” of clients and coworkers by departed partners and employees. However, just because these prohibitions exist in an employment agreement does not necessarily make them enforceable.  The enforceability of restrictive covenants differ widely from state to state; but, generally, post-employment restrictions must (i) protect a legitimate business interest of the employer, (ii) be reasonable in scope and duration, (iii) not seriously impair an employee’s ability to practice their profession, (iv) not pose a harm to the public interest, and (v) be supported by adequate consideration.  With this in mind, let’s look at a number of social media related scenarios.

Firm’s Social Media Resources

In most situations, the information (e.g. content, connections, followers, likes, etc.) contained within a firm’s social media accounts will belong to the firm when developed by a partner or employee within the scope of their job responsibilities. However, some personnel create social media account and on-line persona which is largely independent of their firms; such as a blog focused on specific technical topics or fanciful commentary on the profession.  These social media outlets typically have a following of both current and prospective clients.  As a result, there are valuable relationships developed and sustained by the partner or employee, based on their personal expertise or personality, which may be outside of the reach of the firm, and its legitimate and protectable business interests.  The recommended solution to this uncertainty is a partnership or employment agreement that very clearly spells out the rights of the firm and its personnel in the social media space.  Firms should not simply rely on restrictive covenant clauses that were drafted before the explosion of social media.

Social Media Contact After Employment

In the old days, word of mouth about job changes took a lot longer to get around.  Today, most partners and employees update their social media information immediately after they have departed their prior firm. In addition, they retain their connections, including former and potential client contacts.  Generally speaking, former partners and employees can remain connected with or create new connections with former and prospective clients; provided that they do not actively or directly solicit those clients.  The obvious question is what constitutes solicitation.  There is not much question that a statement, such as “I am so happy I finally left the XYZ firm.  I wish all of my former clients and coworkers would join me at the ABC firm!” would be considered a direct solicitation, violating most restrictive covenants.  However, a posting that “Things are great, I love my new coworkers, and ABC is a great firm” is likely to be viewed as a general update and not targeting any former colleagues and clients.  Former partner and employee public social media activity needs to be closely monitored to determine whether it is simply staying connected or active solicitation violating the restrictions.

Social Media Content Marketing & Client Inquiries

An area of considerable uncertainty is social media content marketing. The ever popular LinkedIn post is undoubtedly designed to demonstrate expertise and attract clients; and not to simply stay in touch.  As suggested above, if the former partner/employee recycles content produced for their former firm, there is a potential copyright infringement issue. However, attempts to curtail content marketing on social media may face enforceability challenges as both excessive interference with the right to practice ones profession, and an unreasonable restraint on competition.  Nonetheless, where there is smoke, there is usually fire; and the otherwise innocuous marketing activity may serve as good evidence of a violation.

One of the inevitable results of social media content marketing is the contact initiated by a former client seeking to replace their existing accounting firm.  Because content marketing is “pushed” to a client who then independently inquires about purchasing services, there is a valid argument that the current firm has lost the client, there is no longer a legitimate business interest to protect, and the restrictions on serving the client are lifted.  Well drafted covenants may ease this problem.

Tips for Firms

The single most effective way that firms can increase the enforceability of post-employment restrictions are provisions in their partnership and employment agreements that are carefully crafted and specifically address social media, including the use of firm-owed content.  These provisions should be tightly drawn and not overly restrictive, otherwise they fail.

The importance of strong confidentiality provisions generally, particularly those noting the confidentiality of contact information, cannot be overemphasized. Confidential information is universally recognized as a protectable business interest.

Systematically monitoring a former partner’s and employee’s public social media account(s) in the early months following their departure is key to detecting potential violations. There will be little judicial sympathy when violations occur right under a firm’s nose.

Finally, firms should be cautious when hiring new personnel as they may be taking on someone who is likely to be subject to restrictive covenants from their former firms.

 

This posting also appears in the Texas CPA Society newsletter and CPATrendlines.