The 'battle for talent', irrespective of the industry sector, has never been greater. Employers and partnerships want to keep hold of their best people and often strengthen their teams through lateral hires with the best individuals from their competitors. A bleaker economic outlook means that law firm managers are even keener to retain key talent. Individuals who can make a real difference in steering a business through more difficult times will be at a premium.

Experience also shows that, during a slowdown, the partner moves market becomes increasingly active with firms looking to police their equity more stringently. The purpose of this article is to address, in the context of recent legal developments, issues which management need to have mastered regarding the application of restrictive covenants in managing such moves, both in respect of partners as well as employees, including in an international context.

In the legal sector the talent war is particularly acute. Recent years have seen a flurry of new initiatives aimed at retaining associates, including pay increases and the introduction of senior-level associate positions and mentoring initiatives. While these developments may assist in discouraging fee earners from exploring new employment opportunities, restrictive covenants also remain important. Irrespective of the steps that firms may take to retain partners and their staff, it is rare for employees, or these days partners, to stay with the firm that they have trained with throughout their legal career. As law firms operate on an increasingly global footing, whether in terms of their client bases and relationship with foreign law firms or through a physical presence in other jurisdictions, the range of opportunities available to partners and staff also becomes greater.

Law firms therefore need to think carefully about the appropriate length and breadth of their restrictive covenants in order to ensure that they have the best chance of being upheld in such a competitive business environment. There is much mythology in the market concerning the application and enforceability of restrictive covenants against partners and members of limited liability partnerships (LLPs). Notwithstanding some commentators' views, the English courts have consistently found in favour of such covenants in a partnership context, where they are appropriately drawn, and no more than are necessary to protect the legitimate business interests of the partnership or LLP. The challenge is in drafting them so that they will meet these requirements.

Where law firms operate globally, it may be tempting to impose the same restrictions on partners and fee earners working in a range of jurisdictions and choose a foreign law to govern the contract N particularly where the dominant office of the firm is outside the UK. While this approach has obvious administrative advantages, the recent case of Alexandre Duarte v The Black & Decker Corporation, Black & Decker Europe showed, albeit not in a law firm context, that employers and partnerships still need to consider whether such restrictions will be upheld under local laws or they risk their partners and fee earners being free to work for competitors immediately upon the expiry of their notice periods. With, for instance, the increasing presence of US law firms in London, these issues need to be addressed by those starting UK operations, although in a partnership context such restraints are unusual in the US.

Duarte, who was advised by Addleshaw Goddard, had a senior role within Black & Decker Europe. In January 2007, he signed an incentive agreement with The Black & Decker Corporation, which also covered its subsidiaries. This incentive agreement prevented Duarte from accepting employment with a list of competing companies, together with their parents, subsidiaries, affiliates and successors, for a two-year period. These were approximately 500 in number. There was also a two-year non-solicitation of employees and non-employment provision. While, in an employment context, these restrictions would raise concerns under English law, due, among other matters, to their wide geographical scope and two-year duration, the incentive agreement was governed by the laws of Maryland; Maryland being the US state where Black & Decker's head office is situated.

On 4 July last year, Duarte resigned to take up a senior role with a competitor which was caught by the restrictions in the incentive agreement. Duarte applied for a declaration that the restrictions were void and unenforceable, while Black & Decker sought an injunction to enforce the covenants. Although the restrictions were contained in a separate agreement, the High Court treated them as part and parcel of Duarte's employment contract.

The High Court found that the restrictions in the incentive agreement were unenforceable against Duarte. When determining the enforceability of the restrictive covenants, the court considered article 16 of the Rome convention, which provides that the application of a foreign choice of law may be refused if such application would be "manifestly incompatible" with the public policy of the forum. The court found that, if the covenants were valid and enforceable under Maryland law but invalid and unenforceable under English law, Duarte would be entitled to a declaration that the restrictions in the long-term incentive agreement were unenforceable. This was because the restraint of trade doctrine has its foundations in public policy and if the foreign law would give a different result to that under English law, this would be manifestly incompatible with public policy.

In the event, the restrictions were found to be unenforceable against Duarte under both Maryland and English law as they were wider in scope than was reasonably necessary to protect Black & Decker's legitimate business interests and could not be narrowed to the point where they were not over-broad. The clauses were not sufficiently tailored to the business with which Duarte had been involved, while the non-solicitation of employees clause applied to Black & Decker's entire workforce worldwide. What is also instructive from the judgment is that the wider principles concerning the enforceability of restrictive covenants were endorsed.

Reference was made to the principle in English law which draws a distinction between covenants entered into between master and servant designed to prevent competition and that between a vendor with the purchaser of the goodwill in a business (Office Angels v Rainer Thomas & O'Connor). It was this principle which the House of Lords had previously emphasised in the still leading partnership case of Bridge v Deacons in drawing a distinction between the legitimate scope of a restrictive covenant in an employment context and that between partners who are the owners of the business including its goodwill. The latter have mutuality of interest in protecting the firm's goodwill and therefore covenants are easier to uphold and can be wider in their scope. Also of interest to management will be last year's Court of Appeal decision in Thomas v Farr where a 12-month non-compete covenant was upheld against a former managing director of an firm of insurance brokers, due in part to the level and degree of confidential information to which Mr Thomas has been privy.

Although Duarte is a High Court decision, the case is significant to international law firms who may have restrictions in their employment contracts (or related contracts such as long-term incentive schemes) which are expressed to be subject to a foreign law. If the application of a foreign law to those restrictions will produce a result which differs from the result under English law, they will not be enforceable in the UK with the result that the employee can walk away from the restrictions.

Law firms should therefore ensure that they include tightly-drafted provisions that will be upheld under the local law in question in order to protect their workforce from competitors. With that in mind, law firms need to think carefully about ensuring that the clauses relate to the work which has been undertaken by the employee in question, the location of their clients and the period during which they can reasonably be expected to represent a threat to the business.

Michael Leftley is a partner and Annabel Mackay an associate in the employment group. William Wastie is a partner in the professional practices and LLP group at Addleshaw Goddard.