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Post-termination restrictions against competition and solicitation of customers and employees

The general rule in English common law is that a “covenant in restraint of trade” between an employer and an employee is void and unenforceable unless it is reasonable as between the parties and it is reasonable with reference to the public interest.

“Covenant in restraint of trade” includes provisions in the contract having effect after termination of the employment which forbid the employee from:


* competing with the employer;


* soliciting or dealing with the employer’s customers; and/or


* soliciting or offering employment to the employer’s employees.

In order to be justifiable, the restriction must be necessary to protect an interest of the employer that is considered by the law to be properly protectable. This will in most cases be the need to protect trade secrets or customer connections or to keep key staff.
The restriction should be no longer, or wider in geographical scope, than is necessary to protect the employer’s interest.


If a clause protecting confidential information, coupled perhaps with one preventing solicitation of customers and/or employees, is sufficient to protect the employer, a complete ban on competition will not be upheld by a court.

Non-solicitation of customer clauses: should not extend beyond those customers with whom the employee dealt personally, except perhaps in the case of a very senior employee such as a managing or sales director who has intimate knowledge of all customers, especially in a highly competitive business. The clause should not continue for more than the period necessary. As a rough guide, a period in excess of three months or so will be hard to justify though each case will depend on the particular circumstances.

Non-solicitation of employee clauses: similar principles apply. The restriction should apply only to those employees who are key to the employer. The clause should not continue for more than the period necessary. The three month guide is again applicable.

Non-compete restriction: the criteria for the validity of such a clause are stricter in the case of a contract of employment than in the case of a contract for the sale of a business. The employer may not use such a clause to stifle bona fide competition or to prevent the employee from using his own skills and knowledge.
If a restriction can be justified at all, it should be no wider in area than is justified by the area in which the business operates. Any restriction should also continue for no more than the period necessary. The three month guide is again applicable, although there have been cases where a longer period was justified, e.g. in the case of a managing director or a broker in a highly competitive business.
A non-compete clause may be justified if the employer can provide evidence that confidentiality or non-solicitation clauses are inadequate or difficult to enforce.

The “blue pencil test": if a restriction is too wide, it will be void and unenforceable. If it is possible to delete the parts of a clause which are too wide, and the remainder of the clause makes sense, the court will uphold the remainder by applying the so-called “blue pencil” test. The court will not however rewrite the clause. Clauses which try to allow such a rewrite are sometimes included by the draftsman but it is unlikely that they will be effective.

Wrongful termination of the contract: if the employer wrongfully terminates the employment contract, he will not be entitled to enforce the restriction.

“Garden leave”


A “garden leave clause” in an employment contract permits the employer to require the employee not to attend the workplace for work but to remain subject to the contract while being paid normal remuneration, during the whole or part of a period of notice terminating the contract.
The effect of such a clause is that the employee is bound not to take employment elsewhere during that period. It is therefore in some respects an alternative to a formal covenant in restraint of trade. The legal remedy of an employer to enforce this clause is an injunction. However, this is a discretionary remedy (unlike damages for breach of contract) and in exercising its discretion, the court may take into account the relevant circumstances such as the need of the employer to protect confidential information, possible harm to either party and the nature of the employment that the employee wishes to take up.
If the circumstances justify it, an employer may impose both a garden leave clause and a non-compete restriction (see the TFS Derivatives case below).

Cases:


Legaleze comment: Case law is the best guide to understanding how the law applies to real situations. The following is a selection of modern cases. The most recent cases are summarised in the What's New section below.

Provident Financial Group plc and another v Hayward [1989] 3 All ER 298


Defendant Mr Hayward employed by plaintiffs Provident Financial Group plc under a contract with a 12 month notice period as financial director of estate agency business in various towns in the north of England and the Midlands; defendant tendered his resignation to plaintiffs who agreed period of notice at 6 months instead of 12 provided defendant undertook not to disclose any confidential knowledge for 2 years from date of notice; defendant continued to work for about 2 months when at plaintiffs’ request and to prevent him from acquiring further confidential information, he ceased to work on premises and was sent home continuing to receive full pay and benefits; 1 month later defendant notified plaintiffs of intention to start work for a supermarket chain as financial controller of their estate agency offices with stores throughout the country; plaintiffs sought an injunction to restrain the defendant from working for anyone else until the period of his notice expired; judge refused their application; plaintiffs appealed; Court of Appeal observed that an express negative covenant not to work for anyone else during the term of the employment was enforceable by the court as a matter of discretion; however court would not enforce such a term where the other business for which the employee wished to work had nothing whatever to do with the employer's business, even if the employee was offered full pay, because an employee had a concern to work and exercise his skills; in circumstances, an injunction would not be granted because the defendant did not have any relevant confidential information of the plaintiffs which would be of use to the rival company and there was no real prospect of serious or significant damage to the plaintiffs from the defendant working as financial controller for the rival company for the short period which remained of his contract.
.[Copyright in original report of All England Law Reports (“All ER”) acknowledged. All ER has not approved above summary for which Legaleze is solely responsible].

Office Angels Limited v Rainer Thomas & O'Connor [1991] IRLR 214


The employers used a restrictive covenant in the contract of employment in an attempt to stop the defendants, who worked in Bow Lane, City of London Office, from working within 3,000 metres of their office and from opening an office within 1.2 square miles of their old office; this included most of the City of London.. The covenant was struck down by the Court of Appeal because it was not appropriate or necessary.

TFS Derivatives Limited v Morgan [2004] EWHC 3181 (QB)


The claimant company TFS had offices in major financial centres across the world, including London; inter-dealer brokering of "over the counter" physical and derivative products; defendant Mr Morgan employed as an equity derivatives broker on the DAX market team; employment contract provided for 3 months’ notice of termination, confidentiality clause, “garden leave” clause and a 6 month post-termination clause forbidding employee from engaging in any business “competitive with or similar to” a business carried on by the claimant or by a connected company in England and any other country in which the company or connected company was carrying on business; defendant resigned to join a competitor; claimant accepted resignation and required claimant not to attend work until expiry of notice and thereafter not to work for competitor until non-compete restriction expired; defendant refused not to join competitor and claimant applied to High Court for an injunction restraining the defendant; court held in the circumstances that both the garden leave clause and the non-compete clause were necessary to protect the legitimate interest of the claimant and were not unreasonable.

CEF Holdings Limited & Or v Mundey & Ors [2012] EWHC 1524 (QB)

CEF Holdings Limited was the holding company of a group ("CEF") which operates in the UK domestically and worldwide as a wholesaler and manufacturer of electronic components in the United Kingdom.
CEF employed employees with a contract containing restrictions against soliciting former customers, soliciting or offering employment to employees of CEF and being involved in a business competitive with that of CEF. These restrictions applied during employment and for a period of six months after termination.
A number of employees resigned from CEF. CEF applied to the High Court in England for temporary injunctions (until full trial of the action) to be imposed on the employees ordering them to comply with the employee and non-compete restrictions. There was no argument about the customer restrictions.
The case also raised issues of jurisdiction over defendants domiciled in a different part of the UK from which the court has jurisdiction, and about the test which court must apply in deciding whether to order a temporary injunction.
The court refused to confirm the injunctions. It held that the employee restriction clause was too wide because it was not limited to those employees known to the former employees or with whom they had dealings. The court also held that the non-compete restriction was invalid because it too was too wide; the effect of the clause would be to prevent former employees from working in parts of the UK and elsewhere in which they had never worked. The court also held that it had no jurisdiction to make injunctions over those defendants who were domiciled in Scotland.
Legaleze comment: this case is of interest because it gives guidance on how post-termination restrictions must be carefully drafted to be no wider than a company strictly requires to protect its legitimate business interests. The case also highlights the rule (under the Civil Jurisdiction and Judgment Act 1982 Sched.4) whereby an employer may bring proceedings only in the courts of the part of the United Kingdom in which the employee is domiciled, subject to certain exceptions.

What's new on this topic [see What's New page or archive for full report]:

27/01/2015: Ex-director liable for breaking non-compete covenant and fiduciary duty

Excelerate Technology Ltd v Cumberbatch and another
[2015] EWHC B1 (Mercantile)

The claimant company was a Cardiff based technology company which employed Lindsay Cumberbatch, the first defendant as Technical Director. He was made redundant as from 31st July 2011. The parties, separately advised by solicitors, reached a settlement agreement whereby Mr Cumberbatch received £137,500 including £62,500 that was specifically referable to his agreeing to extend his post contractual termination covenants be extended until 31st July 2012 i.e. 12 months.

The post-termination covenants were in standard form for employees in this type of SME and included:

* non-compete: not to be employed or engaged by or otherwise interested in or concerned with any concern which competes with any business of the Company in which he was involved during the last 12 months of his employment;

* non-dealing: not in competition with any business of the company in which he was involved during the last 12 months of his employment to deal with or accept orders from any third party with whom he had personal dealings within the last 12 months of his employment and who was a customer, agent supplier, investor or distributor of the Company or who was negotiating or contemplating doing business with the Company;

* non-solicitation: not in competition with any business of the Company in which he was involved during the last 12 months of his employment solicit business or orders or canvass or facilitate the soliciting or canvassing of business or orders from any third party with whom he had dealings with during the last 12 months of his employment and who was a customer, agent supplier, investor or distributor of the Company who was negotiating or contemplating doing business with Company.

In High Court proceedings brought by the claimant company, the court found that Mr Cumberbatch had set up a competing company and passed confidential business information to it during his period of restriction in breach of his fiduciary duty as a former director, and had broken the non-compete agreement in the same period.

The court found as facts that:

(i) by the setting up a competing company and being involved in it during his period of restriction, Mr. Cumberbatch and his company were in breach of his non-compete agreement;

(ii) M Cumberbatch provided his new company with confidential information belonging to the claimant company;

(iii) through his company, Mr Cumberbatch solicited renewal business from a customer of the claimant company in competition with it and used its confidential information in that process;

(iv) Mr Cumberbatch was in breach of fiduciary duty to the claimant company by exploiting a business opportunity he knew of while a director of it.

The court ruled that the claimant company was entitled to damages for the defendants’ breaches of the non-compete agreement, fiduciary duty and confidentiality. The judge rejected the defendants’ argument that the sum of £62,500 was not repayable because it was a penalty; it was a genuine pre-estimate of loss (representing one year’s salary). Damages were calculated in the sum of £158,343 plus interest, less a credit for the £62,500 awarded for the breach of the non-compete agreement.

[Original text of the case report supplied by BAILII gratefully acknowledged. Crown copyright: contains public sector information licensed under the Open Government Licence v2
Legaleze is solely responsible for the above text which is a summary only and the full report should be read.]ge content in here and before Publishing this page delete all the square brackets]

 

26/11/2014: Ex-employee liable for conspiracy and breach of duty of fidelity

Reuse Collections Ltd v Sendall and another company


[2014] EWHC 3852 (QB) Hearing Date: 2/3 October 2014
High Court, Queen’s Bench Division

Reuse Collections Ltd (Reuse) is in the glass recycling business. Keith Sendall (KS), the first defendant in the law suit, joined Reuse in 1980 but did not have a written employment contract until October 2012 when he was given a written contract. The contract included provisions relating to confidential information and post-termination restrictions.

01/08/2014 Employee on 12 month notice barred from taking up job with competitor

Elsevier Ltd v Munro [2014] EWHC 2648 (QB)  Hearing Date: 31 July 2014
Court: England and Wales High Court, Queen's Bench Division

The Claimant in this case was a company within the Reed Elsevier publishing and information group. The Defendant was a Chartered Accountant employed as Chief Financial Officer (CFO) of the Elsevier Research sub-division.

The Defendant gave the Claimant notice of resignation on 1 April 2014, having received a job offer to join Cengage Learning Inc (Cengage) as its CFO. The Defendant proposed to take up that offer after a period of transitional arrangements which he suggested, ending on 31 May 2014. The Claimant objected to that proposal, relying on the requirement of the Defendant's contract of employment that he give them 12 months' notice. After further exchanges, the Defendant ceased working for Elsevier Research at the end of May 2014, claiming that his contract was at an end.

The Claimant issued proceedings on 4 June, relying on the 12 month notice clause and contractual duties owed by the Defendant during the period of his employment. The main remedy sought by the Claimant were injunctions to restrain the Claimant until 10 April 2015 from commencing employment with or providing services to Cengage or any other competitor and from breaching his duties of good faith, fidelity, trust and confidence.

The Defendant resisted the claim, arguing that he was is entitled to move to Cengage as he was constructively dismissed by the Claimant, and therefore became free of the contractual restraints on which it relies. Alternatively, he argued that there should be no injunction, with the Claimant left to a remedy in damages, or only a limited injunction.

The Judge ruled in summary:
(i)  The Defendant was not constructively dismissed by the Claimant. The Claimant did not repudiate the Defendant's contract of employment. The Defendant decided that he wanted to leave the Claimant's employment because he found the Cengage job on offer was more attractive. For the Defendant to take the job with Cengage during the period of his notice would be a breach of his contract of employment. The issue was whether the Court should exercise its discretion to grant the remedy of an injunction to prevent such a breach. The fact that the Defendant was not presently working did not affect the Court's approach to the exercise of that discretion as was submitted on his behalf. His idleness was chosen by him not imposed by the Claimant, nor was it caused by any wrongful conduct of the Claimant.

(ii) The Defendant's contract prohibited him from working for a competitor of the Claimant during his employment. Cengage was a competitor of the Claimant. If the Defendant worked for Cengage during his notice period the Claimant would suffer damage for which money compensation would not be an adequate remedy. That was enough to justify an injunction to prevent the Defendant working for Cengage for the duration of the notice period. An additional justification was provided by the fact that the Defendant retained in his memory confidential information learned by him whilst working for the Claimant which was relevant to and of value to Cengage and the risk that such information would, during the notice period, be misused by Cengage to the detriment of the Claimant. The Defendant had not taken away confidential documents and the Judge did not find that he would deliberately misuse the information he retains, but the risk of misuse and consequent damage were present and substantial.

(iii) The Judge agreed with the Defendant's submission that the Claimant's claim for an injunction to restrain a breach of the duty of good faith was unsound, because the wording was too vague and uncertain. However the Judge did grant an injunction to enforce the prohibition on working for a competitor, in the form of Cengage, until the end of the contractual notice period on 10 April 2015.

[Original text of the case report supplied by BAILII gratefully acknowledged. Crown copyright: contains public sector information licensed under the Open Government Licence v2
Legaleze is solely responsible for the above text which is a summary only and the full report should be read.]

16/11/2013: Stockbrokers allowed to enforce gardening leave clause
http://www.bailii.org/ew/cases/EWHC/QB/2013/3450.html
J M Finn & Co Limited v Holliday [2013] EWHC 3450 (QB)
Mr Holliday was a stockbroker who worked for J M Finn & Co Limited. His terms of employment provided that his employer was entitled to require him to remain on garden leave for any or all of his notice period, which was 12 months. He gave notice of resignation. Before his departure, Mr Holliday had arranged to work with another company providing similar services.
The employer informed Mr Holliday that while he was on garden leave, he was not permitted to contact clients or to advise on, buy or sell stocks, and his access to a set of notes and updates used by brokers was stopped.
The court ruled that the withdrawal of the notes was not conduct that had seriously damaged the relationship of trust and confidence or demonstrated an intention by the claimant to abandon and altogether refuse to perform the contract between the parties. The claimant had had reasonable and proper cause for withdrawing the notes. Further, the notes were not needed for the defendant's CPD.

13/05/2013: High Court rejects non-compete clause in wealth management director’s contract
Ashcourt Rowan Financial Planning Ltd v Carlton John Hall [2013] EWHC 1185 (QB)
http://www.bailii.org/ew/cases/EWHC/QB/2013/1185.html
Ashcourt Rowan Financial Planning Ltd, the claimant company, employed Mr Hall as a wealth management director. His contract included a non-compete clause preventing him from working for a competing company for six months following the termination of his employment, and other clauses dealing with his duties during a notice period and “gardening leave”.
Mr Hall gave six months' notice of termination of his employment to the claimant. When he started after the expiry of the notice period, the claimant took legal action in order to enforce the non-compete clause.
The court ruled that the wording of the clause was wide enough to prohibit Mr Hall defendant from being indirectly concerned in the business or activity of a direct competitor, whether or not the work done by his or his 'activity' itself directly competed. The application of the non-compete clause was not defined by whether there was direct competition from the defendant in his new employment or from his own business or activity and therefore the clause could have the effect of preventing the defendant from working in parts of the financial services industry where, and in activities which could not compromise the legitimate business interests of the claimant on any reasonably view.

9/07/2013: High Court strikes down non-compete agreement
White Digital Media Ltd v Weaver and another [2013] EWHC 1681 (QB)
http://www.bailii.org/ew/cases/EWHC/QB/2013/1681.html
As a preliminary issue, before full trial of the case, the High Court ruled that a clause that restrained a person from being involved in a competing business as a shareholder or in any other capacity was not enforceable because it prevented him being even a minority shareholder. The Defendants did not raise the issue that the one year period of time prescribed in the clause was unreasonable.

07/12/2012: Employer wins damages against ex-director for breach of covenant
Safetynet Security Limited v Coppage
[2012] EWHC B11 (Mercantile)
http://www.bailii.org/ew/cases/EWHC/Mercantile/2012/B11.html
Legal background
Clauses in an employment contract which try to restrict an employee’s activities after termination of the employment are void and unenforceable under English common law, unless justified by the business needs of the employer and go no further than is reasonable in the interest of the employer and in the public interest.
Under the Companies Act 2006 s.175, a director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. This applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity)". Under s.70 (2) of the Act, a person who ceases to be a director continues to be subject to the duty in section.

[Page updated: 04/02/2015]

 

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