When your business is under threat of unfair competition, it is tempting to think that an injunction is the answer. But, the courts do not necessarily think that way when dealing with injunction applications. If damages are more appropriate, then the application may fail. Risk being that the applying party pays the other side’s legal costs. And – the disruption to business continues.

To help you work out your approach, we have explained below the position currently adopted by the courts when deciding whether to award an injunction.

Injunction risks

An injunction is a powerful court order. It can force, prevent, or halt actions. Therefore, the courts have adopted a strict test. If the criterion is not met, then the application may fail. The threat of an injunction is powerful to many but to be meaningful the chances of success and risks do need to be worked out.

Injunction applications – risk of failing to prove the case

The applying party has to show that the status quo should not be preserved. The status quo is the position immediately prior to the injunction application, i.e. whilst the offending actions continue. The court will look at each party’s position. If the offending party will suffer greater loss than the other side if the injunction is granted, then an injunctive order may not be made.

There is a balancing exercise that is undertaken by the courts.  How the decision will land is always uncertain.

Injunction applications – risk the court decides damages are more appropriate

The basic test for seeking an injunction is that damages would not be appropriate. Defendants will always argue that damages are adequate and go onto argue why the damages are not as alleged. Difficult arguments can arise in practice. Showing that damages alone would not repair the loss suffered by the business is not always easy.

To set out how this works in practice, we have set out below examples.

Example 1 – Good chance of securing an injunction – misuse of intellectual property

An employment agreement includes provisions designed to protect intellectual property. The provisions state that all intellectual property created during the course of the employee’s engagement vests in the employing company. The employer terminates the employee’s employment, and on day 2, the employee launches a new software model created outside working hours.

Here:

  1. The company has not had the opportunity to utilise the intellectual property created; so
  2. The company does not know what monetary value the intellectual property has.

The court would likely award an injunction. The injunction would force the former employee to deliver up all rights to the intellectual property by way of assignment.

Example 2 – Good chance of securing an injunction – unfair competition

shareholders’ agreement includes restrictive covenants. Those restrictive covenants prevent shareholders stealing company clients or customers.

The restrictions apply whilst the individual is a shareholder, and for two years thereafter. The shareholder exits, and takes clients and customers.

Here, it is difficult to quantify the monetary loss, because the private company must:

  1. Show the past revenues from such clients; and
  2. Estimate future expected revenues from such clients.

Since the loss cannot be readily quantified, the court would likely award the injunction. The injunction would compel the shareholder to cease the infringing behaviour. Damage to reputation is worth stressing.

Example 3 – case that could go either way – damage to property

The owner of a high value software company outsources development work. The work is completed, and is not up to standard. The software has malfunction issues and does not operate as intended. The owner of the company had intended to licence the software for a fixed fee.

As a result, licensees will not accept the software for the fixed fee suggested. A reduced fee is agreed. The software company could apply for a mandatory injunction forcing the developer to remedy the defects. However, the developer could compensate the company for the reduced licence fee.

Damages could be appropriate, but it would depend on the company’s use of the software. If it had a material affect on the company’s future performance, then an injunction to force the developer to remedy the defects could be awarded. A case analysis would provide the full picture.

Example 4 – Injunction likely to be refused – interference with land

A property developer owns a large parcel of land. The land has development potential, and planning permission is granted. The owner of the neighbouring parcel of land is a farmer. The farmer brings livestock to the land. The noise and smell transmits to the developer’s land.

The developer wants to stop the farmer’s actions. The value of the developer’s land prior to the farmer’s actions was £10m. With the farmer’s actions, the value reduces by £500k. An expert determines the value.

Here, damages would compensate the developer. The loss is monetary, and the developer does not live on the land. If the developer did live on the land, then the loss may not be quantifiable. The court would likely dismiss the injunction application, and order the farmer to pay the £500k difference.

Acting for defendants

When acting for defendants, the trick is to use practical arguments to persuade the court to refuse the injunction. We outline below the common defences raised.

Defending injunctions by challenging restrictions

Here, we look at the wording of any restrictive covenant. It may be that the offending party’s actions are outside the scope of the wording, so the applying party’s arguments fail. If there is no written contract then a court is unlikely to imply restrictions which do not exist. We interpret restrictive covenants and advise on enforceability.

Defending injunctions by attacking any failure to disclose

Has the person seeking the injunction disclosed all material facts, whether or not the facts are in its favour? If not, then the application is procedurally flawed. This is a route of attack.

Defending the injunction on grounds there is a collateral purpose

Is the applying party seeking an injunction for a collateral purpose, e.g. to diminish the value of the offending party’s business? We look to see if the applying party can be compensated with damages. If so, then the application will fail. We do put forward settlement offers that can lead an applying party’s hand to withdraw the application.

Unfair restraint of trade defence

There is a public policy that individuals must be free to earn a living. Even if there is an agreed restrictive covenant it must be reasonable. If not reasonable the agreement will be void for being an unfair restraint of trade. Reasonable means no more than is necessary to protect the business.

For example, the offending party may only have skills in one sector. If the injunction is granted, will the offending party be unreasonably restricted, and thus unable to make a living? If we can argue positively then the injunction application will be turned down.

Injunction applications – risk of legal costs even if you win

You can bring an injunction application before or during court proceedings. The general rule is that the loser pays the winner’s costs. The problem is often the loser does not have the funds to settle the other side’s legal costs. The winner will then have to take enforcement action to recover its costs. Even if that is successful, the loser may not have assets to satisfy the costs award.

The result is, even if you win, there is the risk of costs. For that reason, alternatives to injunctions should be considered seriously no matter how frivolous the injunction application.

Ways to mitigate injunction risk

There are ways to mitigate risk, such as the applying party seeking an undertaking from the offending party, or agreeing a commercial settlement. These routes can save on costs, but more importantly, can halt the court action and damage to business.

Alex Kleanthous is the partner charged with running the commercial litigation team. Alex acts for both claimants and defendants to injunction applications. Please do get in touch if we can be of assistance to you.

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