Injunction: restrict ex-employees, ex-directors or ex-shareholder's activities
- Alex Kleanthous
- Updated: Mon, 30th Jan 2017
We work with business owners who want to stop an ex employee or director from competing. We also work with employees and directors who think there is nothing to stop them from competing with the ex-employer.
We know what is reasonable, achievable and cost-effective. If your chances of success are slim, we will tell you.
Our expertise in injunctive claims and defences includes:
We work with a range of businesses who want to restrict the activities of former employees and or directors. The restriction can be over staff, clients and customers and general competition. Increasingly, we are dealing with restrictions to protect intellectual property such as software, trade marks and research and development.
On the flip side we work with those hit with a threat or an action who want to defend themselves. We help you take the urgent steps.
Obtaining an injunction – working out the chances of success
To obtain an injunction you will need to show loss, or the potential for immediate loss, i.e. the threat of loss is imminent. For example, loss can be the diversion of revenue to a competitor. Damage to reputation can be a loss.
There is no automatic right to an injunction. Instead injunctions are issued at the discretion of the court. In exercising its discretion to grant an injunction, the court will look at a number of factors, such as:
- Is there a serious issue in dispute? E.g. the ex-employee taking clients away from the company.
- Could the claimant be compensated with damages? If yes, then the court will consider if the injunction is necessary.
- If the injunction is granted, will the defendant be unreasonably restricted? If yes, then the application may fail. The court adopts a balancing exercise.
Our case analysis will tell you whether the injunction has merit.
Injunction payments to the defendant
Successful injunction applications require the claimant to pay the defendant money, if it later transpires the injunction was wrongly ordered. The claimant will only be required to pay this sum if it transpires that the injunction was wrongly ordered. There is no obligation to pay this sum when making the application itself.
Ex parte injunctions
Injunctions can be made on an “ex parte” basis. The benefit of this being that the court will hear the application immediately, often on the same day. The defendant is not given notice.
This means that the defendant is not notified of the initial injunction hearing. If the court grants an injunction the defendant will have to apply to have it set aside.
Injunction – full and frank disclosure
Injunction applications made without notice to the defendant require full and frank disclosure of all relevant documents. We know what to disclose and when to disclose it.
Defending an injunction – working out the strength of the defence
We defend injunction applications. Common defences are as follows:
- The defendant will be unreasonably restricted if the injunction is granted. E.g. the defendant possesses specialist skills that can only be utilised in a small market, so will have to compete with the claimant to make a living.
- The restrictions are not enforceable in the first instance. We look at how the restrictive covenant is worded in this respect. There is usually a hole in the drafting that we can exploit.
If the defendant is given notice of the injunction application, we defend it at the initial hearing.
Defending ex-parte injunctions
If no notice was given to the defendant of the injunction application and the application was successful then the defendant will have to apply to have the injunction set aside. The court will fix the date. We handle applications for set aside. If set aside, then the claimant will be required to satisfy its duty to compensate the defendant for loss during the period in which the injunction was in force.
Injunctions – finding the evidence
To apply for an injunction or to defend an injunction, the court will want to see the evidence upon which you rely. We will review and gather together the best evidence available relating to the injunction.
- Shareholder agreement – could be relevant if the ex-employee or director was also a shareholder;
- Share purchase agreement – could be relevant if undertakings and covenants were given as part of the deal; and
- Partnership and LLP agreements – relevant if looking at partners.
If you want an injunction to stop a former employee damaging your business, you require good evidence. Suspicion is insufficient.
Injunctions – quantifying loss
Here, the employer or person bringing the injunction application has to show its loss. How can that be proven? Usually, accounts can be a good starting point. Questions to ask are:
- Do we look at loss on a “profit” basis; or
- Do we look at loss on a “revenue” basis.
Losses are usually calculated on a revenue basis. Although, circumstances will dictate what is the best way to show loss. The loss of a key client can be enough. Attempting to solicit a client can also be enough, but the claimant will have to present strong evidence of the defendant’s intention to do so. A mere tip off will unlikely be adequate.
Obligations in business contracts
The courts distinguish between obligations placed on employees, and obligations placed on shareholders, former shareholders or companies. The general rule is that restrictions on shareholders, former shareholders, or companies, can be more onerous than restrictions on employees. The court considers the seniority of the employee and will usually uphold tighter restrictions on senior employees or directors.
If the restrictive covenant is weak in the first place, then the injunction application may fail. Restrictive covenants should be “no more than is necessary”.
You can seek an injunction without restrictive covenants, for example in knowledge based sectors. If an employee leaks a trade secret or know-how, then an injunction can still be obtained. However, the claimant will have to produce greater evidence without a restrictive covenant in force.
Lack of evidence
The High Court recently stated it will not protect employers whose employment contracts lack adequate confidential information provisions.
The case concerned an ex-employee who leaked confidential information to the press. The employer sought an injunction to delete or return this confidential information. The High Court refused the employer’s application.
The application was refused on the basis that the employer did not have the benefit of any restrictive covenants. The confidential information was not know how or a trade secret, just confidential information. The case is a timely reminder to ensure business assets are adequately protected.
Injunctions – costs awarded by court
The general rule is, if you lose, you will pay the other sides reasonable legal costs. You will also have your own legal costs to pay.
When we bring any injunction application we will ask the court to require the defendant to pay the claimant’s costs. However, the court often reserves costs for a later date, e.g. a future trial or return day. Litigation cost reforms have forced parties to act reasonably in the position adopted. The aim of this is to prevent frivolous applications that have no merit.
It does not matter whether you are in the right or wrong – you still have an obligation to seek alternatives to court action. We will always work out what the alternatives could be as explained below.
Injunction alternatives – quicker and cheaper solutions
A defendant can offer an undertaking.
An undertaking is an alternative to an injunction. An undertaking means the offending party “promises” the applicant and the court either:
- Not to breach the restriction for an agreed period; or
- Cease breaching the restriction.
An undertaking carries the same weight as an injunction. There are other cost effective alternatives depending upon the facts of the case. For example, apologies can be agreed. Intellectual property created as a result of infringement can be destroyed. The list is extensive.
Recent successful injunction applications and defences
Recent instructions include:
- Defended an injunction application for an FX trader. Previous employer sought to restrict the trader’s future employment. We:
- Challenged the restrictions’ wording,
- Permitted our client to pursue his intended career.
- Obtained injunction for an insurance brokers’ firm. Some employees resigned, intending to create a competing business. So:
- Before they incorporated the competing business, we
- Exhibited the expected loss, and
- The court granted the injunction.
- Undertaking from group of ex-employees. The group left a FinTech software company to join a Silicon Valley competitor, and utilise company information.
- We filed the undertaking with the court, and so
- Protected our client’s business valuation.
- Resisted injunction application for corporate body who had sold their shares to a private fund. Our client:
- Opened a business that was outside the share purchase agreement’s definition of “the business”,
- The court dismissed the fund’s injunction application.
Alex Kleanthous is the partner charged with running the commercial dispute team. Please do not hesitate to get in touch with Alex if we can be of assistance.