Case Study

Enforcement of restrictive covenants

Our client was considering applying for an urgent interim injunction to enforce restrictive covenants against a former employee. This would have been an expensive process with no guarantee of success. We successfully negotiated bespoke undertakings to be given by the former employee and his new employer, which gave our client greater protection than an interim injunction at a fraction of the cost.

Background

Our client had recently taken part in a tendering exercise run by Crown Commercial Services to offer particular professional services to public sector organisations. Our client operates in a small and competitive industry, and the success of this tender is of critical importance to their business. To assist with preparing the bid our client hired an employee – we’ll call him Mark.

Mark spent about 12 years working for one of our client’s competitors, and it was hoped he would bring valuable experience and insight to our client and would be of great assistance in producing a successful bid. Mark was given complete access to our client’s systems and was a key part of the team that worked on the bid. However, shortly after the bid was submitted Mark resigned from our client and indicated that he had accepted an offer to return to his previous employer.

Our client was understandably concerned that:

a) Mark would reveal our client’s confidential information to his former employer;
b) Mark would undermine our client’s bid (the result of which was to be announced within the next two months, and could potentially be appealed or challenged by Mark in his new role); and
c) the publicity of Mark’s return would cause our client to lose the bid.

As Mark was still in his probationary period his contractual notice period was one month, and our client placed him on gardening leave immediately. Mark’s employment contract included restrictive covenants which, among other things, prevented him from working for a competitor for six months following termination.

Solicitors representing Mark contended that the restrictive covenants were too broad and long-lasting to be enforceable, especially as Mark had only been employed by our client for a short period of time.

Enforceability of the restrictions

Mark was a senior employee that played an important strategic role and had access to a lot of our client’s confidential information, and so we advised that the restricted period of six months was not so unreasonable as to render the clause unenforceable. Importantly, it did not matter that Mark had only worked for our client for a short period of time; the reasonableness and enforceability of restrictive covenants is judged from the date when the restrictions are entered into, and so restrictions are either enforceable from day one or they are not enforceable at all.

However, there is always a risk when applying for an interim injunction that the court will consider that the restrictive covenant in question goes further than is necessary to protect the interest of the employer, and is therefore unenforceable. In this case, the wording of Mark’s non-compete prevented him from working for any business which consisted “wholly or mainly of the production or supply of goods or services which are the same or substantially similar to the services provided or goods produced, ordered, stocked, or supplied by the Employer or its group companies.”

This was quite a wide restriction, and it might be argued (as, indeed, Mark’s lawyers did argue) that it was wider than necessary. The restriction could have been made narrower by, for instance, specifying that Mark was restricted from providing services which are similar to the services he provided himself while employed.

Set-off for garden leave

One point raised by Mark’s lawyers was the absence of a contractual term that set-off any period spent on garden leave from the length of the restriction. This means that an employee who has a three month notice period could be prevented from working/contacting clients for a period of (in this case) 9 months, and it might be that a court would consider this period to be longer than necessary to protect the interest of the employer.

However, this point merely means that we as the employer would need to justify the longer period, not that the covenant is unenforceable. If we had been able to justify the rest of the covenant it is quite likely we could have done so for this slightly extended period.

What is the employer trying to protect?

In deciding whether a particular restriction is justified a court will consider what interest the employer is seeking to protect. Two recent cases are a useful example of this. In one, the court refused to enforce a nine month non-compete where the employer sought to protect client contacts, despite the fact such contacts take up to a year to develop due to the unique regulatory circumstances of the employer’s industry and the employee in question had only been employed for a couple of months.

In another case, where the employer sought to protect confidential information that could be obtained shortly after employment began, the court upheld a non-compete despite the fact the employee was newly employed.

How we helped

Our case was more similar to latter example than the former, and so we may have been successful in enforcing our restrictions through the court. However it certainly would have been expensive and there was a risk we would lose and be liable for the other side’s costs. Mark and his solicitors would have only needed to show one reason why a covenant is unfair and unenforceable, while we would have needed to succeed on every point in order to show it was enforceable.

What is more, even if we secured the injunction it might not have addressed our concerns as Mark (now motivated by spite) could have undermined the bid while not being employed by the new employer.

Instead, we negotiated contractual undertakings, which addressed our client’s concerns directly. We agreed that Mark could start working for his new employer, but that neither Mark nor his new employer would announce the move to the market, and that Mark would not be in a client facing role and he would have no involvement in appealing or advising on the new employer’s response to our bid. This achieved our clients aim at a fraction of the cost of an injunction, and likely more effectively.

 

Alex Kennedy

I know that when the noise dies down there is a solution to be found. I set about that task as quickly as possible.

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