High Court finds non-compete, non-dealing and non-solicitation restrictions to be unlawful restraint of trade
Decision took account of employee’s length of service prior to leaving the organisation.
Employees may find that within their employment contracts they are prevented from carrying out or engaging in certain activities for specified periods of time. Broadly, these usually prevent the employee from working for certain employers, contacting or seeking to take away custom from the employer’s suppliers and clients and sometimes also from trying to ‘poach’ staff to another employer. These types of terms are generally referred to as ‘post termination restrictions’.
These restrictions are often used in employment contracts where the employee works in sensitive areas of the business where they will have access to key information and material crucial to its operation. This might also include information which would be invaluable to competitors. For this reason, employers will be concerned that such an employee might leave their organisation, go to work for a rival and use that knowledge to the rival’s advantage. Employers in charity sectors may also have reasons to use restrictive covenants. This might be to protect income sources and/or donor information, for example.
Because these restrictions limit an individual’s right to work, they will only be enforceable by a court if an employer can show that enforcing them will protect a legitimate business interest and that the restrictions go no further than is necessary to protect those interests.
When considering the reasonableness of a restriction, courts will assess them at the time they are entered into and in light of what may happen in the course of employment, even if those events do not, in fact, happen.
An interesting recent High Court decision considered restrictive covenants in a financial advisor’s contract after they left a job following a short period of service.
Ms Falconer joined Quilter as a financial advisor and her employment contract contained a non-compete clause which prevented her from working for any organisation in competition with Quilter in the UK for nine months after her employment ended, although she was able to work anywhere where Quilter did not operate. In addition, the contract contained a non-solicitation and no dealing clause which prevented her from trying to draw away any business or custom from Quilter for 12 months post-employment and not to provide any services to Quilter customers post-employment for 12 months in competition with Quilter.
Ms Falconer was not happy with her role and left Quilter after less than six months in the job. She decided to move to a competitor to work as an independent financial advisor. At the time she left Quilter, Ms Falconer was still in her probationary period and only had to give Quilter two weeks’ notice.
Quilter sought an interim injunction from the High Court to enforce the restrictive covenants in Ms Falconer’s contract, which was granted. The case then came to full trial to decide on liability for the purposes of assessing damages and costs.
Reviewing the restrictive covenants, the High Court determined that they were void as unlawful restraints of trade. The court noted that Ms Falconer had a six-month probationary period and could be dismissed on two weeks’ notice during that time. The contract therefore envisaged a situation where Ms Falconer could have been employed for a very limited period but would still be bound by a nine-month restriction. The court noted that the length of the period of notice an employee is subject to can be an indication of the unreasonableness of the duration of the restraint; the shorter the notice the less important the employee’s services would appear to be to the employer and the less risk there is likely to be of the employee obtaining and using sensitive business information, key business relationships and contacts for their own or a competitor’s purposes.
The court highlighted that the purpose of the restrictions in Ms Falconer’s contract was predominantly to protect its customers and potential customers and business secrets. The court highlighted the fact that Ms Falconer had only worked for Quilter for a few months, significantly reducing its exposure to risks in these areas. Indeed, Quilter accepted that it would expect staff to take 12 months or more to build the kind of client relationships needed for someone in Ms Falconer’s position to pose a risk to these special trade connections. As the court noted, having access to client-related documentation did not in of itself build a strong client relationship.
For these reasons, the court held that the restrictions were unreasonable.
The court also commented on the geographical element of the contract which allowed Ms Falconer to work in any part of the country in which Quilter did not operate. In the court’s view this had no practical effect since Quilter was a nationwide business and Quilter had no legitimate interest in preventing Ms Falconer from providing financial advice in an area of the country where she had not had anything to do with Quilter’s clients whilst she was employed by them.
This case highlights the difficulty employers face if they use one size fits all restrictive covenants, and further underlines the importance of tailoring restrictions to the individual and the legitimate interests that a business is seeking to protect.
The case also highlights that restrictions need to be enforceable at the time they are entered into. In this case, the fact that Ms Falconer’s notice requirements were so short during her initial probationary period meant it was unsuitable to rely on these restrictions when she left during her probation. The practical effect of this is that if employers are minded to impose restrictions, they should either only come into effect once a probation period ends or are increased from a relatively short restriction to a longer one to align more clearly with increased notice periods once probation is passed.
This logic would also suggest that staff on statutory notice provisions are less likely to see a court uphold restrictions of several months’ duration until they have worked for their employer for several years. A follow-on point from this is that employers should ensure they review any restrictions when an employee changes their role to ensure the restrictions are appropriate. For example, an employee may take up a role that changes the degree to which they are exposed to sensitive business information meaning that old restrictions are too harsh, or perhaps not strict enough. If this occurs then any new restrictions will have to be incorporated by some form of consideration, which may take the form of a raise in salary or a one-off payment.
In the not-for profit and charitable sectors, restrictions will still be of use, for example to protect strategic, operational and financial information, but it is likely that restrictions in these situations are only going to be effective in the contracts of the most senior staff in the organisation who have access to such information and/or strong relationships with key contacts.
The specific issue of the use of non-compete clauses is also subject to a current government consultation which is looking at whether they should be unenforceable in their entirety or only enforceable if the individual is compensated for the duration of the restriction. For more information on this consultation, and to have your say on the matter, see the government web page here.
If you would like to discuss any aspect of this article further, please contact Michael Crowther or any other member of the Employment team on 0113 244 6100.
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The information in this article is necessarily of a general nature. Specific advice should be sought for specific situations. If you have any queries or need any legal advice please feel free to contact Wrigleys Solicitors.