The issue of employees joining their employer’s competitors has long been a headache for employers. The Court of Appeal has recently scrutinised a covenant not to join a competitor for a full year. Was this enforceable? Naomi Flynn gives notice.
Is a 12 month restrictive covenant ever enforceable?
Law stated as at 25 June 2007
The issue of employees joining their employer's competitors has long been a headache for employers. These employees are often well trained, highly skilled individuals who can take with them a wealth of knowledge to their new employer. As a consequence, the fear of losing client accounts to competing agencies has driven many advertising agencies to add stringent post termination restrictions to their employees' contracts of employment, for example to prevent the employee from joining a competing agency for 12 months after the termination of their employment. However, such restrictions are often unenforceable, leaving the agency with little or no protection against their clients being poached.
The scope of restrictive covenants
As a general rule, all restrictive covenants are void unless the party seeking to rely upon the covenant can persuade the court that the restrictions are reasonable and are protecting a "legitimate business interest". Courts are particularly reluctant to enforce non-competition restrictions (which are often the most useful restrictions for an employer) on the basis that they prevent employees from freely seeking employment with an employer of their choice. Historically this has particularly been the case with restrictions of 12 months or more.
However, this position has been called into question by a recent Court of Appeal decision, in which a restrictive covenant preventing an employee from competing with his old employer for a period of 12 months was upheld.
Employer friendly decision
The case in question is Thomas v Farr plc and Hanover Park Commercial Limited [2007] EWCA Civ 118. Mr Thomas, a managing director of a firm of insurance brokers, Farr Plc ("Farr"), claimed that the 12 month non-competition clause contained in his contract of employment was unenforceable as it was an unreasonable restraint of trade. Mr Thomas argued that his employment contract also included non-soliciation and confidentiality clauses, which should have offered adequate protection to Farr.
The issue was initially dealt with by the High Court, who held that the 12 month non-compete clause was enforceable. This decision has been upheld recently by the Court of Appeal. The High Court found that as managing director of the firm, Mr Thomas had sensitive confidential information which would be helpful to the competitor he was going to work for in devising a strategy for seeking to undercut Farr. In the circumstances it was decided that Farr had a legitimate continuing interest in protecting this information after Mr Thomas's employment ended.
The High Court considered the application of the non-solicitation and confidentiality clauses contained in Mr Thomas's contract, but held that alone they did not provide Farr with adequate protection. In making its decision the High Court noted that Farr was likely to experience problems with policing a non-solicitation of clients provision, given that the poaching of clients was unlikely to be done by Mr Thomas direct, but instead by more junior employees.
Practical Tips
Whilst the employer in this case was successful, it is an unusual decision which is unique to the facts. Employers should therefore remain cautious when drafting post termination restrictions. Some practical tips for employers to bear in mind when drafting such provisions are as follows:
– a court is unlikely to enforce a restrictive covenant which takes the employee out of his/her chosen marketplace altogether;
– employers will need to think carefully about the legitimate business interest they are trying to protect;
– generally speaking, the more senior an employee is, the more likely the court is to enforce the covenant;
– similarly, the shorter and more specific a covenant is, the more likely it is to be deemed enforceable;
– a 12 month restriction is at the maximum end of what will be enforceable; and
– the duration of a restrictive covenant should include time spent by the employee on garden leave.
