Client information, know how and relationships can be some of the most valuable assets that a company has. Protecting this after the end of an employee’s employment is often a priority and companies ask employees to agree to post termination restrictions, limiting how the employee can behave after their employment has come to an end.
Post termination restrictions include clauses inhibiting an employee's ability to poach, solicit and deal with customers, clients and employees. These types of post termination restriction are frequently enforced but clauses preventing an employee from competing with their previous employer after termination of employment have tended to be viewed less favourably and are enforceable in more limited circumstances. Some employers choose to put an employee on a lengthy period of garden leave but this can affect the validity of a post-termination restriction, meaning that it is not enforceable. Courts may alternatively decide to shorten periods of a post termination restriction, for example where the employee has been put on garden leave before the end of their contract.
The basic principles
Regardless of the type of restriction, there are a number of principles that a court will take into consideration when deciding whether to enforce the restriction:
- what the restriction actually means when properly construed (as it is not always clear)
- whether the employer can show that it has a legitimate business interest requiring protection
- the restriction must be no wider than is reasonably necessary for the protection of those interests (bearing in mind the circumstances of the parties at the time the restrictions were agreed)
Tradition Financial Services v Gamberoni & Others
This recent case has confirmed that, provided the post-termination restriction complies with the principles set out above, (regardless of whether the employee has also been put on garden leave or not) there are circumstances in which a lengthy non-compete clause will be enforced.
Andrea Gamberoni was an inter-dealer broker who joined his employer at a junior level but had been promoted and received several raises in his salary over a short period of time. The inter-dealer broker world is small and his contract of employment included a substantial set of post termination restrictions, which included a clause restricting him from competing with his employer's business for 6 months after the end of his employment. His contract allowed him to be put on garden leave but also specified that time spent on garden leave would not be set off against the period of the post-termination restrictions unless the garden leave period exceeded three months.
When Mr Gamberoni gave in his notice, his employer decided that rather than put him on garden leave, they would put him on back office duties and restrict his access to clients. Three months after his employment ended, Mr Gamberoni started working for a competitor. His employer objected and sought an injunction from the court, requiring Mr Gamberoni to abide by the terms of his non-compete clause.
Mr Gamberoni responding by arguing that restricting him for a total of 9 months (that is the 3 months doing back-office work followed by the 6 months non-compete clause) was unreasonable.
The High Court considered the principles set out above and decided that, as a highly paid member of staff working at one of the top inter-dealer brokers, Mr Gamberoni could be expected to establish a strong client base with and personal bonds and that it was important for the employer to protect these. As a result, a non-compete clause was, in principle, justified. In addition, the Court decided that a non-compete clause that kept a broker out of the market for 9-12 months would not be excessive by industry standards and in Mr Gamberoni's case, keeping him out of the market for 9 months would not be unreasonable. The employer required that reasonable period to shore up its client contacts and find a replacement.
Similarly, the Court thought that the restriction was not unreasonably wide in its scope in terms of both breadth and duration so that all the post-termination restrictions were valid and enforceable.
Mr Gamberoni had argued that he was a ‘vulnerable’ young man when he signed up to the post-termination restrictions and that he enjoyed no negotiation power, with the result that it would be unfair to enforce the restrictions against him. However, in reaching its conclusion, the court was rather scornful of this suggestion and instead concluded that Mr Gamberoni was well educated (holding numerous degrees and speaking three languages), well qualified and had worked for the employer for a year before signing the contract containing the restrictive covenants and that he had been fully prepared to sign up to the contract terms and understood their implications.
- Never assume that a non-compete clause will not be enforceable. If the clause complies with the basic principles set out above then it ought to be upheld;
- Remember that the restrictions have to be carefully drafted so that they are no wider than is reasonably necessary to protect the specific legitimate business interests of the employer; and
- Consider the impact of a garden leave clause: this case illustrates that a court will not always offset time spent away from the coalface of client contact or on garden leave against the total length of any post termination restriction.