There have been a number of important, recent cases in the UK concerning post-termination restrictive covenants. These decisions demonstrate a continued willingness on the part of the UK courts to enforce restrictive covenants in employment contracts, but only if they are reasonable and well-drafted. The use of such covenants (including non-compete, non- dealing and non-solicitation covenants) remains one of the most effective ways in which an employer can protect its business against unfair competition by departing employees. Therefore, it is worth identifying the lessons that can be learned from these decisions.
Non-solicitation clauses are looked on more favorably than non-competition clauses, which have a more severe impact on the employee.
The General Rule
The general rule in the UK is that a post-termination restrictive covenant in an employment contract is void for being a restraint of trade and contrary to public policy. However, such a covenant will be enforceable if an employer can show that it has a legitimate proprietary interest to protect (e.g. trade connections with suppliers or customers and, more generally, goodwill, and trade secrets and other confidential information). An employer will also have to show that the protection sought is proportionate (i.e. no more onerous than is reasonably necessary having regard to the interests of the parties and the public interest). Essentially, the courts have to balance the interests of the employer and employee.
The Nature and Scope of Restrictive Covenants
In Coppage v. Safety Net Security Ltd, the issue concerned the enforceability of a non-solicitation of customers clause. Mr. Coppage had resigned from his position as the Business Development Director of Safety Net, established a competing business, and approached Safety Net’s customers. His contract of employment contained a six-month non-solicitation covenant in relation to Safety Net customers. Notably, the covenant was not limited to customers with whom Mr. Coppage had personal dealings within a certain period of time (e.g. within the previous 12 months), which would normally leave the covenant vulnerable to challenge. However, the UK Court of Appeal held that the clause was sufficiently limited, both in duration and in respect of the class of customer with whom Mr. Coppage could not deal. Key factors in reaching this decision included the fact that Mr. Coppage was a key employee, the fact that the length of the restriction (only six months) was relatively short; the type of restriction (a non-solicitation rather than a non-compete restriction), and the stability of the customer list (very few customers had ceased to be customers over the previous 12 months).
The lessons to learn from the Coppage v. Safety Net Security Ltd case are:
- Non-solicitation clauses are looked upon more favorably than non-competition clauses, which have a more severe impact on the employee.
- The issue of reasonableness has to be assessed as at the time when the employment contract is entered into and “not in the light of matters that have subsequently taken place (save to the extent that those throw any general light on what might have been fairly contemplated on a reasonable view of the clause’s meaning)”.
- The Courts ought not to be interested in whether the wording of the restriction would, hypothetically, capture matters which would be improbable or could not have been contemplated by the parties.
Construction and Interpretation of Restrictive Covenants
The Courts, if faced with an ambiguous contractual provision with one interpretation leading to an apparent absurdity and the other to a commercially sensible solution, are likely to favor the latter. The UK Court of Appeal case of Prophet plc v. Huggett concerned Mr. Huggett, who was employed by Prophet plc as a UK sales manager. Mr. Huggett’s contract of employment contained a non-compete clause which provided that the restriction “would only operate to prevent the Employee from being so engaged, employed, concerned or interested in any area and in connection with any products in or on, which he/she was involved whilst employed hereunder”.
A literal reading of the clause made no sense as no competitor would ever be involved with Prophet’s actual products. In the first instance, the High Court treated this as a drafting error, and read in the words “or similar thereto” into the clause to produce a commercially sensible result and upheld the re- worded covenant. However, on appeal, the UK Court of Appeal disagreed with this approach and held that the only interpretation was the one that rendered the covenant useless, a decision that is rather worrying for employers.
Restrictive covenants must be carefully drafted to ensure that the intention of the parties is captured accurately.
The points to note from the Prophet plc v. Huggett case are:
- Restrictive covenants must be carefully drafted to ensure that the intention of the parties is captured accurately. The courts will not rewrite poorly drafted covenants on the basis that they result in a bad bargain for an employer.
- The courts will not rewrite clauses that are unambiguous. Although the Court of Appeal in this case agreed that the literal interpretation resulted in the clause having no commercial effect, it held that, as the clause was unambiguously clear, there was no basis on which to rewrite the clause.
Remedies for a Breach of a Restrictive Covenant
In One Step (Support) Ltd v. Morris-Garner, the issue concerned the remedies available for an employer for breach of a restrictive covenant by a former employee. In this case, the two defendants, who had entered into post-termination non-compete and non- solicitation of client covenants, left their respective positions at One Step (Support) Ltd (“One Step”) and set up a competing business (unbeknownst to One Step). The competing business was successful and was sold by the defendants for £12,823,205.
One Step alleged that the defendants had breached their restrictive covenants and that, in this case (with injunctive relief being useless because the competing business had been sold), ordinary compensatory damages would not provide an adequate remedy. This was because it was difficult for One Step to identify the particular financial loss it had suffered as a result of the breaches.
The Court acknowledged that damages are not always a sufficient remedy for breach of contract, but held that the case was not sufficiently exceptional to justify the alternative remedy of an “account of profits”. However the case was deemed to be a “prime example” of a case in which so-called “Wrotham Park” damages should be and were available, as the restrictive covenants had been breached in circumstances where it would be difficult for One Step to identify the financial loss it had suffered as a result. Under a “Wrotham Park” damages approach, the Court awards an amount of damages representing the sum that might reasonably have been demanded as compensation for releasing the defendants from the restrictive covenant, by reference to a “hypothetical negotiation” carried out between the parties at the date of breach.
However, employers should note that the extent to which “Wrotham Park” damages will be used going forward is unclear. Reservations had previously been expressed in BGC v. Rees, in which the Court noted that Wrotham Park damages were “not available as a substitute for conventional damages to compensate a claimant for damages he has not suffered. Nor should it be used to award a larger sum than a conventional calculation of loss provides”.
The One Step judgment, if followed, would represent a relaxation of the circumstances in which “Wrotham Park” damages might be appropriate, but further cases are awaited to assess the extent to which this approach will be followed.
Garden Leave, Restrictive Covenants and Keeping the Contract Alive
In Sunrise Brokers LLP v. Rodgers, the issue concerned the employer’s options where an employee seeks to leave employment immediately (in breach of contract). In this case the defendant, Mr. Rodgers informed his employer, Sunrise Brokers LLP (“Sunrise”), that he was leaving its employment immediately, despite being locked into a three-year period, which required him thereafter to serve twelve months’ notice to terminate his employment. In addition, Mr. Rodgers’ contract contained restrictions lasting six months beyond termination. Mr. Rodgers had signed an employment contract with a competitor to begin on January 1, 2015.
Sunrise asked Mr. Rodgers to return to work, but he refused and instead offered to remain on garden leave (i.e. remain on normal salary and bound by the contract of employment but not attend the office or contact clients or customers) until September 2014. The garden leave provision would also have reduced the length of Mr. Rodgers’ post-termination restrictions. As Mr. Rodgers refused to work, Sunrise refused to pay his salary and, crucially, refused to accept his repudiatory breach of the contract. Mr. Rodgers claimed that this amounted to a constructive dismissal (an argument rejected by Sunrise) which looked to enforce the contract by seeking: (a) a declaration that Mr. Rodgers was still employed by them; and (b) an order restraining Mr. Rodgers from working elsewhere in accordance with the restrictive covenant in his employment contract.
The Court rejected the idea that Sunrise’s decision to cease paying Mr. Rodgers amounted to an acceptance of his repudiatory breach. It decided that the employee must be ready and willing to do the work in exchange for the wages and the employer must be ready and willing to pay the wages in return for the work. Mr. Rodgers, therefore, in the Court’s view, remained employed by Sunrise and granted Sunrise a ten-month injunction consisting of a period of four months (which Mr. Rodgers would have spent in a handover process) and the six-month period of post-termination restrictions specified in the employment contract.
The key points that employers should note from this case are:
- An employer does not have to accept a “walk out” by an employee as terminating the contractual relationship. When an employee leaves his employment without giving proper notice (stating that he will never return), the employer can keep the contract of employment alive (so as to be able to enforce the employee’s obligation not to work for anyone else).
- An employee cannot force his employer to place him on garden leave.
- If an employee refuses to work he or she may not be entitled to be paid and the contract will not necessarily be breached by an employer’s decision not to pay the employee. If the effect of such a refusal to pay is that the employee will be compelled to work for the employer, the Court will not impose an injunction. However, on the facts of this case, Mr. Rodgers’ particular financial circumstances meant that the Court found no such compulsion.