Over the last year, a series of cases has given useful guidance on the permissible length of covenants seeking to restrict an ex-employee’s client dealings.
Post-termination restraints are void unless the employer can demonstrate a legitimate business interest and show that the wording of the covenant goes no further than what is reasonable. It is accepted that client goodwill is a protectable interest and that relatively short periods of restraint, some 6 to 12 months, are permissible. The recent case of East England Schools CIC v Palmer and Sugarman ( EWHC 4138 (QB)) challenged this approach in the context of a school recruitment agency.
An employee with 6 month client covenants, Palmer, began to contact her former client schools very soon after joining her new employer, Sugarman. Her former employer, East England Schools (EES), sought an injunction and the matter ultimately came to a full trial to assess the reasonableness of the client covenants. The defendants questioned whether in today’s internet age it can be assumed that client goodwill will be always a legitimate interest. If so, was 6 months a reasonable period?
Sugarman argued that the key factor for a school when placing a teacher was the quality and availability of candidates, not loyalty to a particular agency. It is a candidate's market with schools being short of teachers and needing replacement staff rapidly. No one particular agency would have the best candidate and a school seeking teachers would look to a number of agencies for good, immediately available, candidates. Further, the details of schools and their vacancies are readily available on the agencies’ websites, as are the details of candidates. It is an open market based on need with a fast turnaround. Any goodwill between an agency and a school is of marginal value.
EES argued that a close relationship between schools and agencies nevertheless existed, with schools coming to rely upon particular recruiters. Although the court acknowledged that social media and online resources may make it more difficult to prove a close relationship, the judge found in favour of EES on the facts, emphasising the importance of the recruiter and the trust the school placed in her. Despite the fact that schools would look around for the best candidate, they would still come to a preferred agency as their first choice and this was a valuable asset worthy of protection.
LENGTH OF RESTRICTION
The next question was whether 6 months was too long. A covenant should last no longer than the period of time it would take for the departing employee’s successor to establish links with the clients. EES relied upon recent cases which held that senior employees could be restrained for periods of up to 12 months. Perhaps the most persuasive judgment was Coppage v Safety Net Security Limited  EWCA Civ 1176 where the head of a department was known to clients as “the face of the business”. Having established a business stream for the employer, this warranted a 6 month period of protection. Further cases are relevant to the line put forward to EES. Croesus Financial Services Limited v Bradshaw  EWHC 3628 stressed that when senior staff deal with clients on an annual basis, there is good reason for a 12 month covenant. Indeed, this was repeated in the 2014 case of Prophet plc v Christopher Huggett  EWHC 615 which emphasised the importance of client contracts being renewed annually.
Sugarman’s counterargument was that these cases and methods of business were irrelevant to the school recruitment industry. Witness and documentary evidence was produced to show that the colleagues of a departing employee would be dealing with the clients immediately. Associated Foreign Exchange v International Foreign Exchange  EWHC (CH) 1178 was authority that, in a fast-moving business, the life of a covenant must be very short. In the foreign exchange market there are one-off deals made on a weekly basis and customers felt no obligation to use a particular broker. They shop around for the best deal on each given transaction. A 12 month restriction was rejected and it was felt that any period “beyond 6 months would be objectionable”.
Sugarman argued that given the fast transactional nature of the recruitment market, even 6 months was too long. Ultimately, Sugarman lost, in part because the judge held that the recruiter, even though junior, was still the “face” of the business to many clients. Crucially though he stated that the 13 weeks of school holidays each year had to be taken into account. In entering into the contract, it was possible that a covenant would have to cover the 7 week period of a school's summer holiday. As such, 6 months was not too long. Interestingly though, there was no more general finding that 6 months was an acceptable period.
Sugarman shows that employers should avoid simply copying and pasting template covenants into contracts. Lengthy covenants that might be acceptable for senior staff are not necessarily acceptable for more junior ones. Where a company’s business is one based on frequent and open trades, particularly online, as opposed to customer loyalty, thought should be given to implementing very short periods of restriction, perhaps some only 3 to 4 months. There is an argument that as this faster paced world of social media undercuts personal relationships, and in certain businesses replaces human interaction with virtual interaction, standard 6 month restrictions have run their course.
This article was published in New Law Journal in April 2014.