Not necessarily. As the case of Duarte v Black and Decker Corporation and another [2007] EWHC 2720 (QB) makes clear, the English courts will always consider whether the non-competes would be lawful in England under English law principles. This is even if, as in Duarte, the original agreement was not under English law at all but, for example, the home state of the relevant US corporation.

The facts

During his employment with Black and Decker Mr Duarte entered into two key contracts. The first, a standard contract of employment, governed by English law and an agreement referred to as a Long Term Incentive Plan (LTIP), governed by Maryland law. The contract of employment contained a three-month notice clause, but no non-compete clause. The LTIP contained a classic “non-compete” clause and an “anti-poaching” of staff clause.

In July 2007 Mr Duarte gave his employer, Black and Decker, three months notice of his resignation in accordance with his contract of employment. His intention was to enter into employment with a competitor of Black and Decker at the end of the notice period. When Black and Decker asserted that in doing so he would be in breach of contract due to the “non-compete” clause in the LTIP, Mr Duarte sought a declaration from the court that the clause was void and unenforceable.

The argument

Black and Decker said that the LTIP was governed by Maryland law, and since Maryland law allowed for a broader scope in the use of restraints of trade, the non-compete clause should be held to be enforceable. Mr Duarte asserted that the LTIP was governed by English law as a result of which the restraints of trade would clearly be unenforceable as being too severe. He argued that even if the LTIP was governed by Maryland law, Maryland law could not in this instance be applied given that it was “manifestly” incompatible with public policy (as per Article 16 of the Rome Convention, the international treaty which deals with governing law of international contracts).

The findings

The court looked to the provisions of the Rome Convention to ascertain whether the restrictive covenants were governed by English law or Maryland law. The starting point was that Maryland law should hold sway since the parties had chosen Maryland law at the time of entering into the LTIP agreement. However, that choice of law clause would not be effective if (as per Article 6.1 of the Rome Convention) the LTIP was an “employment contract” and if the application of Maryland law would deprive Mr Duarte of protection afforded by “mandatory rules”. The court found that Article 6.1 did not apply in this case. The LTIP was an “employment contract” given that it was obviously intended to operate as part of the overall package of Mr Duarte’s employment terms. However, the English law governing restraints of trade did not consist of “mandatory” rules, but rather was of a different character, being part of the general law of contract. The court said the “mandatory rules” concerned regulatory matters such as health and safety and statutory employment protection rights.

The court then went on to consider whether Article 16 of the Rome Convention was triggered. Under Article 16, Maryland law could not be applied in this case if it was “manifestly incompatible” with public policy (the right for individuals to freely carry out their trade). The court decided that Article 16 would indeed take effect if it was found that the covenants were enforceable under Maryland law but unenforceable under English law. In that event Mr Duarte would be free to start his new job in competition.

The court decided that Maryland law, although less strict than English law in this sphere, would also not enforce the covenants essentially because they were drafted too broadly. As such there was no need for the court to go on to consider whether the covenants would be enforceable under English law, but they went on to do so in any case.

Given that the court had already decided that the covenant would be unenforceable under the less strict Maryland law, unsurprisingly it was also held that it would not be enforceable under English law. The clause was worded too broadly. As for the “anti-poaching” clause, this was also held to be unenforceable on the grounds that again, it was too wide.

Wragge & Co’s action points:

Multi-national corporations with large numbers of senior executives to manage are reluctant, understandably, to depart from standard incentive programs. To do so risks unfairness and expensive and time-consuming administration issues.

However, if it is important to restrain an executive’s post-employment activities in England, it is essential to review the terms of stock-for-non-compete programs to make sure the non-compete clause would be enforceable in the UK. Otherwise, employers are potentially giving away valuable benefits for no reward and leaving them vulnerable in future