English law relating to post-termination restrictive covenants seems simple: covenants are unenforceable as a matter of public policy, unless they are no broader in duration, geographical scope and nature of restriction than necessary for the protection of an employer’s legitimate business interests (i.e. protection of confidential information, client relationships and a stable workforce). If a covenant is too broad it will fail completely, and an English judge will not re-draft a covenant to render it reasonable. As a matter of public policy, English courts will apply English law to any covenant seeking to restrict employees within their jurisdiction, regardless of which law governs the contract.
If a restrictive covenant is breached, an employer may claim damages, an account of profits and/or an injunction.
Two recent High Court cases highlight some important issues for employers wishing to protect business assets.
- Make sure the covenants protect your business assets.
In Towry EJ Ltd v Bennett and others, Towry claimed damages and an account of profits against a group of Independent Financial Advisers (IFAs) who joined a competitor, followed by many of their clients. The IFAs were subject to covenants prohibiting them from soliciting clients, but were not restricted from dealing with clients or from joining a competitor.
Towry failed to prove solicitation and its claims failed. The IFAs’ clients initiated contact with the IFAs, who then discussed details of the services offered by their new employer and facilitated the transfer of accounts from Towry. Had they solicited the clients? The judge, Cox J, explained that the question of who made the first contact may be relevant, but the real question was whether “... the Defendants’ communication with Towry’s clients ... contained a material element of persuasion with a view to gaining the business of those clients.” Towry’s claim failed because when the IFAs spoke with the clients, the clients had already decided to transfer their business and so there was no material persuasion.
Had Towry had the benefit of non-dealing or noncompetition covenants, the issue of solicitation would have been irrelevant and Towry would have been more effectively protected.
- Invest early in obtaining evidence of a breach of the covenants.
Suing on covenants requires evidence of breach (e.g. forensic examination of the IT system). Towry tried to argue the court should infer solicitation from the IFAs’ close relationship with the clients and the timing and similar form of clients’ requests to move their business. First, the IFAs were ordered to disclose details of the legal advice obtained when joining their new employer. This advice showed the IFAs had been careful to avoid breaching their covenants. Second, clients gave evidence at trial and were adamant they had not been solicited.
- Make sure you regularly review and renew covenants.
In Towry, by the time the case came to trial, a group restructuring meant Towry itself no longer traded. Did it have any legitimate business interests to protect? Cox J confirmed that English law assesses the enforceability of covenants with reference to the time at which the covenants are entered into, not at the time they are enforced, meaning that it could seek to enforce the covenants even though it was no longer trading.
This looks like a win for the employer, but this strict approach means that if the nature of its legitimate business interests change, the meaning and scope of the covenants will be determined as at the date they were entered into and may no longer effectively protect the employer’s business assets.
- Make sure you understand what legitimate business interests need protection.
Covenants must be bespoke. They must be drafted appropriately to the employee who is restricted and the legitimate business interests in need of protection.
In another recent case (QBE Management Services (UK) Ltd v Dymoke and others), the employment contract expressed protection of confidential information and client contacts as the relevant legitimate business interests. The employer tried to enforce covenants to protect the stability of its workforce. This attempt failed because the contract purported to set out the relevant legitimate business interests but this was not included. The moral is, either be comprehensive (the better option) or stay silent on the issue.