Last month the Government was hard at work, looking at ways to drive forward the UK economy. What was it doing, I hear you ask…was it Brexit? Was it the EU-US Free Trade Agreement? A potential saviour for the Port Talbot steelworks? Austin Reed? British Home Stores?
In a word, no.
Dissatisfied with the UK placing second to Switzerland in the 2015 Global Innovation Index (https://www.globalinnovationindex.org/content/page/GII-Home) by a margin of just 0.01, the Government is searching for ways to bridge that gap.
Amongst a number of other ideas which are intended to form part of the proposed National Innovation Plan on which the Government is consulting (https://www.gov.uk/government/consultations/national-innovation-plan-call-for-ideas)), the Government has alighted on non-competition clauses as an area in which those dastardly Swiss have outwitted the UK. This notwithstanding the fact that the UK scored higher than Switzerland both in terms of regulatory environment, regulatory quality and intensity of local competition.
Quite why non-competition clauses are being demonised is unclear. All the formal announcement says is that “The Business Secretary has today announced plans to look into employment rules that could be stifling British Entrepreneurship by preventing employees from starting up their own business after leaving a job“.
If the Government is looking at non-competition clauses, they must be a serious issue and cause all manner of unjust rulings, surely? Again, no. It is a long-held principle of our legal system that unreasonable restraints of trade on individuals are, unenforceable. As the Government’s own consultation concisely but ungrammatically states, “such clauses are [only] enforceable in a court of law if it protects a legitimate interest and is reasonable“.
Undoubtedly a National Innovation Plan is a Good Thing, at least in principle. We should also acknowledge that this idea may be nothing more than “blue sky” thinking and hopefully will never come to fruition. However as advisors to businesses (including many start-ups) on how best to protect their intellectual property and position in the marketplace, the idea of abolishing non-competition clauses, even just for an undefined class of ‘start-ups’, is in our view frankly bonkers, a proposition as unthinking and unnecessary as can be imagined for a notionally business-friendly administration.
Of course, on the basis that our collective minds also boggled at the concept of shared grandparental leave and the Government plans to launch consultation on that in May, it probably makes sense not to dismiss this proposal out of hand as an early advent to the Silly Season. With this in mind, a number of practical questions arise:
- Would banning or limiting non-competition clauses prevent employees or start-ups becoming embroiled in litigation that might act as a ‘barrier to entry’?
This is easy – it won’t. As mentioned above, there will need to be definitions of the businesses to which any exception will apply. Where there are definitions there is ambiguity and where there is ambiguity, there are Court cases and legal fees. The prospect of the usual reams of accompanying Guidance referring breezily to the Courts adopting a “common sense approach” is too depressing to contemplate.
Further, removing non-competition clauses would likely lead to a greater reliance upon the contractual and common law duties of confidentiality (i.e. employees cannot take information belonging to their employer and use it for their own gain). The best way of proving these claims is through a lengthy disclosure exercise and subsequent trial, which nowadays often involves specialist forensic IT analysis. An employee looking to set up his own start-up is unlikely to be able to fund such litigation.
- Is this about labour, confidentiality or intellectual property? Merely securing the services of the employee may be of limited value if he remains unable to use confidential information or his IP or to contact prospective clients.
- What would be the proposal to protect employers, perhaps themselves start-ups, against the loss of the investment they have made in key staff?
- Innovation is not the exclusive preserve of start-ups – would any relaxation of covenants apply only to certain employers, just new ones (even if subsidies of established business), small ones or those with material R&D plans?
- Is this to be a ban on such clauses or a limit on their length? Would the latter not reduce the number of over-wide (hence unenforceable) covenants and so actually worsen the situation?
- Would this affect non-solicitation clauses or merely non-competition restrictions?
- Why is innovation stifled by such clauses anyway? If an idea is genuinely innovative then the current employer won’t be doing it and so the covenant wouldn’t stop it. If the current employer is already doing it then it is its idea and it should be able to take steps to keep it that way.
So what should the Government do?
In our view, it should leave well alone.
The English Courts have a long-established track record in limiting or amending the ambit of non-competition clauses to what is reasonable. Why should hard-working employers which have built up their business, invested in developing employees and found a position in the marketplace then have the rug pulled out from under them by an employee being freely able to leave and immediately start work in competition with their former employer? Good news for the new employer, of course, right up to the point where the employee waltzes off with its relationships also and poacher suddenly becomes gamekeeper.
Many innovative businesses, being those who gave the UK such a high mark in the 2015 survey, themselves spawn innovative, entrepreneurial businesses started by employees who had been attracted to their former employer’s specific ethos. Without that employer being able to adequately protect itself, far from encouraging innovation the Government runs the risk of encouraging a sort of ‘Lord of the Flies’-style marketplace, with employees being free to leave and undermine their former employer at a moment’s notice, or what we in the covenant business call “America”, essentially.
In halting English it may be but the last word should come from the Government itself:
“The clauses are only enforceable in a court of law if it protects a legitimate interest and is reasonable“.
It sounds a sensible approach. Why mess around with it?