The High Court has held that the enforceability of a non-compete clause must be decided at the time it was entered into, even where the employee has subsequently been promoted to a role where the restriction would be more reasonable, unless the clause is explicitly re-affirmed at the time of the promotion.  The court also expressed the view that a 12 month non-compete provision would, in any event, have been too long to be enforceable.

Patsystems Holding Ltd v Neilly

Mr Neilly joined Patsystems as an account manager in 2000.  At the time he signed a contract which contained a non-compete restriction preventing him from being engaged or concerned with a competitor for 12 months post-termination (the "non-compete clause").  He was promoted in 2005 to the role of Director – Global Account Management, and his contract was varied by a letter signed by Mr Neilly in respect of certain terms and conditions (e.g. role, salary, notice period).  The letter stated that all other terms and conditions of his original contract would remain unchanged.  By 2012, Mr Neilly’s role was a key role in relation to account management and business sales for the EMEA region. 

In April 2012 Mr Neilly resigned.  He was subsequently dismissed for gross misconduct, on the grounds that his declared intention to work for Trading Technologies ("TT") was in breach of the non-compete clause.  Mr Neilly then immediately started work with TT, and Patsystems sought an injunction to enforce compliance with the non-compete clause.  Mr Neilly brought a counterclaim for wrongful dismissal.  Patsystems acknowledged that the non-compete clause could not be justified in the case of an employee with the relatively junior status and responsibilities which Mr Neilly had when he joined, but argued that the enforceability should be considered at the time of his promotion.

Decision

The High Court refused to grant the interim injunction and upheld Mr Neilly's counterclaim for wrongful dismissal.  Underhill J held that the non-compete clause was unenforceable because it was not reasonable at the time that it was originally entered into (when Mr Neilly started employment).  The contract variation in 2005 did not 'revive' the non-compete clause - a general acknowledgement that all other terms and conditions remain unchanged is not sufficient.  In order to do this, there must be "explicit reconsideration" by the employee. The High Court stated that this could take the form of the employee's explicit acceptance of the post-termination restriction.  Alternatively, signing a fresh agreement without explicitly drawing the employee’s attention to the non-compete provision would “probably” have been sufficient.

Although not required to decide the point, Underhill J also expressed the view that the non-compete clause would in any event be unenforceable, as a 12 month restriction went beyond what was reasonably necessary to protect Patsystems' legitimate interests.  A 6 month restriction would have been sufficient to project confidential information relating to new products under development.  Underhill J was also influenced by the fact that most of Mr Neilly’s colleagues were subject to non-compete covenants which lasted no longer than 6 months – although many were more junior, they had access to the same confidential information.

Underhill J also expressed the tentative view that if the clause had been enforceable, Patsystems would have precluded themselves from enforcing the non-compete by summarily dismissing Mr Neilly because of his anticipatory breach of the clause.  It would only enforce the clause if it was prepared to comply with its own obligation to continue to employ and pay Mr Neilly during his notice period.

Comments

To have the best chance of being enforceable, covenants should be tailored to an individual’s role and should be reviewed when an employee is promoted or moved to a new role.  However, even where the covenants remain the same, it is likely to be beneficial to have an employee explicitly acknowledge that the covenants will apply to them in their new role if they are promoted or move to a role where the restrictions will be easier to justify.

The case is also a reminder that, even though the courts have been more willing to enforce non-compete clauses in recent years, it is still necessary to ensure that they are no longer than is reasonably required to protect the particular business interests at which they are aimed.