Restrictive Covenants Flashcards
What is a restrictive covenant?
A restrictive covenant is a clause in an employment contract that seeks to prohibit an individual from competing with their ex-employer for a certain period after they have left the business.
What is the aim of restrictive covenants?
To protect an organisation’s legitimate proprietary interest by limiting an employee’s freedom in trade.
When can restrictive covenants be enforced?
- Must be based on an identification of advantage or asset in organisations business which can be regarded as property, for example confidential information or business secrets.
- Such clauses can only be enforced against the ex-employee where they
- Are designed to protect the ex-employer’s legitimate business interests
- Extend no further than is reasonably necessary to protect those interests
What are examples of restrictive covenants?
Non-competition
non-solicitation (of clients)
non-poaching
Non-competition description
Seeks to prevent ex-employee from working for a set period of time after termination of employment.
Typically, 6 months, but can be up to 12 or more, dependant on seniority.
Foster & Sons Ltd. v Suggett, 1918.
Foster & Sons Ltd v Suggett 1918
- Where an ex-employee of pursuers learnt secret production methods during his employment, and agreed to not set up a competing business for 5 years in the UK.
- Breached clause by setting up a business in direct competition.
- Pursuers were entitled to enforce this reasonable contractual restraint in order to protect important trade secrets.
Non-solicitation description
- Aim to stop ex-employee contacting clients/customers/contacts of ex-employer for a set period of time after they have left.
- Usually, 3-12 months dependent of seniority.
- Restrictions can be in the form of a “non-solicitation” or “non dealing” clause
- Latter is more difficult/intense (onerous)
- Robb v Green 1895
Robb v Green 1895
- Employee wrote down the names of his employer’s customers before he left his employment.
- Employee intended to approach said individuals personally upon termination of employment in order to persuade them to use the services of the business he had set up which was now competing directly against his ex-employer.
- Employee was prevented from approaching his ex-employer’s customers to poach them for his own business.
Non-poaching description
Restricts the poaching of key employees of ex-employer.
How can you evaluate fairness of covenants in contracts?
- Must state that the covenant must be apt.
- National Coal Board v National Union of Mineworkers 1986 raises the distinction between apt and inapt.
- General position re restrictive covenants –
- Void on public policy grounds as being in restraint of trade – unless they are being used by the employer to protect a legitimate business interest.
- This can include client and customer connections (including prospective ones)
- Confidential information (trade secrets)
- Connections with suppliers
What is generally considered to be ‘apt’?
- Employee under common law duty to obey any lawful and reasonable orders that an employer may issue.
- Clause must not be more restrictive that is reasonably necessary in the particular circumstance to protect an employer’s business.
- If clause only restricts clients that ex-employee has had material dealing with and within circa 12 months up to termination date, more likely to be upheld.
- Employer must show they have a legitimate business interest to protect.
- Restricting actions of senior employees is more reasonable.
Why is restricting senior employees more reasonable?
- They are in contact with customers, are privy to more secrets etc.
- Even if not in senior position, restrictive covenants more likely to be upheld if ex-employer can establish substantial personal connection with relevant customers, regardless of if decision to solicit them is made.
- Prove knowledge of trade secrets
- Vestergaard v Bestnet Europe 2013
- 2 ex-employees accused by Vestergaard of using confidential information which they had acquired during their employment for their own gain when setting up competing company.
- Employees duty of confidence
- The Supreme Court held that Vestergaard’s action for breach of confidence failed because an action for breach of confidence will be determined as a matter of an employee’s conscience.
- Employee must know/agree that information is confidential, employee did not know about confidential information until the trial.
What is considered to be ‘inapt’?
- Blanket attempt to deny ex-employee the right to make a living in their chosen industry/profession is unlikely to be enforceable.
- If clause is too restrictive – likely to be unenforceable.
- For example, if covenant seeks to restrict dealing with all clients (non-dealing clause) likely to be too wide, thus unenforceable.
- Cannot simply seek to restrict ex-employee competing against them for the sake of it – prove they have a legitimate business interest to protect.
- Non-compete clauses are difficult to enforce –
- Especially if non solicitation clause would achieve same objective.
Structure of Answer
Relate to case (identify as a restrictive covenant)
Define restrictive covenant
State when they can be used & the aim of them
Types of restrictive covenants with case examples
Fairness - apt/inapt - and define (National Coal Board v National Union of Mineworkers 1986)
What is considered to be apt?
What is considered to be inapt?
Non dealing description
Prevents departing employee from providing any services to the employer’s customers for a given period of time. This will apply regardless of which party approached the other and does not require enticement or interference on the part of the departing employee.
