Employment Update: Non competition clauses

20 March 2007

A restrictive covenant which prevents an ex-employee from competing for one year after termination will be upheld where non-solicitation and confidentiality covenants are insufficient to protect the employer’s genuine business interests.

On 20 February 2007, in the case of Thomas v Farr plc and another, the Court of Appeal rejected an appeal by a former managing director that a one–year non-compete covenant was an unreasonable restraint of trade.

The covenant was included in the contract which Mr Thomas signed when he became MD of Farr in 2003. Farr were insurance brokers specialising in the social housing market. Mr Thomas wanted to leave and work for a new entrant into that market. He argued that the covenant was unenforceable because –

  • he had no information that could continue to be regarded as confidential after termination of his contract

  • the company was adequately protected by non-solicitation and confidentiality covenants

  • the non-compete clause was too wide

  • the non-compete period was too long

The court disagreed. Mr Thomas would inevitably know detail of budgets and business plans which would be valuable to a competitor trying to undercut Farr in its dealings with clients and insurers. This was exactly the kind of ‘trade secret’ that should remain confidential.

It was difficult to ‘police’ a confidentiality covenant particularly where difficult to differentiate between confidential and non-confidential material and, as he had no direct day-to-day client contact, a non-solicitation covenant would be ineffective.
The restriction covered any place where Farr had done business in the 12 months prior to termination but did not prevent him from operating as an insurance broker outside the social housing market.

In fact, the insurance business operated on a cycle longer than the 12 months restricted period but 12 months was a conservative estimate of the time for which the confidential information would retain its currency.

The covenant was upheld.

Points to note –

  • Although they are useful business tools, restrictive covenants will not be enforced by the courts unless they are reasonable in extent and duration and the employer can show that it has a genuine business interest to protect. It follows that they need to be carefully drafted to suit each individual case. We are happy to advise on appropriate wording for the contracts of your key employees

  • The employee was the claimant in this case – he took the initiative and asked the High Court to make an order that the restrictive covenant was unenforceable. A high-risk strategy which, in his case, did not pay off. When key employees resign, urgent and specialist advice is needed if restrictive covenants are to be enforced by court order

  • In the case of an MD the court was content to consider the question of what constituted confidential information in terms of generalities such as budget and business plan details and accepted that it was hard to know where to draw the line over what should remain confidential post-termination. Indeed the fact that it was difficult to police a confidentiality covenant and the non-solicitation covenant was one of the reasons that the court upheld the non-compete covenant. With more junior employees, the courts are more insistent that covenants are drafted so that employers identify precisely what the confidential information is that they wish to protect. Employers must also show that the employee had been made aware of its confidential nature. We can advise on how this can be done.