Employment Update: Restrictive covenants



Enforceability of a ‘leaving contract; application of covenant to employee’s email address book and collection of business cards.

In WRN Ltd v Ayris the High Court has given some helpful guidance on some issues that always seem to arise when an employer loses an employee who has become rather a key player.

The employee joined WRN in September 1999 and was given a contract, which he never signed, which contained restrictive covenants not to compete or solicit business from the employer's customers for 6 months post-termination of his employment.

By December 2007, when he resigned, he was Head of Sales and Marketing.

WRN, realising that he had never signed the employment contract and knowing that he was going to work for a competitor, required him to sign a 'leaving contract' which contained similar covenants but extending for a twelve month period. In return, the employer agreed that he would only work, and be paid, up to a certain date.

WRN then discovered that he had taken with him a Rolodex with customer details and some 50 odd business cards that he had collected while employed. He had also emailed everyone in his email address book telling them where he was going.

WRN applied to the Court for an injunction to enforce the restrictive covenants.

The High Court judgment says -

The Rolodex and most of the business cards (those that he had collected while employed by WRD) belonged to the employer and had to be returned. Similarly, the employee had to delete from his computer any addresses in his email address book that he had acquired while working for WRD. These details did not amount to confidential information and it would only take him about 3.5 hours to reconstitute his address book from publicly available information, but that was what he should have done.

The 'leaving contract' was unenforceable because there was no real deal. He received no real consideration in return for agreeing to the draconian new covenant.

The employment contract was enforceable, even though he had failed to sign it, because there was clear evidence that he had received it on joining and had worked to its terms from 1999 to 2007. The relevant covenants in the employment contract were only unenforceable because the definition of 'customer' was not limited to those customers with whom the employee had had personal dealings while working for WRN.

So, having returned the Rolodex and business cards and deleted customer email addresses from his system, the employee was free to leave and compete

Points to note:

  • Restrictive covenants can be very useful to employers in competitive markets. The best times to negotiate for a covenant to be included in an employee contract is when the relevant employee is recruited or promoted.

  • The covenant will only be upheld by the Court if it meets certain criteria (see Norbrook Laboratories case below) – expert legal drafting is essential.

The reasonableness test – to decide whether a covenant is enforceable - is well-established. No special significance should be given to other factors e.g. salary level and relevance of confidential information to the job.

Norbrook Laboratories (GB) Ltd v Adair and Pfizer is an important High Court judgment on restrictive covenants.

The employer was a small company selling supplies to vets. The employee signed a confidentiality agreement when she joined the firm which included two covenants:

  1. not to work for a competing business for one year after termination; and

  2. also for one year after termination, not to solicit or deal with customers or prospective customers who she had had 'direct access to and/or dealings with' in the previous two years.

The employee was hired to deal with sales in a particular geographical area but, on joining the firm, was shown sales, pricing and customer information covering the whole country. Her salary was £25,000. She was only employed for a year before she resigned to go and work for Pfizer - a much larger company which had a very strong position in the same market. At her job interview with Pfizer she had disclosed details about the employer's discounting system.

The employer applied to the High Court for injunctions to enforce the two covenants.

The employee argued that her low salary was relevant to deciding the reasonableness of the covenants. She claimed that the only confidential information that could be properly protected by restrictive covenant was the information she actually needed to do her job, not the extra country-wide information that she had been given. She said that six months would have been a reasonable period over which to enforce both covenants and that the balance of hardship lay in her favour so the covenants should not be enforced at all.

The Judge said that her first two arguments were wrong. Her salary level was no more or less significant than any of the other terms in her contract. The fact that she had been given confidential information that she did not actually need for her job did not make that information any less confidential and capable of protection by restrictive covenant.

However, the Judge agreed that the non-compete covenant was too wide as it covered all products and not only those which she sold, and in any event the one year restricted period was too long.

As for the non-solicit/non-dealing covenant, the Judge pruned it down by deleting references to 'prospective' (as opposed to 'actual') customers with whom she had dealt; allowing her to solicit outside her old 'territory'; and deleting 'had direct access to' - so that the covenant only covered customers who she had dealt with. With these restrictions, the covenant was upheld so that she could not solicit or deal with such customers for one year after termination.

Points to note:

  • Courts will not enforce restrictive covenants unless they pass a ‘reasonableness’ test. Was the covenant reasonable in extent and duration and did the employer have a genuine business interest to protect? We can advise on how this test may apply in any particular case.

  • Restrictive covenants can be a useful commercial tool but must be very carefully drafted if they are to pass the ‘reasonableness’ test.