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Restrictive covenants – enforceable, or a waste of paper?

Restrictive covenants – can you really restrain a former employee from competing against you?

The Background  – Verition Advisors v Jump Trading International & Jump Trading International v Couture.

Mr Couture left Jump Trading to join a competitor, Veriton Advisors. Jump trading sought an injunction to enforce a restrictive covenant in his employment contract

His employment contract required him to serve his notice (12 months) on garden leave, if required by his employer.

His contract also contained a 12 month ‘non-compete’ restrictive covenant preventing him from working for a competitor for a period after his employment with Jump ended.

As Mr Couture’s notice was spent on garden leave, one would expect the non-compete clause to kick in after the garden leave had been completed, meaning that he would not be able to work for Veriton for a full 2 years from the point he told his current employer.

Complex arguments ensued between the two employers, with Jump applying for interim relief and an injunction, and Veriton appealing against the court’s ruling that a hearing should be brought forward to properly examine the issues.

While we await the outcome of the hearing (Veriton’s objections having been rejected) the case does bring about some interesting observations for employers.

Employer may seek an injunction to enforce restrictive covenants

If it looks like an employee is about to breach a restrictive covenant, the employer may seek an injunction. This is quite an expensive process, so normally confined to senior employees.

The injunction, if granted, would instruct the employee against doing the thing or things that seem to be breaching the covenant, until a full hearing had established the extent, if any, of the breach. In the event, the injunction was refused.

In the case in hand, the breach concerned Mr Couture joining his new employer before the restricted period was up. In the event, the court allowed him to join Veriton, but ordered a speedy trial so that any potential harm, if it existed, could be minimised.

Injunctions should be sought without ‘undue delay’

It took Jump 4 months to apply for an injunction, and this was judged to be an unreasonable delay. Jump may have regarded the fact that Mr Couture was on garden leave as justification for delaying the injunction application, but the court didn’t see it that way, and also felt that Jump had somewhat over-blown the risk to its business.

Long garden leave is likely to be significant

Mr Couture’s year on garden leave also swayed the decision, the court noted that ‘this was not a case of leaving the old employer on Friday, and starting with the new one on Monday’, there was a full year on garden leave.

Implications for employers

Cases like this one serve to remind us that well drafted restricted covenants can be enforced, but need to be regarded in the context of the full circumstances. Is the employee really a threat to the previous employer’s business, and have they or will they serve a lengthy garden leave period?

Garden leave can reduce the threat of a previous employee becoming a competitor

On the subject of garden leave, this case also shows how garden leave was intended to be used – by isolating the employee from work, and preventing them from starting new employment, their knowledge of the original employer’s confidential information will be significantly eroded. It also provides an opportunity for a well organised employer to secure contracts and clients that might have been at risk had the employee still been at large.

Of course, garden leave should only be invoked unilaterally if the employment contract makes it clear that the employer has a contractual right to do so.

Courts may order a speedy trial in the absence of an injunction

The courts recognise that long waits for verdicts when restrictive covenants are involved are in nobody’s interests, and there is flexibility in the legal system for early hearings, even if an injunction hasn’t been applied.

Remember that restrictive covenants need to be reasonable

To be enforceable restrictive covenants need to go no further than they need in order to protect the employer’s interests. ‘Go no further’ normally means restricting the length of the covenant and the things it seeks to restrict.

In the instant case Mr Couture’s 12 month restriction on top of a 12 month garden leave period seems unusually long. It’s not impossible that the court may find it reasonable, but the fact that he has been allowed to take up employment with his new employer would seem to suggest otherwise – we’ll await the outcome of the hearing.

The rule of thumb is that longer restrictive covenants should be applied to only the most senior people, and then only when they present a genuine risk.

Other relevant considerations not necessarily presented by this case

  • Don’t use blanket restrictive covenants for all employees
  • Do bear in mind that the long-awaited government consultation into the enforceability of RC’s is likely to shorten periods considerably
  • Make decisions based on level-headed real risk management, not emotion!
  • Remind exiting employees (in writing) of any post-employment terms that apply and, without being threatening, make clear that any breaches will be pursued

Can restrictive terms be inserted into a contract after an employee has resigned?

Settlement agreements are the best way to introduce new or extended post-termination restrictions. It is also possible to sign an amendment to contract to introduce new restrictive covenants. In both cases you would need the employee’s agreement, and the employee must be paid a suitable (taxable) sum in consideration of the new clauses.

What should employers do as a result of this case?

Restrictive covenant clauses should be reviewed periodically, and confidentiality and IP clauses should be updated for relevance. In particular employers should consider who should be covered by post-employment terms, and to what extent these may reasonably apply. Reasonably regular updates reflecting a well thought out approach are more likely to be viewed favourably by the courts. Remember that substantial new terms cannot be unilaterally introduced for existing employees – their agreement will always be required, as will a payment in consideration of their accepting the new terms.

HR Support from myHRdept

Apart from drafting good quality restrictive terms, our retained support packages contain support hours which can be used to draft the various letters and agreements an employer may need when exiting a senior employer. We are also on hand to provide any necessary advice and guidance.

If you’re thinking of outsourcing your HR, payroll or employment law needs, why not contact myHRdept? Call us on 01628 820515, email us at enquiries@myhrdept.co.uk to discuss your requirements, or contact us via our website and we’ll call you back.

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