In the era of the Great Resignation, would your organisation’s post termination non-compete provisions hold in court?
On 31 August 2022, AstraZeneca secured an injunction to prevent its COO from joining rival GSK. The departing COO had a 6 months’ non-compete clause in his contract and AstraZeneca argued that an injunction was required to prevent ‘’irreparable damage’’ to the company. Emmanuelle Ries and Chris Rodda recently also advised a client in the Clinical Research Organisation industry on enforcing a non-compete clause for their departing COO. In an out of court settlement, they secured an undertaking from the COO that he would abide by the terms of his 9 months’ non-compete clause preventing him from starting work with a competitor CRO company.
Could you enforce the restrictive covenants in your senior executives’ employment contracts to protect your business? Unfortunately, just as couples about to tie the knot may find it distasteful to discuss prenups agreements, employers and employees can be reluctant to apply themselves to tailoring the standard wording of the post termination restrictions and non-compete clauses in the employment contract at the outset of the relationship.
Post termination restrictions
Too often post termination restrictions are not properly thought through and will be too vague and too wide so will not assist in restraining an employee from departing to start with a competitor. I thought it would be helpful to briefly highlight the points that a judge would look at in deciding whether to grant an injunction to enforce the post termination restrictions.
- The starting point in English law is that all contractual restraints on a former employee’s freedom to work are void and unenforceable as being in restraint of trade and contrary to public policy. The employer will therefore need to show that the restrictions are no wider than reasonably necessary to protect the employer’s legitimate business interests.
- Legitimate business interests fall broadly within the following categories:
- Trade secrets
- Trade connections
- The stability of the employer’s workforce.
- The types of restrictive covenant used to protect these interests are, broadly, as follows:
- Non-competition restrictions, which prohibit the former employee from working in a competing business
- Non-solicitation covenants, which prohibit the former employee from soliciting specified business connections
- Non-dealing covenants, which prohibit the former employee from dealing with customers or other business connections of the employer.
- Post termination restrictions need to be reasonable in terms of length and scope. This is where the work needs to be done at the outset of the relationship, to tailor the covenants to be no longer or wider than necessary to protect the legitimate interests of the employer. For this exercise the employer will need to consider, among others, how long it will take to replace the employee in the role, the life cycle of the confidential information the employee may be taking with him, the length of the employee’s contractual notice period, he geographical scope of the restrictions.
Many businesses consider their key assets to be information and knowledge, such as a secret recipe or formula, a list of key business contacts and customers or specialised IT systems and data. Employers can take steps, such as entering into confidentiality covenants, to prevent employees making use of the information either for themselves or for a third party (most commonly a competitor).
The courts have handed down a solid framework by which they have grouped information according to a scale of confidentiality, from the eminently protectable “trade secrets” to information that is trivial or easily obtained from sources that are accessible to the public. It is difficult to know with absolutely certainty where on the “confidentiality scale” it is appropriate to place a piece of information. This is crucial, however, because its place on that scale will determine the level of protection that is awarded to it and the remedies that are available to its owner following its disclosure.
Can an obligation to disclose the terms of an offer received by the employee be enforceable?
Post termination restrictions often require the employee to notify the employer if they are approached by a competitor. In Square Global Ltd v Julien Leonard, the broker’s contract contained a job notification clause requiring him to inform the employer of the identity of any party making a job offer as soon as possible after accepting the offer. The Court ruled that this clause would only bite once all major terms of the offer had been settled. The employer argued that the sending of a first draft of the employment contract by the offeror reflected an agreement of all the essential elements and the drawn-out negotiations over trivial details during the following months were simply trying to obscure that. The Court rejected this, noting that although the changes after the first draft were relatively small, there were some non-trivial amendments (concerning mandate and garden leave).
Importantly there had been no indication that the broker had made clear to the new employer that it should regard all the major terms as settled and that these would not be subject to any further reconsideration by him prior to readiness for signature. It was probable that the parties had a high degree of confidence that a binding contract would in due course be executed, but that wasn’t sufficient to trigger the obligation.
For assistance in reviewing existing post termination restrictions, tailoring restrictive covenants or enforcing non-compete and breach of confidentiality obligations against a departing employee, please contact the Employment Team.
The material contained in this article is provided for general purposes only and does not constitute legal or other professional advice specific to your situation and should not be relied upon. Appropriate legal advice should be sought for your specific circumstances and before any action is taken.