UK: Spotlight On Recent Covenant Cases

Last Updated: 15 June 2012
Article by James Hyne and Bob Mecrate-Butcher

There has been a glut of cases on restrictive covenants in the last few months which appears to indicate that the current economic climate means companies are more prepared to take action to try to enforce these to protect their businesses. We report on three of them.

Non-solicitation

Towry EJ Ltd v Bennett and ors is a case which involved financial advisers who moved to a competitor following the acquisition of their employer by Towry. Although it had no primary evidence of solicitation Towry brought proceedings on the basis that the "tidal wave" of clients (over 400) moving to the competitor meant that solicitation by its former employees must have taken place.

However, the High Court dismissed the claims on the basis there was no evidence of solicitation which it confirmed must involve some form of persuasion taking place. The competitor was in a strong position to defend the claim as a result of taking precautions such as seeking legal advice at an early stage, using a script to explain the impact and nature of restrictive covenants to the individuals during the recruitment process and paying for each of them to take legal advice on their restrictions. It also made it clear that any breach of restrictive covenants would result in the arrangement being terminated.

KEY POINT TO TAKE AWAY

This shows the importance of also including non-dealing covenants in employment contracts.

Springboard injunction granted to delay team move

The High Court in Clear Edge v Elliot and others granted a springboard injunction to prevent a team of three employees joining a competitor pending a speedy trial. A springboard injunction prevents a former employee and his/her new employer from gaining an unfair competitive advantage over the former employer as a result of the employee's breach, whether this is as a result of misuse of the former employer's confidential information or a pre-termination breach of fiduciary duties or breach of the duty of fidelity. It is a very effective remedy and will usually last for the length of time needed to neutralise any unfair advantage. In this case the injunction was granted because the evidence indicated past misuse of confidential information which the Court considered was likely to persist giving them and their new employer a competitive advantage if not restrained. There was also evidence that the employees had been in breach of their fiduciary duties and the duty of fidelity.

The evidence in this case included a computer forensics report which revealed that computers and phones had been repeatedly wiped prior to being returned to the company. Although the employees claimed this was to delete their personal data the Court considered this suspicious in the light of other evidence which indicated a co-ordinated defection combined with the employees' refusal to give undertakings and warranties when asked prior to litigation being instigated.

The springboard injunction was considered an appropriate remedy as it was for a short duration, damages would be difficult to quantify and the prospect of recovery from the defendants was remote.

KEY POINT TO TAKE AWAY

This demonstrates how important computer forensic evidence can be and how a springboard injunction can be used to the advantage of a wronged former employer.

Preparing to compete – how far can an employee go?

In Customer Systems v Ranson the High Court held that two senior employees, who were not directors, were in breach of their duty of fidelity and fiduciary duties when one, Mr Ranson, set up a company in competition with their employer which the other employee later joined.

Although there was no breach in setting up the company and preparing business plans, once Mr Ranson pursued potential work from his employer's customers during his notice period the Court held he had a fiduciary duty to inform his employer of these opportunities and his interest in them (regardless of whether he was successful) because of his responsibility for sales. Unsurprisingly, he was also in breach when he emailed himself customer contact details and took copies of template documents.

The other employee was also held to be a fiduciary as he too had responsibility for sales. The Court held that he was not under a duty to report the new company's existence to his current employer, or what he had learned in confidence about matters relating to competition, but once he became actively involved in putting together business proposals during his notice period, he too was in breach of his fiduciary duties and duty of fidelity.

This decision has been appealed and is due to be heard in June this year so watch this space!

KEY POINT TO TAKE AWAY

This decision shows the impact of establishing fiduciary duties owed by senior employees (who are not directors) in certain circumstances given the wider remedies available when such a breach has been established (e.g. an account of profits rather than just straightforward damages).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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