United States: Restrictive Covenants - Little Way Out For Employers When The Drafting Goes Wrong

Last Updated: July 24 2014
Article by Michael Smith

In the recent case of Prophet  Plc - v- Huggett, the Court of Appeal reminded employers how vitally important it is to ensure that the drafting of restrictive covenants is accurate and well thought through.  Overturning an earlier High Court judgment, the Court of Appeal refused to re-write an unambiguous, but commercially meaningless, restrictive covenant to make it commercially effective. 

Prophet developed, sold and updated computer software for the fresh produce industry.  In early 2012, it recruited Mr Huggett as its UK Sales Manager.  Mr Huggett entered into an employment contract with Prophet which included a 12-month non-compete covenant.  The covenant limited its scope as follows:

'......this restriction shall only operate to prevent the Employee from being so engaged, employed, concerned or interested in any area and in connection with any products in, or on, which he/she was involved whilst employed hereunder.'

In December 2013, Mr Huggett handed in his notice.  He told his employer that he was joining a company called K3 which was a software supplier operating in part of the fresh produce industry.  Prophet believed that Mr Huggett would be breaching the terms of his restrictive covenant to do so and sought an injunction to prevent him taking up employment with K3. 

Prophet brought proceedings in the High Court and an injunction was granted.  In the High Court, the judge accepted that the wording of the restrictive covenant was clear but it was commercially meaningless and offered Prophet no protection.  This was because the covenant sought to prevent Mr Huggett being involved with products in which he was involved while employed by Prophet.  Mr Huggett had only been involved with a very discrete product line while employed with Prophet, and this product was not provided by any other company.  There was, therefore, nothing to prevent him from joining a competitor as no competitor provided the same product.  

The judge's view was that, although the meaning of the restrictive covenant was clear, something had gone wrong in the drafting and the covenant did not give effect to the parties' intentions.  The judge was therefore prepared to add the words "or similar thereto" to the end of the restrictive covenant above to give it, what he believed, was the parties' intended meaning.  With the additional wording, the judge believed that Mr Huggett would be in breach of the restrictive covenant by joining K3 and granted an injunction.  Mr Huggett appealed to the Court of Appeal.

The Court of Appeal overturned the injunction.  The Court found that the wording of the restrictive covenant was plain in that it prevented Mr Huggett from joining another company where he would be involved in the same products as he had been with Prophet.  However, there were no such other companies.  Although this rendered the covenant commercially meaningless, the Court of Appeal did not believe that anything had gone wrong with the drafting.  Rather, the drafting was clear, but the person who had drafted the restrictive covenant had not thought through its effect.  In that case, it was not for the courts to rewrite the restrictive covenant.  It was only if the covenant was ambiguous, with one interpretation leading to a meaningless outcome and the other giving rise to a commercially sensible outcome, that the court would likely favour the latter.  However, this was not the case here; the meaning was clear. 

The Court accepted that it could, if necessary, "blue pencil" a restrictive covenant to delete words which rendered an otherwise enforceable covenant unenforceable but would not re-write a clear restrictive covenant as here.  In the words of Lord Justice Rymer, "it was not for the judge, nor is it for this court to remake the parties..... bargain.  Prophet made its.... bed and it must lie upon it."

Implication for Employers

When the High Court decision in this case was published, it came as a great relief to many employers.  The courts are notoriously reluctant to enforce post-termination restrictive covenants and traditionally had been unwilling to do anything to render a meaningless or unenforceable restrictive covenant enforceable, other than using the "blue pencil" test.  However, the High Court's decision in this case appeared to give some hope that the courts would look to re-write meaningless or unenforceable restrictive covenants to reflect what they believed to be the intentions of the parties.  However, the Court of Appeal's decision in this case firmly rejects this approach and reasserts the previously understood method of dealing with restrictive covenants.  It is therefore vital for employers to ensure that restrictive covenants are enforceable and commercially workable when they are entered into.  It is clear that if the wording goes wrong, the courts will not be prepared to correct it, other than to utilise the "blue pencil" test.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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