For many employers, confidential information, customer connections and a pool of skilled employees are fundamental to the success of their business. In a world where employees all too frequently jump ship to join competitors or set-up businesses in competition, how can employers protect themselves from breaches (or potential breaches) of confidentiality or restrictive covenant? (Register for our webinar on this topic here).
Restrictive covenants and confidentiality provisions – what are they?
During or following termination of their employment, employees or ex-employees often have the ability to take advantage of confidential information, strategic plans, customer/client details or other important information relating to their employer's business (together, "Confidential Information"), for example to benefit a rival business.
Employees are subject to various implied duties (such as the duty of fidelity) but these are limited in nature and do not generally extend post termination of the employment. It is therefore common for employers to include, in the contract of employment, various express contractual terms with a view to preventing employees from disclosing Confidential Information, competing, soliciting clients and poaching employees. Such provisions are often referred to as restrictive covenants or post-termination clauses.
What are the risks?
There can be various traps for the unwary when it comes to the drafting of confidentiality provisions and restrictive covenants. For example, all too often, contracts seek to provide an absolute prohibition on the disclosure of undefined or loosely defined 'confidential information,' or 'information related to the company's business and finances'. However the courts will not enforce confidentiality provisions which are too vague or broad in nature.
Where obligations relating to confidentiality are not mutual (that is, only the employee is agreeing to them), there is a risk that, unless the employment contract expressly clarifies what consideration is being given by the employer in return for the employee agreeing to any such obligation, the provision could be adjudged unenforceable. (Employers should also be aware that the approach adopted in this regard may have tax consequences.)
Restrictive covenants in employment contracts are generally viewed more strictly than those in commercial contracts (such as those between a seller and a buyer). Unless carefully drafted, they are usually less likely to be regarded as reasonable, because of the inequality of bargaining positions between employer and employee.
In addition, when considering the enforceability of a restrictive covenant, the courts must consider the doctrine of restraint of trade. The doctrine provides that any contractual term restricting an employee's activities after termination is void for being in restraint of trade and contrary to public policy unless the employer can show that: (1) it has a legitimate proprietary interest that it is appropriate to protect; and (2) the protection sought is no more than is reasonable, having regard to the interests of the parties and the public interest.
In order to guard against the consequences of a breach of confidentiality or restrictive covenant, therefore, it is essential to ensure that the contractual provisions are drafted correctly to begin with.
What can employers do in the event of a breach?
Employers commonly include an express term in the employment contract (or in any settlement agreement entered into following a dispute with an employee), requiring the employee to surrender any Confidential Information in their possession upon termination of their employment. Notwithstanding that, breaches of confidentiality are often essentially a misconduct issue, and the first stage should be to immediately investigate the problem .
Where an investigation reveals that enforcement action is required, confidentiality provisions and post-termination restraints are generally enforced by means of an injunction – that is, an order from the court for a party to do something or refrain from doing something, whether on a temporary or permanent basis. Injunctions are an equitable remedy , which may be granted at the discretion of the court by reference to what it regards as fair in the circumstances.
Where an employer seeks to obtain financial recompense following breach of a confidentiality provision, the dispute will often revolve around whether the term breach is a 'warranty', a 'condition' or an 'intermediate term'. This classification will affect the remedy available . In any event, the employer will need to demonstrate loss resulting from the breach. This will often include, for example, loss of profits on contracts, or opportunities diverted by the former employee.
Where the employee has been induced by a competitor into breaching restrictive covenants, the employer can also consider taking action against that entity. That may be a particularly attractive option as the competitor company is likely to have greater financial resources pay any award of damages.
So, an 'at a glance' overview of action that an employer can take in the event of a [suspected] breach of confidentiality or restrictive covenant typically includes:
- Commence investigation, including seek specialist advice .
- Obtain witness statements as to factual circumstances surrounding breach/potential breach.
- Obtain evidence of damage/likely damage.
- Where the employment is yet to terminate, consider use of garden leave.
- Consider whether further information or undertakings should be requested from the employee or any new employer.
- Consider whether to enter without prejudice negotiations and/or a settlement agreement.
- Where necessary and appropriate, seek an injunction and/or damages via court proceedings. It may be that an employer will want to apply for an injunction to request that the employee deliver up or destroy the Confidential Information. The court can make an urgent order on an interim basis, pending hearing the full evidence at a later trial. If at all possible, the employer should not delay in seeking injunctive relief.
Team moves – a related issue
Team moves, where competitors poach whole teams of employees from profitable parts of employers' businesses, have become an increasing problem in recent years, and could become more even of an issue where employees feel uncertain or undervalued in the wake of the Covid-19 pandemic.
Recent case law has, however, demonstrated an increased willingness by the courts to uphold post termination restrictions in favour of employers. As such, where any recruitment is not properly handled by new employers/competitors, the courts may consider there has been an unlawful poaching exercise.
In the event of any suspicions of a raid on employees, employers should seek urgent legal advice so as to protect the company's position and/or to pursue financial compensation where possible.
Apart from the legal options which have been highlighted above, there are a number of practical considerations which can help an employer who faces confidentiality or restrictive covenant/competitor concerns to proactively protect itself. For example:
- Employment contracts should be reviewed periodically, in particular in the event of promotions of employees, to ensure that their provisions are enforceable and offer the best possible protection for employers.
- Company monitoring policies and appropriate supervision should be in place to avoid breaches occurring or going unnoticed. This is likely to be more important than ever, as a result of the post-Covid increase in home- and flexible- working.
- IT systems and document retention policies should be reviewed to ensure that they adequately cater for, and mitigate against, the risk of valuable information being lost in the event of a breach by an employee/former employee.
- Employers may wish to implement staff training for senior/key employees or executives, and to adopt policies and procedures, in relation to the urgent, efficient and effective conduct of investigations. Any such policy should direct the employer to act quickly in instructing specialist advisers and gathering and preserving evidence (which may be in the form of emails, telephone records, social media accounts as well as traditional documents and witness statements) and to identify any system failures and/or areas of vulnerability.
How can we help?
Protecting employers and their Confidential Information is a complex area of law. Cases can be highly sensitive and inevitably turn on their own facts, specific circumstances and often even the personalities involved. Employers should therefore ideally work with specialist advisers, both pre-emptively when it comes to ensuring that their contracts are valid, enforceable and offer the best possible protection for the business; and if/when it comes to investigation and potential enforcement action in the event of any [suspected] breach.
Gwendoline Davies, Nick McQueen, Rebecca Jackson and Walker Morris' specialist employment and commercial dispute resolution teams are experienced and expert in all aspects of employment contract negotiation, risk management and dispute resolution. Please do not hesitate to get in touch if you have any queries or concerns and we will be very happy to help.
1 Whether that investigation is undertaken covertly/internally at the outset and/or requires external legal input and further forensic investigation will depend on the particular circumstances including, for example, the nature of the disclosure or misuse of Confidential Information, or how the breach of restrictive covenant has come to light.
2 An 'equitable' remedy is underpinned by fundamental fairness and awarded by the court at its discretion, as opposed to a legal remedy that is available as of right to a successful claimant. When exercising its discretion, the court will consider whether the applicant has 'clean hands' (is free of wrong doing him/herself), and whether there has been any delay in bringing the application, which could cause unfairness. See our earlier briefing for further information on injunctions/equitable remedies.
3 Our recent briefing provides further advice on the classification (and consequences) of contractual terms.
4 Apart from providing advice on merits and strategy, the involvement of a legal specialist should ensure that the employer's overall position remains protected, and in particular that legal privilege applies, from the outset.
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.