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Employee Competition : When can a disproportionate restriction be enforceable?

In Harcus Sinclair LLP v Your Lawyers Ltd the Supreme Court considered a number of first instance decisions on the enforceability of non-compete restrictions.  In this article we consider how far the contemplation of expected promotion may assist an employer who is looking to enforce a restriction which appears, at first blush, to be disproportionate to the employee’s initial role.

Background

Your Lawyers Ltd acted for Claimants against VW in claims arising from the emission scandal but had limited experience of class actions.  Your Lawyers approached Harcus Sinclair with a view to collaborating with them to apply for a Group Litigation Order and work with them on such actions in the future. 

Harcus Sinclair signed a Non-Disclosure Agreement which included a 6 year non-compete clause which provided, “The Recipient further undertakes not to accept instructions for or to act on behalf of any other group of Claimants in the contemplated Group Action without the express permission of the Discloser.”

Later Harcus Sinclair recruited Claimants for its own group action and Your Lawyers issued a claim alleging breach of the non-compete provision in the NDA.  Harcus Sinclair argued that the NDA contained no reference to collaboration and that the non-compete restriction was unenforceable as a restraint of trade.

Decision

The Judge at first instance determined that the non-compete clause was no more than reasonably necessary to protect the legitimate business interests of Your Lawyer and that the burden on Harcus Sinclair was commensurate with the benefit secured on it.

However the Court of Appeal disagreed holding that, on a strict analysis of the wording of the non-compete clause, it felt that the clause went too far to be enforceable and held that the non-compete was unenforceable.

Coming full circle the Supreme Court agreed with the judge at first instance.  Interestingly, the Court held that in assessing the legitimate interests of Your Lawyers, in addition to the wording of the contract itself, the Court could take into account the objective intention of the parties and what was contemplated by them at the time the contract was made.

Consequently the Supreme Court held that the non-compete was reasonably necessary to protect the legitimate business interests of Your Lawyers and that the restriction was commensurate with the benefits bestowed on Harcus Sinclair.

Considerations

In arriving at its decision the Supreme Court placed particular reliance on two cases.

In Allan Janes LLP v Johal, a small law firm employed an assistant solicitor in the mutual hope that the recruitment would lead to an offer to join the partnership.  The contract contained a 12mth 6 mile radial non-compete and a 12mths all firm clients non-dealing covenant – regardless of contact.  Johal left after 5yrs having not been promoted to partner.  Johal argued that the restrictions were unenforceable and went further than necessary to protect the legitimate business interests of the firm at the time she was recruited.

The court noted that given the mutual hope for partnership, it was clearly in the contemplation of the parties at the time the contract was entered into that she would promote the defendant to its actual and target clients, assist in marketing and form income-generating relationships with actual and potential clients.  The Court held that the non-compete restriction was unenforceable but that the non-dealing provision was enforceable and should be upheld.

In Egon Zehnder Ltd v Tillman an executive search firm initially employed Tillman as a consultant before promoting Tillman to Principal and then Partner.  Throughout, Tillman’s contract contained a 6mth non-compete clause.  The Court held that the validity of the covenant had to be determined at the date the contract was entered into but it is necessary to look at what was in contemplation of both parties at that time in order to assess reasonableness.  In this case evidence was presented to the Court demonstrating that Tillman was a special recruit and that she had access to confidential and strategic information from an early stage.  Consequently the non-compete restriction was upheld.

Practical Implications

These cases show us that where a covenant is contained in an old contract entered into when the employee was employed in a more junior role, evidence for enforceability must be considered not only on the wording of the contract itself but also as to what was in the contemplation of the parties at the time of recruitment and what has happened since - in so far as it reflects what was in the original contemplation of the parties.

Employers should beware that where the initial engagement would not justify the restraint there would have to be very clear evidence of expected promotion by reference to the Contract itself and/or the Offer Letter.  Where a new recruit leaves quickly it is likely to be very difficult to relay on possible promotion in these circumstances.

Notwithstanding the decision in Harcus Sinclair LLP v Your Lawyers Ltd our advice would always be ensure that reasonable and proportionate covenants are tailored to each individual employee, focused on their present role and updated as appropriate during their employment.

Posted on 7 April, 2022 by Ortolan

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