The UK economy has shown positive growth over the past few months. Are you ready for the challenges that growth can bring? Are your crown jewels, whether that's confidential business information or employees, adequately protected from your competitors?
Prevention rather than cure
As the economy improves, increased competitor activity and team or individual moves are inevitable.
As a bare minimum, employees should have express obligations in their contracts of employment in relation to the preservation of confidential information, their conduct whilst employed and post termination restrictions.
Implied duties (by virtue of the nature of the relationship) do not have the same traction. For example, in the absence of an express confidentiality obligation, only trade secrets (or confidential information akin to trade secrets) will enjoy protection by the Courts and the threshold is extremely high.
There is an art to the drafting. Confidentiality provisions with wide definitions of "Confidential Information" may seem like a good idea on paper but can pose problems when enforcement is on the cards.
Courts will not protect the confidentiality of business information simply because of the label ascribed to it. Employers should consider carefully whether information has the necessary quality of confidence by the addition of skill, ingenuity or novelty to something which is in the public domain.
As to restrictive covenants which prohibit certain behaviours post-termination of the employment contract, the starting position is that they are unenforceable as a restraint of trade. The burden is on the employer to convince a Court as to the reasonableness of the restraint.
A Court will only uphold a restrictive covenant if it goes no further than is reasonable to protect the legitimate business interests of the employer. Legitimate interests capable of protection extend only to:
- Trade secrets and confidential information;
- Customer or client relationships; and
- Preservation of a stable workforce.
Businesses can choose from a variety of restrictive covenants including:
- Non-solicitation of customers and/or employees; and
- Non-dealing that restrict the provision of services by the former employee to customers of the employer (where, unlike a non-solicitation covenant, no active steps to solicit are required by the former employee).
Identify the business interest
In order to ensure that a restrictive covenant is enforceable it is important to identify the business interest in need of protection. Non-competition covenants are widely regarded as difficult to enforce given the availability of other types of covenant as well as confidentiality obligations and garden leave provisions.
By way of example, if the business interest to be protected is the preservation of a stable workforce, a non-solicitation covenant in relation to identified employees is likely to suffice. A stand alone non-competition restriction could be considered far too wide by the Court. Equally, if protection against a personal relationship is the concern, consider a tight non-dealing covenant with a time limit reflecting the likely time for the former employee's successor to gain a reputation with the employer's clients.
The Court will consider:
- The length of the restriction - Each case will be fact specific, however the longer the restriction, the more difficult it will be to enforce. Carefully consider the amount of time it would take for the former employee's successor to gain influence and customer loyalty.
- The geographical scope of the restriction - The wider the area, the less likelihood of enforcement. Covenants with even UK reach may be too wide.
- The position of the former employee - Typically, the more senior the employee and the greater responsibility for securing new business, the more likely the covenant will be found to be reasonable.
- The nature of the business - This should be defined precisely and accurately and should cover the business that the employee was engaged in prior to departure with reference to specific clients/customers/accounts with which the employee had been involved prior to termination. Interests in target clients are inherently difficult to protect.
There is little freedom of contract between an employer and an employee and recent decisions reflect that. Comparatively, the Courts are more willing to allow greater restraints in commercial agreements where the parties are of an equal footing and are often the best judges of what is reasonable between themselves.
Other practical steps
Prevention is better than cure and employers can use the following additional steps:
- Restrict access to confidential information and mark documents (which are genuinely confidential) as confidential. Discriminate amongst documents/information;
- Circulate policies for the protection of confidential information and provide training to your work force on best practice (i.e. working on confidential matters on public transport);
- Consider appropriate security, both physical and electronic for example, encryption, password protection and preventing the use of personal USB sticks within the business;
- Consider planting false details in customer lists or other key documents/databases vulnerable to exploitation; and
- Ensure that employment contracts contain suitable and clear restrictive covenants which are customised to the employee's exact role and seniority within the business and conduct regular interviews with employees.
What if the horse (or the employee) has bolted?
There are a wide range of remedies available for breach of confidence/breach of restrictive covenant claims. An account of profits (where the Claimant is entitled to the profits of the Defendant's wrongdoing) is often more favourable than a simple damages claim.
Injunctive relief may also be available depending upon the circumstances. Such relief can extend to a search order to retrieve confidential information (without any prior notice to the Defendant) in the most serious of cases, or a prohibitory injunction preventing certain activities by the employee and his/her cohorts.
It is important to consider your options carefully. A strongly worded request for undertakings or the disclosure of documents may be sufficient to achieve your goals and involve a fraction of the legal costs.
What does this mean for you?
With an upturn in the economy, it is easy to become distracted by the opportunities and pressures that growth brings but do not lose sight of your most valuable assets. Introduce or refresh your contracts of employment, invest in doing so and remember one size does not fit all. Implement, where possible, the practical steps detailed above.
If all fails and the worst occurs, obtain legal advice quickly. Delay can be catastrophic, particularly where injunctive relief is concerned.