High Court adds words into non-compete covenant

High Court adds words into non-compete covenant

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Author: Alex Newborough

Employers can seek to protect their businesses from ex-employees through the use of restrictive covenants. Careful drafting is usually required for such covenants to be enforceable, although this case provides the exception to the rule!

The Law

To be enforceable restrictive covenants must (at the time at which they are entered into) go no further than is reasonably necessary to protect the legitimate business interests of the employer in the particular circumstances. Therefore restrictive covenants will usually include appropriate limitations in terms of time, scope and geographical reach.

In particular, employers face difficulties in justifying non compete covenants which prevent employees working for competitors unless these are designed to protect trade secrets or confidential information and such protection cannot be adequately achieved by less far-reaching restrictions such as non-dealing and/or non-solicitation covenants.

The drafting of such covenants is therefore important as it is not commonplace for the Courts to read words into restrictive covenants in order to make them enforceable. However, that is exactly what the High Court did in the recent case of Prophet plc v Huggett [2014] EWHC 615 (Ch).

The Facts

In this case, the High Court granted an injunction to enforce a 12 month non-compete restrictive covenant against Mr Huggett which, on a literal reading, provided no protection whatsoever for his former employer.

Prophet plc develops tailored, integrated computer software for use by customers in the fresh produce industry under annually renewable licences. Mr Huggett was employed by Prophet in 2010 as a Sales Manager. On 18 December 2013 Mr Huggett resigned from his position in order to join one of Prophet's relatively few UK competitors and requested early release from his employment. Prophet believed that if Mr Huggett joined the competitor business as planned, he would breach a non-compete clause contained in his contract of employment.

The Court found that Prophet had legitimate business interests to protect, namely confidential information about its customers, their requirements and their licence renewal dates. However, on the face of it, the non-compete restriction only prevented Mr Huggett from selling, on behalf of a competitor, the products with which he was involved on behalf of Prophet (i.e. Prophet's products). As Mr Huggett would never have an opportunity in practice to sell Prophet's products on behalf of a competitor, the restriction, when read literally, was not capable of protecting Prophet's business interests.

The Court found that a literal reading of this clause did not truly reflect what the parties intended but rather was the result of a drafting error. The Court went on to find that that the true meaning of the provision could be achieved by inserting additional words so that the restriction was expressed to apply to products which Mr Huggett had been involved with 'or similar thereto' during his employment with Prophet. In the Judge's view, this was the minimum amendment necessary to produce a commercially sensible result and one which the Court was ultimately prepared to enforce.

It is worth noting that the Court found Mr Huggett to be a 'thoroughly unreliable witness', an assessment which no doubt influenced its decision in this case.

Practical Tips

Notwithstanding this decision, employers should not rely on the Court intervening in all cases and are advised to take the following steps:

  • ensure that restrictive covenants accurately reflect the intentions of the parties at the time of entering the employment contract and are tailored according to the potential harm the particular employee could cause in practice if they were to exit the business and enter into competition with it;
  • regularly review any restrictive covenants in place to make sure they are still appropriate and also upon any substantial changes to the business which may affect the nature of the protection required, such as following a business acquisition;
  • consider making promotions conditional upon employees' signing up to enhanced restrictions which accurately reflect the additional responsibilities they will assume and the corresponding increase in their potential to harm the business following termination of employment.

About the author

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Alexandra Newborough

Solicitor

03700 86 8434

Alex is an employment law specialist, providing advice on both contentious and non-contentious employment issues to a diverse range of public and private sector clients. Alex's experience includes restrictive covenants & confidentiality, advising on and drafting employment contracts & handbooks, advising clients on Tribunal matters and business immigration.

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