The Court of Appeal (Thomas v Farr plc and Hanover Park Commercial Limited) recently decided that a 12 month non-compete clause was enforceable in relation to a former managing director of a firm of insurance brokers. The non-solicitation and confidentiality covenants were insufficient by themselves to protect the employer's business interests.
When is a restrictive covenant enforceable?
Restrictive covenants are only enforceable if they are no wider than necessary to protect the legitimate business interests of the employer. They require to be tailored for employees on an individual basis, depending on their seniority, role, degree of client contact etc. Restrictive covenants fall into one of 5 main categories:
- Confidentiality - the employee is prevented from making use of or disclosing the ex-employer's trade secrets or confidential information
- Non-compete - the employee is prevented from working for or carrying on a business competing with the ex-employer within a defined geographical location
- Non-solicitation - the employee is prevented from soliciting the ex-employer's customers or suppliers
- Non-dealing - the employee is prevented from dealing with or acting for the ex-employer's customers or suppliers
- Non-enticement - the employee is prevented from enticing away other members of the ex-employer's staff
Why was the non-compete clause enforceable against Mr Thomas?
When Mr Thomas became managing director of Farr plc he signed a new contract of employment containing restrictive covenants including a 12 month non-compete clause. Farr are insurance brokers specialising in the social housing market. When Mr Thomas wanted to leave to work for a competitor he argued that the non-compete clause was unreasonable and, therefore, unenforceable because -
- he had no information that could continue to be regarded as confidential after termination of his contract
- the company was adequately protected by non-solicitation and confidentiality covenants
- the non-compete clause was too wide in terms of its scope
- the non-compete period was too long
The Court of Appeal disagreed and decided that the non-compete covenant was enforceable for the following reasons:
- As managing director, Mr Thomas would know detail of budgets and business plans which would be valuable to a competitor trying to undercut Farr in its dealings with clients and insurers. This was exactly the kind of 'trade secret' that should remain confidential. In practice it is difficult to 'police' a confidentiality covenant and better protection is afforded via non-compete provisions.
- As he had no direct day-to-day client contact, solicitation of clients was unlikely to be carried out by Mr Thomas (but by staff below him). Therefore, a non-solicitation covenant would be ineffective.
- The restriction covered any place where Farr had done business in the 12 months prior to termination but did not prevent Mr Thomas from operating as an insurance broker outside the social housing market. Therefore, the non-compete clause was not too wide.
- The insurance business operates on a cycle longer than the 12 month restricted period and, therefore, 12 months was a conservative estimate of the time needed to protect the confidential information. As a result, the length of the non-compete clause was reasonable.
Restrictive Covenants can be a useful way of protecting your business. However, if the restraints are to be enforceable, they must be drafted carefully so that they reflect the exact circumstances of the employee's position and the employer's business, and should be regularly reviewed to see if they need to be updated. We would be happy to advise on the tailoring of your restrictive covenants for individual employees.
Thomas v Farr plc and Hanover Park Commercial Limited 2007 EWCA Civ 118