The need for restraint in ‘restraint of trade’
One issue that employers can find notoriously difficult is drafting restrictive covenants preventing their employees from competing with them when they leave.
Often the natural instinct is to draft clauses with as many restrictions as possible so that there is no ‘wiggle room’ for the employee. Unfortunately that is precisely the wrong approach.
Courts and tribunals will only enforce restrictive covenants where they both:
- protect a legitimate business interest, and ;
- go no further than necessary to protect that interest.
As a rule of thumb, as far as restrictive covenants are concerned, less is definitely more.
A good example of that can be found in the recent case of Bartholomews Agri Food Limited v Thornton.
Mr Thornton was an agronomist for the Claimant company. When he left to work elsewhere his employer asked the High Court to issue an injunction, preventing him from working, relying on the following provision:
‘Employees shall not, for a period of six months immediately following the termination of their employment be engaged on work, supplying goods or services of a similar nature which compete with the Company to the Company’s customers, with a trade competitor within the Company’s trading area, (which is West and East Sussex, Kent, Hampshire, Wiltshire and Dorset) or on their own account without prior approval from the Company. In this unlikely event, the employee’s full benefits will be paid during this period.’
The Employer said that the provision was necessary to protect confidential information about the business which the employer was privy to, as well as the relationships the employee had with its customers.
The judge held that, contrary to the employer’s arguments, the covenant went much further than necessary. Specifically:
- it applied to all customers of the company even though the customers the employee actually dealt with only contributed around 1% of total revenue, and
- those customers the employee did deal with were mainly in West Sussex and that there were no such customers at all in Wiltshire, Dorset or Kent.
The court was also very sceptical as to whether there was a legitimate business interest to protect given that the employer was unable to adduce any compelling evidence of the confidential information it relied on.
Finally, the court noted that the covenant was entered into in 1997 when the employee was a mere trainee. That was a problem for the employer because the reasonableness of restrictive covenants is to be judged at the time they are entered in to, not at the time of enforcement. As a trainee the employee would not have had the type of confidential information and business connections that the employer sought to protect, so the covenants could not be justified.
The lesson for employers is that they should think carefully about restrictive covenants at the outset of the employment relationship (or when an existing employee takes on a new role), clearly identify the business interest they need to protect and tailor the restrictions so that they achieve that goal with the minimum impact on the employee’s post termination activities.