Restrictive Covenants

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Restrictive Covenants

Introduction

In English law all restraints on trade are contrary to public policy and therefore void. However it is possible to design a covenant that protects the legitimate business interest of an employer. As long as it goes no further than is reasonably necessary to protect the employer's interests, a court will uphold the covenant.

The courts recognise that:

it is in the public interest to promote competition

there is an inequality of bargaining power between an employer and employee.

Therefore the courts are very keen to find any reason to strike down a restrictive covenant.

Legitimate business interests

There are four legitimate business interests which the employer is entitled to protect:

trade secrets or confidential information
customer connections or goodwill
supplier connections
employee connections.

The employer will wish to protect those legitimate business interest by preventing the ex-employee:

competing
soliciting customers or suppliers
dealing with customers or suppliers
enticing away employees
using or disclosing confidential information.

Reasonableness

If the employer can demonstrate that it has a legitimate interest to protect then it must go on to show that the covenants extend no further than is reasonably necessary to protect the interest.

Confidential information

Information may come into one of four categories:

trade secrets
confidential information
amounting to the general skill of the employee
is trivial or in the public domain.

Trade secrets will be protected even if there is no express duty of confidentiality.

Confidential information will only be protected during the employment and afterwards if protected by express covenant (competition/solicitation/dealing/confidentiality).

Information which is in the public domain or known to the employee as part of his general skill and knowledge cannot be protected pre- or post-termination.

It is sometimes difficult to distinguish between the first two categories and also the second two. In the latter case the obvious example is the names and addresses of customers.

An express confidentiality clause specifies what information the employer considers to be confidential.

Reasonableness of express covenants

The courts will take into account the following factors:

The seniority of the employee - A senior employee is far more likely to learn confidential information or to gain influence over customers.

Nature of the business/activities of the employee - The employee should only be restrained from carrying out the sort of business in which he was employed.

The duration of the covenants.

The business activities of the employer.

Non-competition covenants

In addition to the above factors the courts will consider the geographical extent of the area of prohibited activity..

Termination

If an employee is wrongfully or unfairly dismissed the employer will not be able to enforce the restrictive covenants in the employee’s contract of employment.

Employer’s should make sure their contracts of employment have: