Employers and Business Interests

Employers are often concerned to protect their business interests when an employee leaves to work for a competitor. ‘The law will protect the employer if necessary by implication of a term of fidelity in the contract of employment thereby restraining the employee inter alia from divulging confidential information.’ However the employer may wish to go further and extract an express promise in the form of a restrictive covenant.

Restrictive covenants are vital to protect the interests of the employer as there are no implied terms that provide protection from competition, solicitation and sharing of trade secrets or confidential information after the contract of employment is terminated.

It is therefore now common for employers to insert restraint of trade covenants into employment contracts for senior as well as junior employees, which seek to restrict an employee’s conduct post termination. The modern law on restraint of trade can be found in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co.

In order to advise John on the enforceability of the covenants enclosed in his employment contract, the legitimacy and reasonableness of the restraints shall be discussed.

In regards to the scenario, the restraint clause stipulates that John may not for a period of 2 years following the termination of their employment either:

1. 1. Solicit any past or current customers of Maximise Limited that he has dealt with during the period of his employment; or

2. 2. Work in the private training sector in England and Wales.

It must be first identified what type of restrictive covenants the employer is trying to enforce.

There are four main types of restrictive covenants are non-solicitation, non-dealing, non-competition and non-poaching. The employer must prove the reasonableness of each covenant, in the form of protecting a legitimate interest which is potentially placed in jeopardy by the ex-employee, or else it shall be rendered void.

Restrictive covenants can be used by employers to protect three basic areas:-

1. Business connections such as customer (past or present), prospective customers, suppliers and other key contacts
2. Trade secrets and confidential information.
3. Stability of the workforce

Part (a) of the restraint is preventing John from initiating contact with the employer’s past or present customers to seek their custom. This restraint is a non-solicitation restraint in regards to trade connections. If John, as he wishes, opens his own tuition company, he would be restricted from contacting past or present clients in an effort to gain their custom. He can however inform clients that he is leaving and setting up his own practice, and if said clients chose, out of their own initiative to transfer business from Maximise Ltd to John’s own company, the courts would allow them to do so, as this would not amount to an act of solicitation as seen in the case of Austin Knight (UK) Ltd v Hinds.

Part (a) contains ‘any past or current customers’. In regards to current customers, who are referred to as ‘goodwill’ as they are the core value of the business. As the nature of John’s work means he has a close contact relationship with both students and parents and his ability to attain 100% pass rates means he is subsequently popular with both. The courts would view current customers as a legitimate interest and one that is capable of protection from John. The non-solicitation clause would restrict John from attempting to coerce clients into changing to his own tuition company.

In regards to past customers, John may ask the courts to look at the reasonableness of the restraint. The courts will ensure that the covenant protects the legitimate interest of the employer no more than necessary. The courts will take into account how recent the contact was between John and the former customer. In the case of Hinton v Higgs (UK) Ltd v Murphy & Valentine the court held that the term ‘previous or present’ (past or current) was too wide. Previous customers who had been a client of Maximise Ltd in the past and were not a reoccurring client, would not be classed as a legitimate interest. The relationship would be deemed to be stale. If however the client was a reoccurring customer then it would seem the company has a legitimate interest. In this situation, Maximise can only seek to restrain John in regards to former clients who have had business with Maximise during John’s employment, i.e. in the last 5 years. Also upheld in the case of Dentmaster (UK) Ltd v Kent..

The restraint in the contract provides no backstop in terms of previous customers, as the company has been trading for over 20 years, but the courts said a backstop in terms of previous clients is not necessary. As held in the case of Axiom Business Computers Ltd v Frederick .

The restraint clause also incorporates a timeframe in which John cannot solicit any customers. It states ‘for a period of 2 years following the termination of their employment’. In the case of Stenhouse Australia Ltd v Phillips , Wilberforce LJ stated,

‘It is for the judge, after informing himself as fully as he can of the facts and circumstances relating to the employer’s business, the nature of the employer’s interest to be protected, and the likely effect on this of solicitation, to decide whether the contractual period is reasonable or not’

If the covenant seeks to restrain an employee for an amount of time longer than necessary, the judge can hold it to be excessive, unreasonable and void.

During his induction John was provided rigorous training on teaching techniques to equip him with the necessary skills to teach pupils effectively. He was also provided with the company’s standardised detailed lesson plans, teaching materials and power point slides which all of the company’s Chemistry tutors utilise.

Though Maximise have not mentioned Trade secrets in the restraint clauses, they may consider the rigorous training on teaching techniques provided to John as trade secrets and feel like they had a part to play in him becoming so popular since John had no prior teaching experience nor did he posses any teaching qualifications.

Although Lord Parker stated in the case of Herbert Morris Limited v. Saxelby that ‘by reason of his employment or training, obtain the skill and knowledge necessary to equip him as a possible competitor in the trade’. i.e. the training provided was not a factor.

In the case of Mason v Provident Clothing and Supply Co. Ltd, it was determined that by working for an employer, the employee will become more skilled and experienced which would then be at the disposal of the new employer, would be perfectly legitimate, as this would constitute as subjective knowledge and not as objective knowledge.

Maximise may also argue that the standardised detailed lesson plans and teaching materials as confidential information. If this was the case, the employer must show that the employee was impressed upon the confidentially of the information. Though it can be argued that the materials were given to all Chemistry tutors and the circulation of information was not restricted and therefore would be classed as non-confidential information. This principle was recognised in the case of Faccenda Chicken Ltd v Fowler and others.

‘A distinction must be drawn between trade secrets and confidential information on the other hand, and an employee’s skill, knowledge and general familiarity with his former employer’s business on the other hand.’ As affirmed in Printers and Finishers Ltd v Holloway.

Part (b) of the clause is a non-competition restraint states. Non-competition clauses prevent an ex-employee from working in the industry or working for named competitors. Part (b) states that John must not work in the private training sector in England and Wales. John works for Maximise Ltd in the Greater Manchester training centre and teaching pupils from the surrounding schools.

Maximise can argue that the reason for such a covenant was to protect legitimate interests. i.e. ‘customer connections’ of the business throughout England and Wales, as they have 50 teaching centres located throughout England and Wales.

‘There are several limitations on the right of the employer to impose such restraints, for the courts will look with a critical eye on any agreement which has the effect of restraining a person from earning his livelihood in the future’. The employer cannot take away the employees skill, experience and fund of knowledge which he has obtained during the employment, and, in particular, the employer cannot protect himself against competition per se. The case of SW Strange Ltd v Mann affirms this.

Once the court has looked at the legitimate interest of the clause, they must also look to see of the reasonableness, and in terms of non-competition covenants the time and area covered. Lord Parker quoted: ‘no more than adequate protection to the party in whose favour it is imposed.’

Lord Parker also stated in the case of Herbert Morris Limited v. Saxelby ;

“I cannot find any case in which a covenant against competition by a servant or apprentice has, as such, ever been upheld by the Court.”

John could argue that the timeframe of 2 years and the area covering the whole of England and Wales is too wide. The decision of each case is based on each case, as each case is different.

In conclusion if John was to set up his own business, he would need to argue his case but could possiably win based on the fact that Maximise has made the clause excessively wide and thus would be made void.

Bibliography

Books

Selwyn, N, M., (2008). Selwyn’s Law of Employment. 15th ed. Oxford: Oxford University Press.

Taylor, S. and Emir, A,. (2006). Employment law: An introduction. Oxford: Oxford University Press.

Smith, I, T., and Thomas, G, H., (2008). Smith & Wood’s Employment law. 9th ed. Oxford: Oxford University Press