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New laws on non-compete

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The High Court regularly turns down applications by employers to enforce badly drafted post termination restrictions contained in employment contracts of key staff. Very often this means that the employer is unable to protect its proprietary interests in its client relationships, its workforce and its valuable confidential information when a key employee leaves.

Sometimes, however, a covenant is saved because the law permits the Court to delete words from the covenant and if the remaining words are reasonable, enforceable and make sense then the Court will uphold it. In the case of Prophet PLC v Huggett, the Court went a step further and actually added words to a covenant so that it reflected what the Court considered “a reasonable person would have understood the parties to have meant.” Although the employer in this case succeeded, it wasn’t without a fight, and it was no doubt a costly exercise which perhaps could have been avoided had the covenant been properly drafted in the first place.

What happened in this case? Prophet PLC developed computer software which it sold to the fresh produce industry. Mr Huggett was Prophet’s sales manager from April 2012 until December 2013 when he resigned to join a competitor, K3. His employment contract  contained a 12 month non-competition clause which effectively operated to prevent him from selling any products with which he was involved whilst employed by Prophet for this 12 month period. The contract also contained covenants restricting him from using or disclosing confidential information and soliciting or dealing with customers. On discovering that Mr Huggett was to join a competitor, Prophet applied to the Court for an injunction to prevent him from working for K3 for 12 months.

What the Court decided
The Court noted that, on its face, the non-compete clause was ineffective and that there had clearly been a drafting error because no competitor would ever be selling Prophet products, which were the only products which Mr Huggett would realistically have been involved with whilst employed by Prophet. Consequently, the Court considered it necessary to explore what a reasonable person would have understood the parties to have meant by their use of language. The Court concluded that the minimum change necessary to produce a sensible result was to add the words “or similar thereto” to the end of the clause. Having added those words, the Court went on to consider the reasonableness of the clause. It is a well established principle of English law that a covenant intended to protect an employer against competition from a former employee is only enforceable if the Court considers it reasonably necessary to protect trade secrets or confidential information.

The Court said that: the use of confidential information known by Mr Huggett, such as the identity of Prophet’s prospective customers, could cause the loss of a prospective sale or otherwise damage Prophet’s interests; this was a legitimate interest which underpinned the non-competition clause

– the 12 month period of the restriction was not excessive as it was the nature of the confidential information that the employee was privy to and how long its non-disclosure remained of significant value to the employer, rather than the seniority of the employee, which was relevant

– although it accepted the assertion made by K3’s Managing Director that Mr Huggett was not hired for his contracts book and would not be encouraged to breach the confidentiality covenant, the Court considered Mr Huggett could still use prohibited information to secure a sale for K3, particularly given that he could earn commission.

On giving evidence to the Court, Mr Huggett attempted to play down the extent to which he accessed confidential information but the Court was not convinced. In fact, it transpired that he had transferred a large quantity of Prophet’s company documents on to a hard-drive before returning his company laptop and failed to give the Court a satisfactory explanation for doing so. The Court found that the non-solicitation and non-disclosure of confidential information covenants in the contract provided insufficient protection on their own. As a result it concluded, in light of the above, that the non-competition covenant as “re-drafted” by the Court was enforceable. The Court ordered an injunction preventing Mr Huggett from working for K3 or any other software supplier in the UK fresh produce sector until the expiry of the 12 month period.

What this decision means for employers
This decision reinforces the point that the courts have a wide discretion when considering the enforceability of post termination restrictive covenants. This case means that even if a clause in an employment contract is poorly drafted and does not have the effect that the employer intended if read literally, the court may be prepared to read words into the clause to produce a commercially sensible result. That said, in our view this case is rather unusual and goes against the overriding principle that a Court will not re-write a covenant that is too broad. It should be borne in mind that this is a first instance decision and that the Judge appeared to be influenced by the fact that he did not consider the employee to be a reliable witness. As a result our advice is that this does not reflect a fundamental change in approach by the Courts and that employers should not rely on this case but continue to take great care to properly draft their restrictive covenants and to update those covenants as employees progress through the ranks.

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