Monday 25th September 2023
PUBLISHED ARTICLES
Article 7
Preventing Ex-Employees from Working for the Opposition
Most would agree that entrepreneurs who provide much needed employment
are entitled to protect their investment in new technology and business connections
from unauthorized use or disclosure by unscrupulous employees. On the other
hand nobody wants to see employees shackled to one employer long after their
contracts of employment have ended. The law in my opinion has done a good
job in balancing these two often conflicting principles.
Often an employer will try to protect a business by introducing agreements
with employees which aim to prevent the employee soliciting or working for
clients and/or competitors once they leave the company. Post termination restrictive
covenants (ie Restrictive covenants in employment contracts which are intended
to operate after employment has ended) are usually seen as anti-competitive
and in restraint of trade.
Agreements, therefore not to poach staff or customers/clients from the employer
or not to work for a competitor after employment has ended are basically void.
They are enforceable only if the ex-employer can show that they do no more
than is reasonable to protect his legitimate business interests.
What is Capable of Protection Under a Restrictive Covenant?
In the case of, Thomas v Farr plc and Hanover Park Commercial Limited* A Managing
Director (the Employee) appealed a High Court decision on the basis that a
non-competition clause in his employment contract was an unreasonable restraint
of trade and unenforceable. The Court of Appeal upheld the decision of the
High Court that the clause was reasonable and that there was a legitimate
business interest to protect.
The Employee was the managing director of a firm of insurance brokers. Contained
within his employment contract was a 12 month non-competition clause preventing
him from competing with the company for 12 months after the termination of
his employment. The Employee terminated his employment in 2003 and subsequently
sought a declaration that the non-competition clause was an unreasonable restraint
of trade and unenforceable. The Manager also had a clause in his contract
forbidding him to approach clients of the ex-employer for a period of 12 months.
The High Court Judge ruled that once employment has ended only information
which is either a trade secret or, whilst not capable of being properly described
as a trade secret, is in all the circumstances such as to require the same
protection as a trade secret, is protected information. The judge held that
the information being sought to be protected in this case was exactly the
type of confidential information which is likely to fall under the category
which can be protected by express agreement.
An item of information is either secret or it is not and, if it is not, its
use or disclosure after the employment comes to an end cannot be restricted
by a covenant in the employee's service contract. Such a covenant can be enforced
only if it is reasonably necessary to protect the employer's secret and, even
then, only for so long as such protection remains necessary. Such temporary
protection may be necessary where the skills and knowledge that the employee
develops include trade secrets but only until the rest of the industry catches
up
Further it was held that solicitation of clients was unlikely to be carried
out personally by the Employee but by staff below him so there were practical
problems in trying to police a non-solicitation clause which did not provide
adequate protection. As such the non-compete clause was reasonable. The employee
appealed this decision to the Court of Appeal. It was also upheld that in
this circumstance due to the type of business being underwritten and the fact
that the policies were often for 12 months or longer a 12 month non-compete
clause was reasonable.
In summary, the type of information, which may be the subject of protection
in a restrictive covenant must be;
• A trade secret
• Information that in all the circumstances, is such as to require the
same protection as a trade secret (in the above case insurance policy details).
A restrictive covenant can be enforced only if;
• It is reasonably necessary to protect the employer's secret.
• And for so long as such protection remains necessary.
• The terms of the covenant are reasonable in length and in general
content. The shorter the duration or the smaller the pool of competitors cited
the more chance that they will be allowed to stand (It is advisable always
to seek legal advice when drafting the terms of such a clause).
The implied duty of fidelity prevents employees from working for competitors
or discussing their employers' private business with strangers without permission
for so long as their employment subsists. Thereafter the employer can only
protect genuine trade secrets and, only then, for so long as they remain secret.
Tight and documented procedures for regulating the disclosure of information
to those who need to know rather than draconian covenants are the proper way
to protect such secrets.
Whilst in Employment
The position is different during employment. Courts may grant an injunction
forbidding an employee to work for his employer's competitors while the employment
contract subsists regardless of possible non-enforceability of post-termination
restrictive covenants. In practice this rule is, for obvious reasons, especially
important in cases where there has been constructive dismissal of a senior
employee.
Garden Leave
An employee who has been given notice of dismissal (or who has himself given
notice to quit) and who continues to receive normal salary but is told not
to report for duty during the notice period is said to be on ‘garden
leave’. This is probably the safest way of ‘locking an employee
away from the opposition’.
Typically this happens if an employer needs to protect himself against competition
or poaching of customers/clients/staff by a senior employee who has given
notice or is to be dismissed. Restrictive covenants are less reliable and
difficult to enforce against ex-employees so it may be attractive for the
employer to send the employee home on ‘garden leave’.
The attraction has been increased by recent case law confirming that post
termination restrictive covenants can start at the end of garden leave. An
employer may have difficulty in imposing ‘gardening leave’ if
there is no specific contractual provision giving him the right to do so.
When there is no Contract Term
It is the case that many duties of an employee will not be expressed in black
and white within a contract. Certain ‘invisible’ terms however
are implied to exist in the contract of employment. An example is the duty
of an employee to take reasonable care of the employer's property. If sufficiently
serious, breach of an implied term can justify disciplinary action, and sometimes
even dismissal, just as much as breach of an express term. For this reason
industrial action such as a work to rule can nevertheless sometimes justify
disciplinary action and even dismissal.
Although there is an implied duty of ‘trust and confidence’ in
employment contracts there is no overall implied duty of disclosure. In normal
cases neither party is obliged to disclose to the other all facts (eg one's
own failings) which the other may consider relevant to deciding to enter into
or. However each case must be considered on its own facts and merits so that
if an employee is sufficiently senior he may be under a duty to disclose his
own misconduct to his employer. Further if the employee is also a director,
his obligations qua director will mean that he is under a positive obligation
to disclose misconduct of which he is guilty.
The implied duty of fidelity prevents employees from working for competitors
or discussing their employers' private business with strangers without permission
for so long as they are employed (it is advisable to remind employees of this
duty in their contract of employment). Thereafter, the employer can only protect
genuine trade secrets and, only then, for so long as they remain secret. Tight
and documented procedures for regulating the disclosure of information to
those who need to know rather than draconian covenants are the proper way
to protect such secrets.
*Thomas v Farr plc and Hanover Park Commercial Limited [2007] EWCA Civ 118
27th February 2007
The Court of Appeal upheld the decision of the High Court that the non-compete
clause was reasonable. The Court of Appeal confirmed that the test applied
from Faccenda Chicken v Fowler was the correct test and it had been correctly
applied. It was also upheld that in this circumstance due to the type of business
being underwritten and the fact that the policies were often for 12 months
or longer a 12 month non-compete clause was reasonable. The Court further
ruled that the non-solicitation and confidentiality clauses contained within
the contract were not sufficient particularly given the likely problems of
policing the non-solicitation clause in this case.
In Faccenda Chicken Ltd. v Fowler [1984] ICR 589, Goulding J suggested a
threefold classification of information acquired by an employee in the course
of his service that is not the subject of any relevant express agreement:
1. information which, because of its trivial nature or its easy accessibility
from public sources of information, cannot be regarded as confidential at
all;
2. information that the employee must treat as confidential (either because
he is expressly told that it is confidential, or because from its character
it obviously is so) but which once learned remains in his head and becomes
part of his skill and knowledge; and
3. specific trade secrets such as the secret process that was the subject
matter of Amber Size and Chemical Co. Ltd. v Menzel [1913] 2 Ch 239.
Goulding J said that information falling into the first category may be used
or imparted to anyone at any time, even an employer's competitors while the
employment subsists. Information in the second category, however, cannot be
so used or disclosed while the employment relationship continues. Once the
employment comes to an end, the employee can use such information such information
or disclose it to whomsoever he likes unless restrained by a valid restrictive
covenant. Information in the third category in the third category is so confidential
that, even though it may necessarily have been learned by heart and even though
the employee may have left his employer's service, it cannot lawfully be used
for anyone's benefit but the employer's. The Court of Appeal substantially
endorsed this classification on appeal in [1987] Ch 117 though it respectfully
disagreed with the passage in Goulding J's judgment that suggested that an
employer can protect information in the second category even though it does
not include a trade secret or its equivalent.
Difficulties of the Faccenda Classification
Goulding J's distinction between trade secrets and other confidential information
was never very satisfactory. In interlocutory applications around the country
motions judges have had to decide whether price lists, the identity of suppliers
and the ways in which individual traders prepared their products or promoted
their business were trade secrets. In Ocular Sciences Limited and others v
Aspect Vision Care Limited and others [1997] RPC 289 Laddie J reconsidered
the obligations that employees owe to their employers and has proposed a much
more viable formula.
The Facts of Ocular Sciences
The facts of Ocular Sciences are slightly more complicated than the usual
case where former employees of a small high technology company set up a competing
business. The first plaintiff was a private company incorporated in England
and Wales which manufactured soft contact lenses. The third and fourth defendants
were members of that company but they also controlled the first defendant
(another private company) which distributed soft contact lenses. The fourth
defendant had invented a mould for manufacturing such lenses for which he
had obtained a patent. By a series of agreements made on or shortly after
the 30th September, 1992:
the second plaintiff, a Californian company, acquired the shares of the second
and third defendants in the first plaintiff;
the fourth defendant licensed the first plaintiff to work his patent;
the first plaintiff agreed to supply minimum quantities of various soft contact
lenses to the first defendant at a price to be calculated in accordance with
an agreed formula; and
the first plaintiff agreed to employ the third defendant as its managing director
without requiring him to dispose of his shares in the first defendant.
Laddie J noted with hindsight that the network of obligations created by those
agreements contained the seeds of friction in that the third and fourth defendants
remained free to run the first defendant, which was a potential competitor
of the first plaintiff, and in which neither the second plaintiff nor its
principal shareholder had any financial interest. In August 1993 the first
defendant advised the plaintiffs that it would require far more lenses than
the first plaintiff had agreed to supply and that it was thinking of manufacturing
those products. The principal shareholder of the second plaintiff objected
very strongly. He threatened to cut off supplies of lenses to the first defendant,
raise the prices of the lenses that the first plaintiff supplied and dismiss
the third defendant from his job as managing director of the first plaintiff
if the first defendant started to make lenses. Fearing that the plaintiffs
would carry out their threats, the defendants set up manufacturing facilities
with considerable alacrity. The principal shareholder of the second plaintiff
instructed the third defendant to increase the unit price of the lenses that
the first plaintiff supplied to the first defendant from £1 to £1.57.
The third defendant observed that such a price increase would breach the first
plaintiff's contract with the first defendant whereupon the principal shareholder
of the second plaintiff caused the first plaintiff to sack him. On learning
that the defendants were ready to manufacture lenses, the plaintiffs issued
a writ alleging inter alia breach of confidence, conspiracy, infringement
of copyright and design right and breach of fiduciary duty by the third defendant.
The defendants argued that the plaintiffs had repudiated their patent licence
and sought the usual remedies for patent infringement whereupon the plaintiffs
counterclaimed for revocation of the patent. The judgment is very long and
contains many interesting points on all those issues. This note is concerned
only with Laddie J's analysis of employees' obligations to their employers.
The Issues
The plaintiffs claimed that their designs and specifications for soft contact
lenses together with procedures for their manufacture and processing including
engineering drawings, testing procedures, computer programs, manuals and formulae
were confidential. They alleged that the defendants had set up the first defendant
to manufacture soft contact lenses to precisely the same designs and specifications
thereby using information that had been disclosed to the third defendant in
confidence. The defendants replied that such information had become part of
the third defendant's skill and knowledge which he was entitled to use for
another employer.
The Judgment
Laddie J said that the identification of those items of technology, if any,
which the defendants were entitled to use as part of their acquired skill
and expertise had raised particular difficulties. He noted that the law on
the subject had been considered in detail by the Court of Appeal in Faccenda
Chicken Ltd. v Fowler [1967] Ch 117 but dissented from its analysis. He started
from the premises that an employee is entitled to deploy his skill and expertise
for any employer though an employer may restrain unauthorized use or disclosure
of his confidential information like anyone else. He acknowledged that it
is public policy that an employee should use and put at the disposal of new
employers all his acquired skill and knowledge no matter where he acquired
it or whether it was secret at the time. Where the employer's right to restrain
misuse of his confidential information collides with the public policy it
is the latter that prevails. He rejected the notion that there exists any
class of information that is so trivial or commonplace that an employee is
free to disclose to anyone including a competitor. Such disclosure would breach
an employee's implied duty of fidelity as postulated in Hivac Ltd. v Park
Royal Scientific Instruments Ltd. [1949] Ch 169. The judge stressed that this
duty of fidelity was quite distinct and separate from the duty of confidence.
He warned of the danger of confusing the two concepts:
"….. there is a risk of slipping into thinking that what an employee
can be restrained from using while in employment is likely to be secret when,
in truth, that restraint has little to do with secrecy but a lot to do with
the employee's obligation to act in the interests of his employer. Once one
slips into thinking that because a piece of information cannot be disclosed
to a competitor, therefore it is secret, it is but a little step to assuming
that it is secret for the purposes of the law of confidence."
For that reason he found difficulty with the first Faccenda category.
Analysis of the Judgment
It is possible to quibble with the details of Laddie J's judgment but not
with the thrust.
As for the detail, Hivac was concerned with moonlighting employees and not
with the disclosure of information. His lordship cannot possibly have meant
that a chemist would breach his duty of fidelity by publishing a scientific
paper that refers to his employees' patent specifications or other information
in the public domain. On the other hand it disposes of the distinction between
trade secrets and other confidential information. An item of information is
either secret or it is not and, if it is not, its use or disclosure after
the employment comes to an end cannot be restricted by a covenant in the employee's
service contract (see the speech of Lord Parker of Waddington in Herbert Morris
Ltd. v Saxelby [1916] 1 AC 709). Such a covenant can be enforced only if it
is reasonably necessary to protect the employer's secret and, even then, only
for so long as such protection remains necessary. Such temporary protection
may be necessary where the skills and knowledge that the employee develops
include trade secrets but only until the rest of the industry catches up.
Properly negotiated and drafted restrictive covenants can be useful purpose
in that they strike a balance between the interests of the employer in protecting
his investment and the public interest in a free labour market.
Summary
The implied duty of fidelity prevents employees from working for competitors
or discussing their employers' private business with strangers without permission
for so long as their employment subsists. Thereafter the employer can only
protect genuine trade secrets and, only then, for so long as they remain secret.
Tight and documented procedures for regulating the disclosure of information
to those who need to know rather than draconian covenants are the proper way
to protect such secrets.
Common Law Restraints of Trade
An item of information is either secret or it is not and, if it is not, its
use or disclosure after the employment comes to an end cannot be restricted
by a covenant in the employee's service contract (see the speech of Lord Parker
of Waddington in Herbert Morris Ltd. v Saxelby [1916] 1 AC 709). Such a covenant
can be enforced only if it is reasonably necessary to protect the employer's
secret and, even then, only for so long as such protection remains necessary.
Such temporary protection may be necessary where the skills and knowledge
that the employee develops include trade secrets but only until the rest of
the industry catches up
the first matter which the employer obviously needed to establish was that
at the time of the contract the nature of the proposed employment was such
as would expose the employee to information of the kind capable of protection
beyond the term of the contract (ie trade secrets or other information of
equivalent confidentiality). The fact that it might be very difficult for
the parties to a contract of employment to know where the line lay between
information which remained confidential after the end of the employment and
information which did not might support the reasonableness of a non-competition
clause that was intended to protect the employer’s interest in confidential
information. The degree of the particularity of the evidence required to establish
that matter must inevitably depend on the facts of the case. The fact that
the distinction could be very hard to draw might support the reasonableness
of a non-competition clause.
The position is different during employment. A Court may grant an injunction
forbidding an employee to work for his employer's competitors while the employment
contract subsists regardless of possible non-enforceability of post-termination
restrictive covenant
There is a general rule (sometimes called the rule in General Billposting
Co Ltd v Atkinson HL 1909 AC 118 HL) that where an employer has behaved so
badly towards his employee that the employee can treat his employment contract
as at an end (ie can treat the contract as having been "repudiated"
by the employer) then, because the contract has been ended by the employer's
own fault he, the employer, cannot as a general rule enforce any post-termination
restrictive covenants it may have contained. In practice this rule is, for
obvious reasons, especially important in cases where there has been constructive
dismissal of a senior employee.
In any matter concerning restrictions, the possibility of general law on restrictive
trade practices being relevant, including any possible effects of Art 85 of
the Treaty of Rome, should not be overlooked (see Passmore v Morland plc 1999
ICR 913, CA).
At a general level, it may be useful to refer to the WIPO web-site. WIPO is
the World Intellectual Property Organisation, one of 16 specialised United
Nations agencies. It is based in Geneva, has 179 nation states as members
and administers various international treaties dealing with intellectual property
protection.
Implied Terms
These notes should be read subject to the general points re implied terms
in IMPLIED TERMS IN EMPLOYMENT CONTRACTS/a general introductory note and in
particular to the overriding point that courts and tribunals exercise considerable
caution before implying terms into any contract (Liverpool City Council v
Irwin [1976] 2 All ER, HL).
That being said, it is normal for many duties of an employee to be unspoken.
They will be "implied contractual terms" but no contract will, or
could, include every term governing the relationship of the employee and employer.
Many terms will simply be "implied". An example is the duty of an
employee to take reasonable care of the employer's property, normally implied
if not expressly set out in the employee's contract (Lister v Romford Ice
and Cold Storage Co Ltd [1957] 1 All ER 125).
If sufficiently serious, breach of an implied term can justify disciplinary
action, and sometimes even dismissal, just as much as breach of an express
term. For this reason industrial action such as a work to rule, in which by
definition there can be no breach of any express contract provision, can nevertheless
sometimes justify disciplinary action and even dismissal ( British Telecom
plc v Ticehurst CA 1992 ICR 383, CA).
Although there is an implied duty of "trust and confidence" in employment
contracts there is no overall implied duty of disclosure. In normal cases
neither party is obliged to disclose to the other all facts (eg one's own
failings) which the other may consider relevant to deciding to enter into
or continue the contract (Bell v Lever Bros 1931 AC, 161, HL and for a recent
example of an employer having no obligation to disclose to employees detrimental
information about its affairs see ICR/BCCI v Ali & ors 1999 ICR 1068,
Ch D). However each case must be considered on its own facts and merits so
that if an employee is sufficiently senior he may be under a duty to disclose
his own misconduct to his employer (see Tesco Stores Ltd v Pook and ors ChD
2003 reported at [2004] IRLR 618). Further if the employee is also a director,
his obligations qua director will mean that he is under a positive obligation
to disclose misconduct of which he is guilty (see Fassihi and ors v Item Software
(UK) Ltd CA 2004 IRLR 928). The implied duty of fidelity prevents employees
from working for competitors or discussing their employers' private business
with strangers without permission for so long as their employment subsists.
Thereafter the employer can only protect genuine trade secrets and, only then,
for so long as they remain secret. Tight and documented procedures for regulating
the disclosure of information to those who need to know rather than draconian
covenants are the proper way to protect such secrets.
*Thomas v Farr plc and Hanover Park Commercial Limited [2007] EWCA Civ 118
27th February 2007
By Charles Price, barrister No5 Chambers
www.charlesprice.net
This article Copyright HRZone - Written by Charles Price
