Out-Law / Your Daily Need-To-Know

Financial firms should review appropriateness of non-compete clauses

Out-Law Analysis | 07 May 2021 | 2:28 pm | 4 min. read

Financial services firms who include non-compete and confidentiality clauses in their contracts of employment should take care that these reflect the circumstances of individual staff and their sector to avoid the risk of them being held unenforceable by a court.

The High Court in London recently found unenforceable a number of such clauses in respect of an employee who resigned a post with Quilter, a financial adviser, after six months in order to work for a competitor. They included a nine month non-compete covenant and 12 month non-dealing and non-solicitation covenants, all of which were found to be wider than was reasonably necessary for the protection of Quilter’s legitimate business interests.

The court did, however, find that the employee had breached implied terms of fidelity and trust and confidence by scanning documents containing client information onto her personal laptop with the intention of continuing to deal with these clients in her new role. Notably, the court considered that the duty of fidelity explicitly incorporates a duty on the employee not to conceal her own wrongdoing, in this case by scanning the documents onto her personal laptop.

Standard lengthy non-compete clause unenforceable

Emma Faulkner joined Quilter as a financial adviser in January 2019. Her contract with Quilter contained a nine-month non-compete covenant and 12 month non-solicitation and non-dealing covenants. Before this, she was employed in a similar role at Tilney Financial Planning, between July 2016 and January 2019. Her contract with Tilney contained a 12-month non-solicitation and 12-month non-dealing covenant, but did not contain a non-competition covenant.

Faulkner resigned from Quilter in July 2019, after just under six months in the role and within her probation period. She was hired by another financial advisory business, Continuum, very shortly after, at which point a number of Quilter’s clients transferred to Continuum.

The decision has attracted attention in its criticism of non-compete covenants which apply for a long period, regardless of length of service and the length of any notice period

The High Court found that Quilter’s non-compete covenant was unenforceable, as it was wider than was reasonably necessary for the protection of Quilter’s legitimate business interests. Among the points considered relevant by the court were that the same restrictions applied irrespective of the length of Faulkner’s employment and that similar restrictions imposed on the head of the firm were for a shorter period of time, only six months. In addition, the type of non-competition covenant imposed on Faulkner was not industry standard for employees in her role.

Similarly, the non-dealing and non-solicitation covenants were unenforceable as they were too wide, with a ‘look back period’ of 18 months and little justification provided by Quilter as to why this was reasonable.

The decision has attracted attention in its criticism of non-compete covenants which apply for a long period, regardless of length of service and the length of any notice period. The decision criticised the fact that Faulkner was subject to a probationary period allowing termination on just two weeks' notice, whilst the non-compete extended for nine-months. This could allow a position where Faulkner was employed for just two weeks, but restricted for nine-months. Employers in the financial services sector, who wish to protect their legitimate business interests, should consider whether probationary periods (allowing termination on short notice) remain relevant; the use of variable covenant periods in the initial contract of employment which increase in tandem with length of service; or renegotiate covenant periods at appropriate points during the employment relationship.

The judgment in the Quilter case has since been backed by the courts in a recent Scottish decision, Apex v MacDougall, involving recruitment consultants. The Court of Session distinguished Quilter on the facts, noting that Quilter concerned "a very different employment sector, namely financial services" and that there is less movement of clients in the financial services sector due to on-boarding requirements. Whilst other sectors may therefore look to distinguish Quilter due to its sectoral focus, the Court of Session has indirectly conceded that the criticisms in Quilter will remain an ongoing concern for financial services firms in looking to enforce what were considered 'standard' covenants.

Compliance with duties of confidentiality and fidelity

The High Court upheld Quilter’s claim for breach of implied terms of fidelity, trust and confidence in respect of Faulkner scanning its client information to her personal computer. It found that Faulkner had scanned the information deliberately, so that she could continue to deal with those clients in her new role. Further, her decision to scan the documents onto her personal laptop without informing Quilter was also taken deliberately, in order to conceal her own wrongdoing.

The court’s conclusion on this point – that the duty of fidelity encompasses a duty by the employee not to conceal their own wrongdoing – are significant, as they seem at odds with established cases on this point. For example, in the 1932 case Bell v Lever Brothers Ltd, the House of Lords said: “The servant owes a duty not to steal, but having stolen is there superadded a duty to confess that he has stolen? I am satisfied that to imply such a duty would be a departure from the well-established usage of mankind and would be to create obligations entirely outside the normal contemplation of the parties concerned”.

Financial firms will also welcome the High Court’s decision in the recent, unreported case of Zoll Medical UK v Trebilcock, where it held that the employee’s duty of confidentiality was not superseded by the employee’s argument that he had emailed confidential information to himself in order to support a whistleblowing claim. Zoll successfully sought High Court orders for delivery and deletion of the information, and an order for the employee to provide information about how he had used the information.

Future changes to restrictive covenants

The law in respect of restrictive covenants may be changing in the near future, as we await the outcome of a government consultation. Among the potential options for reform explored by the government in the consultation exercise is banning post-termination non-compete clauses outright, along with placing statutory limits on their length and requiring the employer to compensate their former employee during the term of the clause.

The government has said that the proposals will support economic recovery by creating the conditions for new jobs and increasing competition.