High Court enforces 12 month non-compete clause in Service Agreement

Out-Law News | 05 May 2022 | 9:18 am |

Ed Goodwyn tells HRNews about the UK government’s plans to curtail the scope of non-compete clauses
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  • Transcript

    The High Court has upheld a covenant restricting a solicitor from joining a competitor for 12 months following the termination of her employment. The case underlines the importance of careful drafting when it comes to restrictive covenants in employment contracts and is, on the whole, a reassuring ruling for employers seeking to protect their business interests.

    The Law Society Gazette and Legal Futures both report on the case which involved a dispute between employment lawyers. Manchester-based boutique firm Law by Design won its High Court claim against a former director, Saira Ali, over her attempt to join a direct competitor as a partner. The judge, Jason Beer QC, found that the 12-month non-compete restriction in the Service Agreement was enforceable and granted an injunction. He found that the non-compete clause which allowed Ms Ali to join a business anywhere in England and Wales that does not compete with her former employer for NHS clients in the northwest region was no wider than is reasonably necessary to protect the business interests of Law by Design. Whilst the 12-month term of the covenant is at the top end of the duration that we see enforced by the courts in an employment setting it reassuring to see a well-drafted and carefully tailored clause of this type succeed. As the judge put it: ‘In effect Ali was asking the court to release her from a contractual restraint so that she could join 'the very type of competitor in respect of whom the restraint was intended to apply'.

    Meanwhile, we continue to wait for the government’s response to its consultation on reform of non-compete clauses in employment contracts – that consultation closed in February last year. The latest news we have on progress is the response given by Paul Scully MP on 2 March 2022 to a written question by his colleague Kate Griffiths. He said, essentially, that the government is in the process of analysing the responses to the consultation and a response will be publish

    The government is considering two possibilities. The first is to make non-compete clauses enforceable only when the employer provides compensation during the term of the clause, and they are looking at whether this could be complemented by additional transparency measures and statutory limits on the length of non-compete clauses. Alternatively, the nuclear option, to effectively ban them by making them unenforceable.

    Interestingly, there have been developments in the US which may influence the UK government and it’s something Diane Nicol has flagged in her article for Outlaw: ‘US non-compete clause review could influence UK reform’. She points out that President Biden has already signed an executive order on promoting competition as the US economy recovers from the impact of the pandemic. The order encourages the Federal Trade Commission to consider developing rules to ‘curtail the unfair use of non-compete clauses’. Diane says non-compete clauses are already banned in some US states and in the wake of the pandemic, and, indeed, Brexit in the case of the UK, governments are increasingly focused on ways to boost ailing economies including removing anti-competitive practices.’ She says mandatory compensation and an outright ban are the options under consideration in the UK, which would be pretty radical, although by no means unprecedented in other jurisdictions such as Germany, France and Italy.

    So, let’s get some further thoughts on this. Ed Goodwyn joined me by phone from the London office to discuss what the UK government might do in light of what is happening elsewhere, and how employers may be affected:

    Ed Goodwyn: “Yes, it's quite a hot topic in relation to non-competes both here in the UK and in the US and, and even though I'm commenting from a UK perspective, it's always interesting to see what other jurisdictions are doing because it might catch the eye of the UK government. So, at the moment non competes have been covered by what we call common law which is where the rules have been broadly set in the cases over the years against general principles. However, the UK government decided that it wanted to consult on this around Christmas and the consultation closed in February. They asked for contributions on their consultation as to whether it was considered that the UK law needs to be changed whereby there were more restraints on the use of non competes in the employment context and the commercial rationale from the government is that it was considered that non competes were being overused and they were acting as a brake on the UK economy, particularly in the tech sector, and they thought it was stopping healthy competition, and that's currently with the government and they are thinking about it. So, it was interesting for us to see two things in this context. Firstly, this issue, as I mentioned, has been debated in the US and recently some states have gone the way the UK government seems to be thinking, i.e., to restrict the use of non competes, either to ban them outright or to adopt more of a continental European model where non competes could only be enforced, frankly, if the employer effectively pays for it. We’ve also now seen a case from the Supreme Court here in the UK that, arguably, goes slightly the other way. It wasn't an employment case, it was a commercial agreement between two law firms, but within it was a non-compete covenant which was for 6 years. Now six years is a remarkable length of time, in the normal context, certainly in the employment context in the UK you won't get a covenant for more than 12 months. In the commercial context in the UK, you get much longer periods than that, but they still are judged on what is reasonable to protect the legitimate business interest and 6 years is really out there, on the outer limits, nonetheless, in this case the Supreme Court was prepared to uphold a 6 year non-compete. Now, that's interesting so far as it goes, but the real interest is whether that sort of case will be considered by the government in its consultation period as another example of why they need to legislate on this to restrain the use of non competes, particularly in the employment context.”

    Joe Glavina: “One of the options being considered by the government is mandatory compensation to be paid by employers who want to use non-compete clauses. Is that likely?”

    Ed Goodwyn: “I think that's quite likely. It's it would be aligned to, as I've mentioned already, quite a few other jurisdictions’ approaches. Arguably, it's more reasonable in the sense that if an employer really needs that protection for its legitimate business interest, well, it ought to pay and, equally, the employee who's at the other end of it won't become destitute, will still have an income whilst effectively they're sitting on their hands waiting for the non-compete period to end. It could equally be that the government takes a view that we're not going to make any changes. There are a lot of lawyers out there saying ‘why change that which isn't broken’ and there is an argument that the current case law takes into account the balance between the need for business to protect its interests, and not going to force us to become anti-competitive. But I think the government perhaps will use this as an opportunity to change, yes.”

    A reminder. The government’s consultation is called ‘Measures to reform post-termination non-compete clauses in contracts of employment’ closed on 26 February 2021 and we are still awaiting the government’s response. As soon as we have that will return to this important topic and, doubtless, hear from Ed again.

    Meanwhile the case of Law by Design v Ali is an interesting read – we have put a link to the judgement in the transcript of this programme.

    LINKS

    Link to case report: Law by Design v Ali 

    Link to government consultation: ‘Measures to reform post-termination non-compete clauses in contracts of employment’