By Catriona Watt

This article first appeared on the website of the Employment and Industrial Relations Law Committee of the Legal Practice Division of the International Bar Association, and is reproduced by kind permission of the International Bar Association, London, UK. © 2018 International Bar Association.

Striking the balance

Striking the right balance between an individual’s freedom to work, create and innovate on the one hand and a business’s right to protect its assets on the other, has always been a challenge for lawmakers and the courts. Departing employees who leave their employer to join a competitor or to start up their own business are often well placed to take advantage of their previous employer’s confidential information, details of clients, customers, suppliers and colleagues and other strategic information after the termination of their employment. It is estimated that around 80 per cent of employees take some kind of potentially sensitive data with them when they leave employment. This can have a devastating impact on the former employer’s business. Express and implied provisions in the employee’s employment contract, which subsist only for the life of the contract, will often not be enough to give the employer the protection it needs. This is why employers often incorporate express restrictive covenants into employment contracts for their (usually more senior) staff, which seek to restrict the departing employee’s post-termination activities for a prescribed period. For example, by preventing them from dealing with clients, soliciting clients or staff, employing staff, leaving with colleagues and, in some cases, preventing them from working at all for a competitor.

Courts’ approach to restrictive covenants

Restrictive covenants are still fairly controversial in the context of a public policy debate. In May 2016, the UK Government called for evidence on (predominantly non-compete) restrictive covenants in employment contracts as part of various measures to promote its agenda of innovation and flexibility within the labour market. The Government’s concern was that restrictive covenants stifled innovation and entrepreneurship. It was suggested by the Government that the law of confidence was sufficient to prevent current or former workers from using their employer’s trade secrets or confidential customer lists. Accordingly, it might well be that new legislation confirming or restricting the enforceability of post-termination restrictive covenants was necessary.

The law relating to restrictive covenants in the UK is based on settled common law principles developed over many years. The starting point is that provisions which have, as their nature or effect, a restriction on the activities of former employees are, as a matter of public policy, void and unenforceable as they are in restraint of trade, except to the extent that they go no further than is reasonably necessary to protect the employer’s ‘legitimate business interests’. Legitimate business interests include (a) confidential information and trade secrets, (b) stability of the workforce and (c) trade connections. In order for a restrictive covenant to be regarded as reasonable and in the interests of the parties, it must afford ‘no more than adequate protection to the benefit of the party in whose favour it is imposed’ (Herbert Morris Ltd v Saxelby [1916] AC 688). Factors to which the court will have regard in considering the reasonableness of restrictive covenants include, for example: the duration of the restraint, if they prevent the former employee from working at all, the scope of prohibited clients and work, and the geographical area to which they apply.

Since enforcement of restrictive covenants depends on various subjective concepts of reasonableness and since it has always been at the courts’ discretion to refuse or to grant an injunction, it is very hard to predict accurately whether or not the party seeking to enforce a restrictive covenant would be successful in obtaining an injunction in any particular set of circumstances. Each clause has to be considered in each case by reference to the business needs of the party imposing the restrictions – there is no ‘one size fits all’ solution. The court may take the view at a preliminary stage that it is prepared to give the benefit of the doubt that the restriction is enforceable but may still refuse to grant an injunction ‘on the balance of convenience’. This means that the prejudice to the employee if an injunction were granted and subsequently found not to be justified would outweigh the prejudice to the employer if an injunction were refused and subsequently found to have been justified. Deciding to apply for an injunction to enforce a covenant is a major decision for an employer and it will have to weigh-up from a commercial, financial and reputational perspective whether it is worth their while, also bearing in mind the various hoops through which it must jump to prove enforceability if the matter proceeds to trial, often on an expedited basis.

The UK courts have shown time and again that they are well-equipped to deal with the fine balancing exercise of permitting an employee the right to work to the greatest extent possible whilst allowing the employer to protect its most valuable assets. Applying the well-established legal principles to the facts of each particular case against a backdrop of a changing political and economic landscape has meant that although it is often difficult for practitioners to advise on with certainty, the law has remained flexible and adaptable to the changing needs of employers and employees.

The UK Government dropped its plans for intervention earlier this year stating that:

‘The consensus view across the majority of responses [to the call for evidence] was that restrictive covenants are a valuable and necessary tool for employers to use to protect their business interests and do not unfairly impact on an individual’s ability to find other work. Common law has developed in this area for over a century and is generally acknowledged to work well.’

Trade Secrets Regulations 2018

While legislative intervention relating to restrictive covenants has been shelved, another legal development in relation to the protection of trade secrets and confidential information was brought in on 9 June 2018 with the introduction of the Trade Secrets (Enforcement, etc) Regulations 2018 (the ‘Regulations’). The Regulations came in to force to implement the EU Trade Secrets Directive and seek, for the first time, to legislate for the protection of trade secrets.

The Regulations seek to define what a trade secret is and seem to provide for a new cause of action for misuse of a trade secret. How established case law in relation to trade secrets and confidential information will fit in with the new legislation remains to be seen.

The decision in Dyson v Pellerey

The judgement in the case of Dyson Technology Ltd v Pellerey [2015] EWHC 3000 (Ch) (which was just recently released as a result of the highly confidential nature of the plans for an electric car) demonstrates again the balancing exercise between the interests of the employee, employer and, in this case, a competitive business, that must be undertaken in restrictive covenant cases.

Pellerey worked for Dyson as a motor drives engineer. Pellerey was approached by a recruitment agency working for Tesla (an electric car manufacturer in the US) in November 2014. Tesla offered a job to Pellerey, which he accepted, subject to his obtaining a US visa. Pellerey’s employment contract with Dyson included a clause that required him to immediately notify Dyson if any person approached him in connection with offering him employment which is or potentially may be in competition with Dyson.

Pellerey did not notify Dyson of this approach. In the interim, Sir James Dyson told a select group of colleagues, including Pellerey, of his highly confidential plans for Dyson to develop an electric car. In June 2015, Tesla made a job offer to Pellerey based in Europe, which avoided the US visa issue and Pellerey then gave notice to Dyson.