What do you do when an employee joins a competitor and poaches your customers?
Contracts of employment often include terms stating that employees cannot work for a competitor for a set time. This often leads to the question as to whether this is actually enforceable. If not then you and your business have no protection.
When dealing with these terms, also known as restrictive covenants, the court finds a conflict between two legal principles. Firstly, courts will uphold the terms of agreements that people freely make. However, in contrast, a restriction on an individual’s future right to earn a living is “a bad thing”. Courts resolve this conflict by asking whether the restriction is wider than strictly necessary to protect the employer’s legitimate interests.
There are many ways in which an employer can have this ‘legitimate interest’. Usually, a business would want to protect contacts with customers or key suppliers, confidential information about contract terms, pricing or other issues vital to business relationships. The scope may widen however depending on the role of the employee. For example, you may not need a covenant to restrict a waiter in a restaurant, but if the business depends on the reputation of the chef then a covenant in their contract may be justified. A court will look at all circumstances to decide if the employer has a legitimate interest to protect and whether the level of restriction is justified.
The case of Egonzehnder V Tilman raised some interesting points which could apply to many businesses. Ms Tillman was recruited as a consultant for a subsidiary of E, a worldwide group of companies offering professional services. From day one, her previous experience showed that she was likely to be rapidly promoted; the company made this clear and introduced her to many business contacts, far more than someone who was expected to remain a local consultant. She was soon the global head of a practice group, gaining worldwide contacts and a detailed knowledge of the business.
When she left the company, intending to work for a competitor in the USA, her contract of employment included that she could not, within six months of her termination date, “be engaged or be interested in any business carried on in competition with any of the businesses of (E)… carried on at the termination date or 12 months previously… and with which you were materially concerned”.
Ms Tillman argued that the terms were far too wide and therefore completely unenforceable, so she could work exactly where she wanted.
First she argued, correctly, that the covenant had to be judged at the time the contract was agreed, when she was only a consultant in the UK, but the covenant was worldwide. The court decided that both sides had believed, at the moment that the contract was agreed, that she would be promoted and involved in international business. The covenant was judged in that light, so this argument failed.
She also argued that there was no express geographic limitation in the covenant and E’s business operated in many countries, so this effectively prevented her from working anywhere in the world. The court disagreed because it only covered businesses “with which you were materially concerned”. In other words, if she had been involved locally in the last 12 months she was restricted, but otherwise not.
She also argued that the clause was wider than strictly necessary to protect E’s legitimate interests. However, the court said that the nature of the contacts and the information she had gained justified protection. She was entrusted with a high level of engagement with business contacts and the information to which she became privy was both highly confidential and of great potential benefit to a competitor. Six months was judged to be no more than necessary to protect E in the circumstances.
The covenant was enforced and E was protected by the covenant for six months. This meant that there was a buffer period for both Ms Tillman’s relationships and the relevance of her knowledge to fade and E had six months to ensure Ms Tillman’s successor was appointed and bedded-in before Ms Tillman was back in that market.
Working in commercial litigation, I’ve been involved in many cases where similar issues have arisen. In most cases the employee has had close relationships with customers, whether as a hairdresser, sales rep or a solicitor. In each case an employer has to weigh-up the damage that the former employee may do against the cost, uncertainty and stress of court proceedings. However Tillman’s case certainly shows that well drawn covenants will be enforced.
Originally, covenants tended to be very simple, just covering an area for a set time. They have now become more sophisticated. It can be difficult to enforce geographical non-competition covenants but, as the Tillman case illustrates, businesses should consider the merits of separate covenants designed to prevent the departing employees from poaching or accepting work from clients/customers with whom they were “materially concerned”.
You should regularly review your existing contracts to see whether they meet your current requirements. For example, if you are promoting someone, consider whether the existing covenant, if any, meets the needs of the new position. (The result in the Tillman case might have been different if the parties had not both anticipated rapid promotion).
Stephen Allen, partner