Restrictive covenants: 12 Month non-compete clause enforced by the High Court

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Restrictive covenants: 12 Month non-compete clause enforced by the High Court

Published 9 May 2022

The High Court has enforced a twelve month non-compete clause which was included in an employment contract against an employment lawyer.

THE FACTS

Ms Ali was an employment lawyer employed by Law By Design, a Manchester based niche law firm whose main work is the provision of employment law services to NHS clients in the North West of England and to one NHS client in Hertfordshire. She signed a service agreement containing post termination restrictive covenants. A few years later, she was made a shareholder and signed a shareholder agreement which also contained post termination restrictive covenants.  

Ms Ali was later identified as a flight risk after several other lawyers left to join competitors. She was offered (and accepted) a 25% pay increase, subject to signing a new service agreement, which increased the duration of the post termination restrictive covenants from six months to 12 months.  This included a non-compete clause that effectively restricted her from being involved in any business which was in competition with the parts of Law by Design in which she had been involved to a material extent in the 12 months leading up to the termination of her employment. By contrast, the shareholder agreement sought to prevent her from working for any business which had competed with the business of Law By Design in a territory in which Law By Design had operated in the previous 12 months. This was irrespective of whether she herself had worked in the part of Law By Design’s business that was in completion with that of her new employer.

Soon after signing the new service agreement, Ms Ali resigned and joined another law firm, Weightmans, as a partner.

Law By Design sought an injunction to enforce the non-compete covenants in the shareholder agreement and in the service agreement. The High Court upheld Law By Design’s claim to restrain Ms Ali from breaching the non-compete covenant in the service agreement, rejecting her arguments that the covenant was unenforceable or that it should not be enforced on discretionary grounds. However, the High Court held that the non-compete covenant contained in the shareholder’s agreement was not enforceable.

Key points in the High Court’s judgment in relation to the service agreement non-compete covenants were that:

  • Ms Ali had prepared a business plan which set out her plan to transition more than a third of Law By Design’s turnover and all of the clients with whom she had worked at Law By Design to Weightmans. Her evidence in court was that Weightmans was interested in her “as a person”, rather than in business she would bring with her. However, the High Court considered that the business plan showed her real intentions.
  • Law By Design had a legitimate business interest that required protection. Law By Design is a small firm, and its lawyers work in an open plan office which facilitates the easy flow of information. Ms Ali had access to confidential information, including information about key individuals at client organisations, pricing structures and deals offered to clients, tailored training offered to clients and the status of ongoing matters. Because of her seniority and shareholder status, she had the same access to confidential information as a statutory director. Law By Design was also entitled to protect the client relationships that she had built up over time.
  • The scope of the non-compete covenant in the service agreement was significantly limited. The covenant only prevented Ms Ali from being involved in businesses which competed with areas of Law By Design’s business in which she had been materially involved in the year before her departure from the firm, and in territories in which Law By Design worked. She was therefore only restricted from doing NHS employment work in the North West and a region of Hertfordshire. The High Court therefore considered it to be an “uncomplicated conclusion” that the restriction was no wider than necessary to protect Law By Design’s legitimate business interests.
  • 12 months was a reasonable period to protect Law By Design’s legitimate business interests. It would take at least this long to find, recruit, train and integrate a senior lawyer. This was particularly the case given that Law By Design would have to find a lawyer who was prepared to work in a small firm based in Manchester, focussing on niche work. Such a lawyer would be likely to have a long notice period and be bound by similar restrictive covenants.
  • The covenants had been agreed against the back drop of a significant pay increase and concerns that Ms Ali was a flight risk.
  • Ms Ali was fully aware of the ramifications of the covenants.
  • Covenants restricting Ms Ali from soliciting clients and using confidential information would be very difficult to police, and would not be sufficient to protect Law By Design’s business interests.

Law By Design argued that the court should treat the non-compete clause in the shareholder’s agreement as if the parties were entering into a commercial arrangement involving the sale of part of a business (under which circumstances courts tend to apply a less stringent approach to the enforceability of covenants). However, the reality of the relationship between Law By Design was that Ms Ali was an employee, not a party with equal bargaining power to Law By Design. In this context, the clause in the shareholders agreement was drafted too widely to be enforceable purporting, as it did, to restrict her from working in any business in England or Wales that competed with any part of the business of Law By Design, irrespective of whether or not she had material involvement in that part of Law By Design’s business.

WHAT DOES THIS MEAN FOR EMPLOYERS?

Cases on enforceability of restrictive covenants will always be very fact specific. This case is a useful example of circumstances under which long non-compete covenants may be enforced by the courts.  It also highlights that such covenants are unlikely to be enforceable if the covenant does not limit the scope of the restriction so it only covers business areas in which and/or clients for whom the employee works during a limited period before their departure.

The Government has confirmed that it is currently analysing the responses to the consultation on reform of non-compete clauses in employment contracts and will publish its response "in due course". Possible outcomes from this consultation are: imposing a requirement on employers to pay individuals during the duration of the covenant; legislation to limit the length of the restricted period; and banning non-compete covenants altogether.

Law By Design Limited v Saira Ali

Authors

Zoë Wigan

Zoë Wigan

London - Walbrook

+44 (0)20 7894 6564

Ceri Fuller

Ceri Fuller

London - Walbrook

+44 (0)20 7894 6583

Hilary Larter

Hilary Larter

Leeds

+44 (0)113 251 4710

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