High Court finds six month non-compete covenant unreasonably wide and unlawful restraint of trade

Background

In determining whether a post termination restriction is enforceable a court undertakes a three-stage process: construing the covenant i.e. working out what it says, determining whether the employer has legitimate business interests requiring protection, and assessing whether the covenant is no wider than reasonably necessary to protect those interests. The burden of establishing reasonableness is on the employer. 

Facts

Huws Gray Ltd (Huws) is a nationwide builders' merchant with over 250 branches. Huws employed Mr Gentleman as an area sales manager for just over two years. He was responsible for higher-value customer relationships at its Swindon, Newbury and Cirencester branches, having 103 customers by the end of his employment. His contract contained a six-month post-termination non-compete covenant. Mr Gentleman agreed that he would:

"not without the prior written consent of the Company be engaged or otherwise concerned or interested in … whether as principal, partner, employee, adviser, agent, consultant or otherwise, in any [Competing Business] located within 20 miles of the Company's branch or branches for which you had responsibility in the six (6) months prior to the termination of your employment".

"Competing Business" was defined as "any trade or business that competes or is preparing to compete with any business carried on by [Huws]". The restriction was subject to a "carve-out", allowing Mr Gentleman to:

"engage in any business so far as your duties and work shall relate exclusively to work of a kind which is not related to any area in which the Company has developed Confidential Information, and in which you have not been involved during your employment".

Mr Gentleman resigned to join a direct competitor, MKM Building Supplies Ltd (MKM), as the external sales representative for MKM's new Swindon branch. The High Court granted Huws an interim injunction to enforce Mr Gentleman's non-compete and confidentiality obligations particularly in relation to its internal pricing. This summary covers what occurred at an expedited trial where Huws sought final injunctions.

Mr Gentleman denied breaching any enforceable obligations, arguing that the non-compete covenant was unreasonable in scope and duration and the carve-out was meaningless. He denied retaining or misusing confidential information, asserting that customer identities and pricing information were publicly available or part of his general skill and knowledge. The High Court found for Mr Gentleman on all points, holding that:

• The non-compete was not the right covenant for the protection Huws sought: the non-solicitation and non-dealing covenants in Mr Gentleman's contract were ineffective, as the terms "Restricted Customer" and "Restricted Potential Customer" used had not been defined. This was relevant to the reasonableness of the non-compete restriction, since a properly drafted non-dealing covenant would have provided targeted, adequate protection, making the broader non-compete restriction unnecessary.
• The clause was too wide as it prevented Mr Gentleman from being employed by MKM in any role anywhere, including at MKM's Hull head office, and could extend to roles in procurement, finance or HR, not just sales.
• The clause was also too wide as it sought to protect "any business" of Huws and was not confined to builders' merchant supplies. Nor did it consider whether Mr Gentleman had any material involvement in that part of Huws' business.
• The carve-out in practice "carves out nothing" because the confidential information wording encompassed the entirety of Huws' business, so there was no business activity that Mr Gentleman might undertake for a competitor. Secondly, the carve-out was not limited to work of a kind with which Mr Gentleman was materially or recently involved, and the evidence showed he had been "involved" in multiple aspects of Huw's business beyond his core sales role, including work behind the counter, yard work and generating leads for the hire and kitchen/bathroom departments.
• The non-compete was six months from the first day of Mr Gentleman's employment even though he was subject to a six-month probationary period with a week's notice. Such a restriction could be excessive and unreasonable and was for Mr Gentleman, particularly as he could not have developed customer relationships with all his 103 customers during the early weeks of probation.
• The non-compete was not softened by the phrase "not without the prior written consent of the Company". An employer's power to say yes or no in this context was absolute and did not affect the enforceability of the covenant.
• Huws' assistant branch managers, who had equivalent or greater access to pricing information and systems, were not subject to any post-termination non-compete restriction, undermining its case.
• There had been no misuse of confidential information when it came to pricing. The threat from Mr Gentleman's knowledge of the lowest price which could be offered was "baseless". 
• Customer identities were not confidential when competitors already targeted the same customers, and their details were publicly available.
• The LinkedIn account used was Mr Gentleman's personal account not a "Company Account" containing business contacts. The contacts were publicly accessible, and Mr Gentleman was free to invite those individuals to connect with him via LinkedIn.

What does this mean for employers?

Although there were errors in the drafting of the non-compete clause, this case still highlights how hard it can be to enforce non-compete covenants. Sometimes employers wish their covenants to be a warning shot for exiting employees and are not concerned about enforceability.

However, employers who want to protect legitimate business interests, such as customer connections as in this case, should heed the wording that well drafted non-solicitation and non-dealing clauses are more likely to be enforced than a blanket ban on competition. Indeed, having all three could undermine the reasonableness of any non-compete clause. Careful drafting is key.

This case is a salient reminder that a court will not use its powers to rectify a mistake. Ensuring covenants are proportionate to contractual notice from day one and that they work logically across the spectrum of roles the employee undertakes and their seniority in a business will also be important in persuading a court of their reasonableness.

Huws Gray Limited v Daniel Gentleman