Restraint Issues
Cases
Levinwick Ltd -v- Hollingsworth
[2014] IEHC 333 McGovern J.
1. The plaintiff is the owner of a chain of pharmacies and at all material times owned and operated Blakes Pharmacy at Main Street, Celbridge, County Kildare.
2. The defendant is a Pharmacist who worked as Pharmacy Manager at Blakes Pharmacy from 7th August 2007, until 1st March, 2013. Between 4th March 2013, and 24th November, 2013, the defendant worked as Supervising Pharmacist with ‘Your Local Pharmacy Group’ in Huntstown, Dublin 15. Between 9th December 2013, and 4th January 2014, he worked as Pharmacy Manager with Tesco Pharmacy, Newbridge, County Kildare. On 7th January 2014, the defendant commenced employment with Chemco Pharmacy as Pharmacy Manager and the pharmacy began trading in Celbridge, County Kildare, on 14th January, 2014. It is this latter contract of employment that has given rise to these proceedings.
3. In these proceedings, the plaintiff seeks to enforce the terms of his contract of employment made on 7th August 2007 (“the contract”), in which he agreed not to do similar work in another pharmacy within a two-mile radius of Blakes Pharmacy for a period of 24 months after the termination of his employment.
4. The contract was structured on a three-month rolling basis and the defendant was required to give three months notice of intention to leave the pharmacy. Clause 15 of the contract which is entitled ‘Non-Solicitation’ is in the following terms:
“You undertake that during the term of your employment but for a period of 24 months after the termination of your employment, for any reason, you will not be employed or engaged by, do locum work, manage, own or part-own, a pharmacy or other retail business which trades in cosmetics or gifts or which provides photography services within a two-mile radius of the Pharmacy, you will not solicit in competition with the Pharmacy the business of any person, firm or company who is at the time of termination of your employment or was during the preceding 12 months a customer of the Pharmacy and you will not, in competition with the Pharmacy, solicit any person who was during your employment with the Pharmacy employed or engaged by the Pharmacy within 12 months prior to the termination of your employment, and who by means of such employment, is likely to be in possession of confidential information relating to the Pharmacy or its business.
You agree that all of the above restrictions are reasonable in all the circumstances and are no more than is necessary for the protection of the interests of the Pharmacy.
You agree that, in the event that any of the above restrictions is held to be unreasonable by reason of the area, duration or type or scope of service covered by such restriction, then effect will be given to such restriction in such reduced form as may be decided by any court of competent jurisdiction.”
5. The issue arising in this case is one of the enforceability of a covenant in restraint of trade. Such covenants are, prima facie, unenforceable at common law. They are, however, enforceable if they:
(i) Protect a legitimate business interest; and
(ii) are no wider than is reasonably necessary for the protection of that interest. See Office Angels Ltd. v. Rainer-Thomas & O’Connor [1991] I.R.L.R. 214, and Murgitroyd & Co. Ltd. v. Purdy [2005] 3 IR 12.
6. In Murgitroyd & Co. Ltd. v. Purdy, Clarke J. said at p. 21, para. 17:
“The test seems to be, therefore, as to whether in all the circumstances of the case both the nature of the restriction and its extent is reasonable to protect the goodwill of the employer. Clearly certain clauses which preclude solicitation come within that definition provided that they are not excessively wide. In certain other cases clauses have been upheld which have prohibited employees setting up a similar business within a specified distance of an employer\’s establishment: see for example Marion White Ltd. v. Francis [1972] 1 W.L.R. 1423. But it is clear that the duration of the prohibition and the geographical scope of same are important matters to be considered having regard to the nature of the work in question and the structure of the business.”
In determining the reasonableness of a covenant as between the parties, the burden of proving reasonableness lies on the person who seeks to rely on the covenant. See Herbert Morris Ltd. v. Saxelby [1916] A.C. 688. In the case of Murgitroyd & Co. Ltd. v. Purdy, Clarke J. drew a distinction between covenants by employees and covenants given on the sale of a business. At p. 21, para. 21, he said:
“. . . it is also clear that a more restrictive view is taken of covenants by employees than is taken of covenants given on sale of a business. Covenants against competition by former employees are never reasonable as such. They may be upheld only where the employee might obtain such personal knowledge of, and influence over, the customers of his employer as would enable him, if competition were allowed, to take advantage of his employer\’s trade connection: see Kores Manufacturing Co. Ltd. v. Kolok Manufacturing Co. Ltd. [1959] Ch. 108.”
7. The plaintiff contends that, by virtue of his position as Pharmacy Manager, the defendant had a particular degree of contact with the customers of Blakes Pharmacy, such that many customers would follow him if he worked for another pharmacy in the Celbridge area. For his part, the defendant gave evidence that the plaintiff had exaggerated the level of personal relationship which he, as Pharmacy Manager, would have built up with customers. He also says that, having left the employment of Blake’s Pharmacy on 1st March 2013, he did not commence work in another pharmacy in the Celbridge area (being within the two-mile radius specified in clause 15 of the contract) until 7th January 2014, which was more than ten months after he left Blakes Pharmacy.
8. In assessing whether the restrictions in clause 15 of the contract are necessary to protect a legitimate business interest of the plaintiff and no wider than reasonably necessary for the protection of that interest, it is necessary to analyse the role of the defendant while he was working with Blakes Pharmacy and his current role, and the extent to which he interacted with the customers of Blakes Pharmacy.
9. The defendant was the only person who gave direct evidence as to the degree of interaction between him and customers calling to Blakes Pharmacy. He informed the court that the pharmacy drew customers from Celbridge and that three doctors in General Practice had clinics near the Main Street in Celbridge and there were two nursing homes nearby. In 2007, when he commenced his employment, there were three pharmacies in Celbridge; three further pharmacies have opened in the town since October 2011. He described the role of Pharmacy Manager, which was primarily involved with dispensing prescription medicines and he had responsibility for purchasing and making payments to suppliers. He converted one room upstairs in the premises into an office and he said that the majority of his activities were carried on in the office. He worked a 40-hour week. The pharmacy was open seven days a week and 12 hours every day. He described the staffing levels in the pharmacy. There were two fulltime Pharmacists and two part-time locum Pharmacists to cover weekend and backup work. There were two dispensing technicians and eight or nine counter retail assistants who handled the bulk of customer transactions, although these would have been dealing with non-prescription items. The defendant was one of the two fulltime Pharmacists, but he had many administrative duties. The main role of the other Pharmacist was to run the Dispensary and she had a large level of customer contact. He said that she would have a higher level of personal contact with customers than he did. The two part-time locum Pharmacists would be the only Pharmacists seen by customers at weekends. He did not see himself as “the face” of the pharmacy. In the defendant’s view, issues which might draw people to a pharmacy were proximity to their home or to their doctor and the availability of parking facilities. He said he would find it unusual that people would follow a Pharmacist to another pharmacy where they might go to work. He agreed with a suggestion by counsel for the plaintiff that it would take a new Pharmacist approximately two and a half years to get established in a neighbourhood.
10. The court heard evidence from Mr. Tom McDonald, a Chartered Accountant from Benson Lawlor, who provide services to the plaintiff and the pharmacy industry generally. I accept his evidence that, in recent years, various State health agencies have cut the charges of pharmaceutical products, and in particular, prescription drugs, and that there has been a progressive reduction in the prescription fee for pharmacies. This has put pressure on pharmacies and there is also increasing competition in the market. He gave evidence to the court of the decline in the business at Blakes Pharmacy and attributed 75% of that to the defendant moving. In his view, the customers were following the defendant. Mr. McDonald said that the 24-month restriction in the defendant’s contract of employment would protect the goodwill of the plaintiff because the owners are not involved in the day-to-day running of the business, but a person in the defendant’s position would be seen as “the face” of the pharmacy. Goodwill is a real asset of the pharmacy and it takes time to train a new Pharmacy Manager and for that person to build up a new relationship.
11. The court also heard evidence from Mr. Brian Hyland, an Accountant with Baker Tilley Ryan Glennon Accountants, who carried out a review of the financial statements of the plaintiff from 2008 to 2013, together with copies of VAT returns for part of the period from February 2010 to December 2013, and the projected losses for 2014 and 2015. He gave evidence that since 2009, sales started to decline at the pharmacy and continued to decline annually thereafter, with a total decline of turnover of 26.55% from 2009 to 2013, which was an average decline of nearly 6% per annum.
12. I accept the evidence of Mr. Hyland. Bearing in mind that the defendant worked with the pharmacy from August 2007 until March 2013, it is clear that for the greater part of his tenure in Blakes Pharmacy, turnover was declining. This decline began within two years of the commencement of his employment there which lasted almost five and a half years.
13. There were also other factors at play, as described by Mr. Tom McDonald of Benson Lawlor, and Mr. Dermot Ryan, a director of the plaintiff. Not least among these was the increasing number of pharmacies in the Celbridge area and the fact that there was a reduction in prescription fees due to Government policy.
14. In my view, the evidence fell a long way short of establishing that the defendant represented “the face” of Blakes Pharmacy while he worked there and that he was identified by customers as such. The plaintiff relies on a letter of 27th March 2010, written by the defendant to Independent Pharmacy Ownership Scheme (IPOS), which, at one time, owned or controlled the pharmacy, as identifying him closely as the person with whom the customers had a particular relationship. The letter was written in the context of the defendant expressing an interest to purchase the pharmacy under a scheme set up by IPOS to assist young pharmacists in getting their own premises. In that letter, he says:
“An excellent relationship has been forged between my staff and our customers since I took on the role here as MP and they constantly remind us how professional and friendly our customer service is in comparison to our competitors in Celbridge. As my staff and I all reside in Celbridge, we are regarded as being fellow members of the community and not just employees of Blakes Pharmacy by our fiercely loyal customers, all of which is reflected in the goodwill aspect of the business.”
15. While this letter undoubtedly seeks to identify the defendant closely with the business for the purpose of his expression of interest to IPOS, it must be read in the context in which it is written and it does not single out the defendant from other staff members. The defendant gave persuasive evidence that the plaintiff could have ascertained if any significant number of customers were following him to the pharmacy where he now works. Every customer of a pharmacy has a Patient Record (a ‘PMR’) from which it could find out who were its customers before and after the defendant worked with Blakes Pharmacy. This evidence was not challenged and the plaintiff did not establish, or seek to establish, by empirical evidence, what number of customers, if any, had followed the defendant to the other pharmacies where he worked after leaving Blakes Pharmacy, and in particular, the pharmacy where he now works in Celbridge.
16. In the course of his evidence, Mr. Dermot Ryan, a director of the plaintiff, conceded that the plaintiff was not alleging that the defendant was in breach of a non-solicitation clause, nor was it alleging that he took with him any trade secrets or plans of the plaintiff. The plaintiff contended that it was its goodwill that had to be protected and that the clause in issue in this case was no wider than was reasonably necessary for that purpose. The plaintiff relied on the fact that it takes a substantial period of time for a new Pharmacy Manager to build up a relationship with customers. This was not disputed by the defendant. But I cannot ignore the fact that in Blakes Pharmacy, there were a substantial number of employees, including two Pharmacists and two locum Pharmacists to cover weekends and backup. I have to consider these facts in determining what was reasonable and the extent to which it was likely that a particular Pharmacist (the defendant) would have built up such a special relationship with customers, as is claimed by the plaintiff. I also have to consider the particular role of the defendant, as Pharmacy Manger, which involved him in many administrative duties relating to the pharmacy which required him to spend a considerable amount of time in an office on the premises.
17. The plaintiff did not seek to establish that a less onerous restrictive clause was not reasonable or practicable in the particular circumstances that arose in this case.
18. An issue arose as to the date on which the defendant’s employment with Blakes Pharmacy terminated. The plaintiff contends that it terminated with effect from 30th April 2013, as under clause 8, he was required to give three months’ notice of his intention to leave the pharmacy. The defendant gave six weeks notice. He says this was accepted by the plaintiff, and on that basis, his employment would have ended on 15th March 2013. But as he had accrued holiday leave of two weeks, he gave evidence that his manager, Mr. Juan Fravega, agreed that he could leave the plaintiff’s employment two weeks early, on 1st March 2013. He was issued with a P45 with a date of cessation of 6th March 2013, which corresponds with his final payslip.
19. The evidence of the defendant on this issue was not contradicted and I accept that it was agreed that he could leave on 1st March 2013. It seems that his P45 showed 6th March 2013, as the date of cessation of his employment because he was paid one week in arrears. In any event, not much turns on this. But insofar as it is an issue, I hold that the date of cessation of his employment was 6th March 2013, and that this was agreed with the plaintiff.
Conclusion
20. Clause 15 of the defendant’s contract is contract in restraint of trade and therefore only enforceable if it protects a legitimate business interest of the plaintiff and is no wider than is reasonably necessary for the protection of that interest. I accept the submission of the defendant that both the nature of the restriction and its extent must be reasonable to protect the goodwill of the employer if the clause is to be enforceable.
21. The plaintiff has not established that the nature of the defendant’s position and his work in Blakes Pharmacy gave rise to such a personal connection with customers of the Pharmacy that the restriction imposed by clause 15 was necessary to protect the goodwill of the plaintiff. Therefore, the plaintiff is not entitled to the injunctive relief or damages or other relief claimed in the statement of claim.
M Finn & Co Ltd v Holliday
[2013] EWHC 3450 (QB) (
The Honorable Mrs Justice Simler DBE :
The Claimant company is an investment manager and stockbroking firm. It has a head office at 4 Coleman Street in the City of London and regional offices in Bristol, Leeds, Bury St Edmunds, Ipswich and Cardiff. It has more than 300 staff and as at the end of December 2012, had about £6.5 billion worth of funds under management or administration.
The Defendant was employed by the Claimant in May 1999 as an investment adviser. He describes himself as an old-fashioned stockbroker. He graduated from Cambridge in 1984 and has worked in the financial sector throughout his working life. He turned to fund management in 1994, spending 5 years at Singer and Friedlander. Before his resignation in 2013, he provided investment advice to approximately 275 clients with about 650 accounts between them.
The claim arises out of the Defendant\’s resignation and his desire to join a competitor, Hargreave Hale Ltd, as soon as possible. Having received his letter of resignation the Claimant exercised an express contractual right to place the Defendant on garden leave and sought to hold him to his twelve-month contractual notice period. Within a month of having been placed on garden leave the Defendant resigned summarily relying on an alleged repudiatory breach of contract by the Claimant and indicating that he regarded himself as free to commence employment with Hargreave Hale in consequence. The Claimant\’s solicitors responded to that purported summary resignation seeking assurances that the Defendant would not take up employment as indicated; and in the alternative indicating that an urgent application for an injunction would be made immediately. An application and the claim in these proceedings was issued on 12th August 2013, no assurances having been proffered by the Defendant. There was a contested hearing before Michael Bowes QC (sitting as a Deputy High Court Judge) on 16th August 2013 and an interlocutory injunction was granted together with directions for an expedited trial.
Although the following issues arise for decision in this case, the parties have been unable to agree on the order in which these issues should be dealt with, accepting that this is a case in which a variety of entirely sensible but different views could be taken as to the most desirable way in which to order these issues. I propose to deal with the issues as follows:
a) Was the Defendant constructively dismissed: the Defendant maintains that he was constructively dismissed and that his employment contract therefore came to an immediate end upon his acceptance of the Claimant\’s repudiatory breach. If that contention is right and his contract of employment is at an end, it is common ground that, he would, as he asserts, be free to join a new employer and no injunction could be granted against him.
b) If there has been no constructive dismissal, the next question that arises is the proper approach to the question whether and if so how the court should enforce the negative covenants contained in the garden leave provision in the Defendant\’s contract of employment. So far as this issue is concerned there is some divergence between the parties as to the proper approach.
c) Even if the restraints are enforceable the court will nevertheless have to consider whether to exercise discretion to grant an injunction in relation to the garden leave clause.
d) Finally, if the garden leave provisions are enforceable but the court exercises discretion to refuse an injunction in this case, the question of damages may arise.
Constructive dismissal
Mr Holliday alleges that the Claimant was in breach of the implied term of trust and confidence, and this meant that he was entitled to treat his employment with the Claimant as at an end, having accepted that fundamental breach. It is trite law that there is to be implied into any contract of employment, a term that the employer shall not without reasonable and proper cause, conduct itself in a manner calculated or likely to destroy or seriously damage the relationship of confidence and trust between employer and employee.
The test for whether conduct is repudiatory is that set out by Etherton LJ in Eminence Property Developments Ltd v Heaney [2010] EWCA Civ 1168, endorsed by the CA in Tullett Prebon plc v BGC Brokers LP [2011] IRLR 420 at [20]:
… So far as concerns repudiatory conduct, the legal test is simply stated, or, as Lord Wilberforce put it, \”perspicuous\”. It is whether, looking at all the circumstances objectively, that is from the perspective of a reasonable person in the position of the innocent party, the contract breaker has clearly shown an intention to abandon and altogether refused to perform the contract.\”
The question whether or not there has been a repudiatory breach of the duty of trust and confidence is a question of fact: Woods and WM car services (Peterborough) Ltd [1982] IRLR 413 at 415. It is highly context specific. Reliance may be placed on any conduct by the Claimant which, objectively considered, constituted a breach of the Claimant\’s duty not seriously to damage the degree of trust and confidence which Mr Holliday was entitled to have in the Claimant.
The only conduct now relied on by Mr Holliday as a breach of the implied term of trust and confidence is the refusal to allow him to continue to receive the Buckingham morning summaries. That claim must be considered in the context of a disaffected employee who had already given notice of his intention to resign and was hoping to leave immediately to join a competitor firm with whom he had already secured alternative deployment. Those circumstances give rise at the very least, to a potential concern that the argument of repudiatory breach is deployed as a means of avoiding the notice period and garden leave.
Mr Holliday had not had access to the Buckingham notes since 10th July 2013. The first complaint he made about this was on 31st July. Whilst it is correct that he had a short period of holiday in Iceland during this period (I reject his evidence that he was on holiday for most of this time), it is surprising that he waited as long as he did to make this complaint (and did so as a postscript to his email) if these notes were as important as he now maintains. Of course I accept that during this period he did not wish to rock the boat and was hoping to reach an amicable agreement with the Claimant as to his departure, but I cannot see how requesting the Buckingham notes would have been regarded as rocking the boat.
I am satisfied that the Buckingham notes contained a convenient digest of information available from a variety of sources including the financial press, the Internet (and corporate websites) and publications produced by other organisations, including selling broker publications (for example Winterflood) engaged to publicise companies and provide information about those companies to attract increased sales. I am also satisfied that these notes reflect a summary of broker opinions and other market information that is likely to be helpful to the hard-pressed, busy broker who does not have time to carry out extensive research himself.
The real value of these summaries, sent out early each morning, is speed as both Mr Sussman and Mr Powell made clear and as Mr Holliday himself says at paragraph 43: \”I cannot over emphasise the time that I would otherwise spend trawling through a wide variety of sources to keep up-to-date… if I\’m deprived of this daily information source\”. They provide readily digestible information that can enable a busy broker to make a quick decision about what stock to buy or to sell that day. They have value or potential value for immediate trading.
That need for speed was not one that applied or could apply during garden leave. Mr Holliday would have far more time than normal to carry out research whilst on garden leave and would not be having to make time pressured investment decisions. His reluctance to accept that he would have much more time to keep abreast of the markets and to maintain his knowledge whilst on garden leave was surprising.
Mr Holliday maintained that in addition to speed the other value of these notes is editorial and he pointed to the information concerning Michelmersh bricks (page 68) by way of example; information he described as a nugget that would be extremely useful to him in advising on stocks in his day-to-day work. I accept that this may be so, but, it is clear (on a quick survey of the Buckingham notes of 22nd July 2013 contained in the bundle) that much of this information is likely to become stale within a relatively short period, and its utility where immediate trading is not possible is highly doubtful.
Mr Holliday\’s contemporaneous reaction to what is asserted to be a fundamental breach is helpful in assessing its objective seriousness. I have already noted the fact that he went without the Buckingham notes for three weeks without raising this. He did not even mention the Buckingham notes during the course of the exit interview on 29th July, despite a discussion about CPD and the resources that were available to him in order to keep up with his CPD.
Moreover it is apparent from the terms of his email of 2nd August that he felt the need to exaggerate the significance of the Buckingham notes by claiming that that they were a vital part of his necessary and ongoing CPD. Having accepted that reading the Buckingham notes could not be relied on for CPD purposes, Mr Holliday sought to explain his assertion that the Buckingham notes were a vital part of CPD as a reference in the broadest sense to continuing professional development and the need to have those notes to maintain his knowledge of the market. But his email demonstrates that he knew the difference between market knowledge and CPD requirements and indeed he drew that distinction in his own email. I am satisfied that he was overstating the importance of those notes in order to engineer a constructive dismissal. I am fortified in reaching that conclusion by three features: first, the fact that Mr Holliday resigned immediately without any attempt to query or challenge the decision in relation to the Buckingham notes or to explain to his employer how vital he regarded those notes to be; secondly, the fact that Mr Holliday felt it necessary to rely on the withdrawal of the notes as a last straw and the culmination of a period of mistreatment, none of which is any longer relied on; thirdly, the fact that within minutes Mr Holliday had forwarded his email to his prospective new employer making it clear that he would be free to start work without any need for payment in respect of the client base.
Looked at objectively, the absence of the Buckingham notes, whilst inconvenient, cannot be said to be something which would deprive Mr Holliday of his skills or constitute a breach of the implied term of trust and confidence. The withdrawal of these notes was not conduct that seriously damaged the relationship of trust and confidence or demonstrated an intention by the Claimant to abandon and altogether refuse to perform the contract. I am satisfied that the Claimant had reasonable and proper cause for withdrawing those notes. In circumstances where Mr Holliday was on garden leave and had no need to contact clients and was not permitted to advise on, or sell or buy stocks in the course of business, his FCA registration having been suspended, there was no reasonable need for him to have those notes.
Accordingly, I reject the claim that the Claimant repudiated Mr Holliday\’s contract of employment.
Approach to enforcing restraints in support of garden leave
I turn to consider the proper approach to the garden leave clause and the question whether the order made by Michael Bowes QC should be continued for any period and if so what period.
The parties diverge in their approach to this broad issue. Mr Quinn identifies four questions that he says I must answer: first, I must consider what the Claimant actually did in this case and not what it could have done. The conduct relevant to this question he says is imposing a period of 12 months garden leave. Secondly, I must consider whether that act was in restraint of trade, and he contends that the answer to that question is plainly yes. Thirdly, that being the case he contends that the party seeking to impose the restraint of trade must have the burden of satisfying the court that the restraint was reasonable in the sense of being no more than was necessary to protect its legitimate business interest. Fourthly, the question whether it is open to the court to whittle down the period and impose a lesser period must be considered, and if so what is the appropriate period of any injunction in this case.
Mr Tatton-Brown contends that there is a distinction to be drawn between on the one hand, a contractual requirement that a minimum period of notice of termination be given and an express garden leave clause entitling the employer to place the employee on garden leave once notice has been given, and on the other hand, the issue of whether as a matter of discretion a garden leave injunction ought to be granted. He maintains that the requirement to give a particular period of notice is not a provision in restraint of trade or if it is it is not one the courts have required an employer to justify under the restraint of trade doctrine. Similarly, where there is express entitlement in a contract permitting an employer to place an employee on garden leave, he submits that there is no requirement to justify such a contractual provision. The restraint of trade doctrine comes in, if at all, according to Mr Tatton-Brown, at the stage at which the court is concerned whether as a matter of discretion to enforce such a garden leave clause and if so to what extent. However, in a case concerned with the grant (or otherwise) of a final injunction after a speedy trial (as opposed to an interim injunction preserving the status quo) Mr Tatton-Brown submits that a different approach applies on the authority of Dyson Technology Ltd v Ben Strutt [2005] EWHC 2814 (Ch) paras 1.68 to 1.71. In summary: once the Claimant has established that a restraint sought to be imposed by a negative covenant is enforceable, the court has discretion whether to grant an injunction to restrain its breach. That discretion must be exercised in accordance with established principles that an express or implied negative covenant will in general be enforced by injunction without proof of damage. Although the absence of damage to the Claimant is not in general a bar to such relief, there may be exceptional cases where the grant of an injunction would be so prejudicial to a Defendant or cause him such hardship that it ought to be refused absent proof of damage. The primacy of holding an employee to his bargain is apparent in this approach and the doctrine of restraint of trade does not feature.
I accept that express provisions regarding minimum periods of notice and an entitlement to place an employee on garden leave during a period of notice are commonplace in employment contracts. Indeed it is well known that garden leave provisions have become a standard feature of senior employment contracts: see observations to this effect in SG & R Valuation Service Co LLC v Boudrais [2008] IRLR 770 14 (Cranston J). The reason for this is that in a case involving a senior employee with a right to work under his contract, an employer will, generally speaking, need an express provision entitling him to send his employee on garden leave so as to absolve him from what would otherwise be a breach of contract.
There is a distinction between post-termination restraints (self-evidently operating after the contract has been terminated) and garden leave provisions operating during the currency of the employment relationship.
During the currency of the employment relationship, when an express negative covenant or the implied duty of good faith apply to prevent an employee working for another employer, the doctrine of restraint of trade will not apply to such a restraint; nor is there a need to justify an express contractual garden leave provision by reference to this doctrine. However in circumstances where an employer has put an employee on garden leave and then seeks an injunction to restrain the unwilling employee from joining a competitor before the expiry of his notice period, an injunction to enforce or aid that period of garden leave must be considered in light of the restraint of trade doctrine. The fact that the employee agreed to the contractual provisions may be a factor in the court\’s consideration but it is not the only or primary factor. The scope for abuse by an employer of a garden leave provision is well recognised and I agree with Mr Quinn, that public policy considerations compel consideration of the restraint of trade doctrine in this context.
In my judgement, the proper approach even at the final (rather than interim) stage is that identified by Jack J in the Tullett Prebon case at paragraphs 219 to 226, in particular at paragraphs 221 to 224:
\”[221] \”Where the enforcement of the garden leave provision differs from the enforcement of the covenant is that the enforceability of the covenant is to be judged at the time that it was entered into. If, on that basis, it is unenforceable, that is the end of the matter. If it is enforceable, then prima facie an injunction will follow. But there may be situations where the court will nonetheless hold that, because of what has actually happened an injunction is inappropriate, or is inappropriate for the whole period of the covenant. The enforcement of the garden leave provision may come in at this stage as a reason for declining to enforce the covenant in whole or part.
[222]Where the issue is garden leave, the court looks at the situation at the time enforcement is sought. The court will look primarily at what is required for the reasonable protection of the protectable interest, here trade connection. It will also take account of the situation of the employee. That brings in here the facts that the brokers are on garden leave as a result of their having walked out from their employment in reliance on their indemnity from BGC without, as I have held, having grounds to do so; that they are suffering no financial loss because they are receiving salary from Tullett and will be indemnified for bonus by BGC and are in fact better off as a result of what has happened by reason of their signing payments from BGC. The court will also have in mind the strong public interest in employees being held to contracts which they have freely entered into for substantial remuneration. That interest pulls in the opposite direction to the public interest in employees being freely able to exercise their skills in work by transferring from one employer to another. It is also a fact that the brokers will take time to get back up to speed once they begin work again. It is also ironic that under their contracts with BGC they will have rather less freedom of future movement than under their contracts with Tullett. These are all factors which are subsidiary to the main issue as to the time required for the reasonable protection of the employer\’s protectable interests.
[224] Where the court considers that the period for which the employer is entitled to protection ends during the time for which the employee may be on garden leave, it will enforce the garden leave provision for that period, and will decline to enforce any enforceable post termination restriction. It will decline the latter because the employer will have already got all the protection he is entitled to, and the court has discretion not to enforce an enforceable post termination restriction or covenant where the circumstances are such that it should not.\”
Mr Quinn sought to persuade me that the court has no discretion to whittle down the terms of a garden leave clause or its period. I cannot accept that submission. When dealing with restrictive covenants the court is bound by the terms of the contract. The restrictive covenant contained in the contract is either enforceable so as to justify the grant of an injunction enforcing it, or is unenforceable and no injunction will be granted. Where a garden leave clause is concerned the court is enforcing a negative covenant to aid or support the enforcement of the garden leave clause rather than enforcing the garden leave clause itself. As a result any injunction obtained might be for a shorter period than that envisaged by the garden leave clause itself. The distinction is illustrated by Mont (JA) UK Ltd v Mills [1993] IRLR 172, CA and the court\’s different approach is exemplified in GFI Group Inc v Eaglestone [1994] IRLR 119 where, in relation to a notice period of 20 weeks, an injunction was granted for only 13 weeks on the particular facts.
I accept however that in exercising that wide discretion both as to the period of the injunction to enforce garden leave and as to its scope, the court will be astute to recognise that the practice of long periods of garden leave is obviously capable of abuse: it is a weapon in the hands of the employer that might be used to ensure that an ambitious employee will not give notice if he is going to be unable to work at all for anyone else for a long period of notice: Provident Group plc v. Heywood [1989] ICR 160 at 165 (Dillon LJ).
Accordingly, an injunction sought to aid or enforce a garden leave clause must be justified on similar grounds as a restrictive covenant. This means that the Claimant must demonstrate a legitimate interest to protect and must show that the injunction sought extends no further than is reasonably necessary to protect that legitimate interest. The grant of an injunction is a discretionary remedy, and may be refused if in fact the Claimant will suffer no damage (or because of delay). Finally, there is greater flexibility in cutting down the terms of the restriction when dealing with garden leave than when dealing with the terms of a restrictive covenant. The court accordingly has the flexibility to grant an injunction for less than the full notice period if that is the extent of the period in respect of which it can be justified.
In this case, the legitimate interest sought to be protected is customer or client connection. It is common ground that Mr Holliday built up strong relationships whilst employed by and paid by the Claimant with those clients with whom he dealt. His success as a broker depended largely upon establishing and maintaining those relationships with clients. That customer or client connection is undoubtedly an asset or interest that the Claimant is legitimately entitled to protect. The \”Key Statistics\” document (page 80) given to Mr Holliday during the course of his employment, shows that the total funds under management (FUMA) represented by his clients, was £200 million. This is top quartile for the firm\’s investment managers. Although the revenue yield (and the profit to the firm) produced by Mr Holliday in respect of these clients was not as high as it could have been, these clients were potentially profitable and had real value for the Claimant.
In Beckett Investment Management group Ltd v. Hall [2007] IRLR 793 Maurice Kay LJ said the following:
\”Any financial services company relies on employees to attract and retain a client base. If those employees who deal directly with clients leave the company and set up on their own account or go to work for a rival company, it is not unnatural that, one way or another, sooner or later, the clients will follow them. Although they have been the clients of the company rather than of its employees, from the client\’s point of view it may well be the personal relationship with an individual adviser in which they have particular trust and confidence. A tension therefore arises between the interest of the company in protecting its client base in the event that one or more of its employees depart and the interest of such employees who wish for the freedom to develop their careers elsewhere. The clients are not captive. In this situation, it is inevitable that employers include in contracts of employment clauses which seek to limit the ability of employees to take the client base with them.\”
These points are equally applicable in the instant case. The Beckett case (at the level of the Court of Appeal) concerned the enforceability of a 12 month non-dealing covenant. Such a covenant had been held to be unenforceable by the trial judge, who held that a three-month restriction was all that was necessary. In reaching this conclusion the judge held that the 12 month period was purely arbitrary and too wide on that account. All that was necessary was a period long enough to enable an alternative adviser to make contact with the client and thereafter to have an adequate opportunity if the client was not immediately persuaded, to seek to change his mind. On that basis three months would have been adequate for that purpose. Similar points are made by Mr Holliday in this case, albeit that the period he contends for is four months.
In allowing an appeal against that decision and holding that the 12 month period was enforceable the Court of Appeal continued:
\”In my judgement, the judge adopted an unrealistic and erroneous approach to the question of duration. He considered the period of 12 months to be purely arbitrary but it was only arbitrary in the sense that any fixed duration bears an element of arbitrariness. His three-month rationale is to my mind simplistic in so far as it addresses the relationship between the Claimant\’s and the clients but is deficient in having no regard to what BIMG and BFS would need to do to persuade clients to remain loyal. Mr Hall and Mr Yadev were not run-of-the-mill expendable employees. They were of enormous importance to the success of the Leicester office. To have any prospect of retaining the clientele, BIMG and BFS would need to recruit, organise, train and project suitable replacements. On any basis, this was an important aspect of the reasonable protection of their legitimate business interests. However, it was ignored by the judge who chose instead to attach significance to the fact that a non-dealing clause would prevent a client from doing business with someone in whom he had confidence for a period which the judge considered to be too long. It is apparent from the solicitor cases that a non-dealing clause may be valid notwithstanding the potential interference with the client\’s choice as to whom to instruct and the degree of confidence which exists between client and solicitor….During the period of restriction, the client is not compelled to remain with the covenantee. If he cannot await the expiration of the period of restriction, he can in the meantime seek the advice of any service provider with which the covenanter is unconnected. For these reasons, I consider that the confinement of reasonableness to a period of three months was wrong. Whilst I do not consider the period in excess of 12 months would have been reasonable in respect of either Mr Hall or Mr Yadev, I am prepared to hold the 12 months was a reasonable period in both cases.\” ….
As with the Beckett case, I have no doubt that to have any prospect of retaining Mr Holliday\’s client base (that had been \”cemented\” over many years) the Claimant would need a reasonable period in which to establish or attempt to establish relationships between his clients and new investment managers. This is an important aspect of the reasonable protection of the Claimant\’s legitimate business interests. The real question is what period of restraint, if any, is the minimum necessary for legitimate purposes.
There is no evidence before me of any industry norm in relation to garden leave clauses and I do not regard Mr Sussman\’s evidence about two recent recruits who had come to the Claimant from a competitor having served a 12 month garden leave period, as establishing any industry norm.
Mr Powell gave largely unchallenged evidence that in his experience it takes a long time to lay and entrench the foundations of a relationship between a new investment manager and his or her clients. This is particularly so when dealing with discretionary portfolio clients. This is because formal contact with such clients only occurs a few times a year. Valuation letters are sent out to such clients twice annually or sometimes quarterly but otherwise contact is typically made at some time between the beginning of the New Year and April when the new tax year starts. These occasions are the best opportunity, according to Mr Powell, for an investment manager to win and maintain a relationship with a discretionary client. It is important not to force a client to meet at a time not of their choosing or when they are reluctant to do so. Otherwise the investment manager appears to be too pushy and to be conducting a hard sell. For this reason, Mr Powell explains that if early attempts at arranging meetings are unsuccessful, it is best to allow the client some space before seeking to rearrange an initial meeting to make arrangements for a follow-up meeting. Even if the first meeting has been held, followed up by sending a confirmatory email which sets out next steps to be followed, Mr Powell explains that it is important to try to cement the relationship with further emails. Most clients would expect some reason for a further meeting or review. For example, a change in market conditions may warrant a change in stock selection and so provide an effective basis for approaching the client for a meeting. Such a change that might trigger a justifiable basis for arranging a meeting or review with the client is unpredictable and cannot reliably be expected to take place in any particular period, whether a six-month or a 12 month period. For that reason, in relation to those clients who do not immediately decide either to stay or leave the Claimant following the departure of an investment manager who has previously dealt with them a reasonably substantial period of time is necessary to seek to establish a new relationship with a new investment manager. Mr Powell explains that this process would prove virtually impossible if Mr Holliday, who had the obvious advantage of an established relationship with the clients, was simultaneously soliciting such clients on behalf of a new employer or taking steps to undermine the efforts made by the newly appointed investment managers.
The second reason Mr Powell gives to justify the need for a long time to lay and entrench the foundations of the relationship with a new investment manager is that it usually takes significantly longer than six months to make any meaningful assessment of the success of any adjustments to the portfolio that may have been recommended by the investment manager and consequently, it takes longer than six months for the client to make an assessment of the performance of the new manager. There are some clients for whom no adjustment is needed to their portfolio and in such a case it is difficult to assess performance in the absence of any positive activity. Moreover the fact that valuations are only sent out every six months, combined with potential volatility in the market, means that it takes at least a year for the client to see an accurate picture of the success of their portfolio and of the investment manager responsible for it. Mr Powell indicates that this latter point is supported by communications the Claimant has received from some of Mr Holliday\’s former clients, who have given the Claimant 12 months to demonstrate a good performance before they decide whether to leave with Mr Holliday or to remain on the Claimant\’s books. Others have stated that they do not wish to move stockbroking firms too often and will remain with the Claimant so long as their portfolio performs well over the next 12 months.
In light of this unchallenged evidence which I accept, it is clear that there are a number of factors that will be relevant to whether a relationship is established between the new investment manager and the client. Some of those factors, such as personal chemistry, are immediate. However others, such as demonstrating integrity, reliability and good performance, invariably take time. Moreover a new investment manager cannot artificially speed up the process of forging the new relationship, for example by having lots of meetings or sending lots of letters within a short period, without running the risk of acting counter-productively. The timing of meetings is to a significant extent dictated by external factors, such as the timing of half yearly valuations or the end of the tax year. Any initial busy period of wooing as described by Mr Holliday at paragraph 22 of his third witness statement, will in practice have to be conducted over a longer period than the four months he identifies.
Although in Mr Powell\’s case, he had secured four of the five charity clients he inherited from Mr Holliday within four months, I accept as realistic his evidence that a significant proportion of Mr Holliday\’s other clients remain undecided and that there is everything to \” play for\” in terms of their retention. Even in relation to those who have at the moment been persuaded to remain at the Claimant, there has been little time to cement the relationship or demonstrate good performance by an alternative investment manager. There remains a strong risk in relation to these clients that they will succumb to Mr Holliday\’s efforts to woo them back if he is permitted to do so in the immediate or short-term future.
I have taken account of the fact that Mr Holliday agreed to a 12 month notice period and that this 12 month notice provision was mutual. In agreeing to that provision Mr Holliday had the opportunity to seek legal advice and availed himself of that opportunity, thereafter agreeing to the clause without any attempt to argue for a shorter period of notice. Moreover, this variation in relation to his notice period was part of the Revised Terms that included a tripling of Mr Holliday\’s salary. The fact that Mr Robotham also agreed to a 12 month restriction is relevant to these considerations.
I have also taken into account as an important factor in my consideration of this question, whether the grant of an injunction for 12 months would cause disproportionate harm to Mr Holliday. There is no evidence that Mr Holliday will suffer financial loss – he will be paid his full salary and benefits during his notice period. Nor has it been suggested that his contract of employment with Hargreave Hale will be withdrawn if he cannot join quickly. The fact that he will be unable to advise clients or carry out transactions for clients for the balance of his notice period if that is the period ordered, seen in the context of a working life building up and using such skills, does not mean that his skills will atrophy, or that he will lose his ability once the relevant period expires. He will have ample time and opportunity during garden leave to keep up with the market and to maintain his market knowledge through publicly available sources and the resources available through the CISI website.
For all the above reasons, I am satisfied that the Claimant has demonstrated a legitimate interest to protect; and that there is evidence that 12 months is the minimum period required to protect the Claimant from sustaining the damage identified. An injunction to aid enforcement of Mr Holliday\’s notice and garden leave period is no more than is reasonably necessary to protect the Claimant\’s legitimate interest in this case.
Discretion
I am quite satisfied that damages would not be an adequate remedy in this case. If Mr Holliday is permitted to leave immediately and join Hargreave Hale, there is a real prospect of the Claimant sustaining loss that will not readily be quantifiable in terms of damages. Any assessment of damages would, of necessity, be based on hypothetical events and is likely to be a complex and speculative exercise. For example, even with the best record keeping exercise in respect of transferring clients such an exercise will not capture loss reflected in (i) loss to the Claimant of potential new clients that would or might have been won had the transferred client stayed with the Claimant; and (ii) the loss reflected in the departure of existing clients who are persuaded to leave to join Hargreave Hale by transferring clients.
Nor do I accept Mr Quinn\’s other arguments against the continuation of any injunction. Mr Holliday suggests that the client\’s own interests in having the stockbroker of their choice, the fact that these clients are likely to be lost to the Claimant in any event, and the damage to his reputation caused by the grant or continuation of the injunction means that I ought not to make this order. So far as these points are concerned, there is no evidence before me from clients regarding any disadvantage to them as a result of continuing the injunction until July 2014; but in any event I am quite satisfied that there are other stockbrokers they can use in the interim before transferring to Mr Holliday as soon as the period of restraint expires. So far as likely loss of clients is concerned, the fact that Mr Holliday strongly believes that his clients will remain loyal to him is a compelling reason why the injunction ought to be granted in order to give the Claimant an opportunity to retain these clients. Finally, I cannot accept that being put on garden leave causes any reputational damage as asserted. Garden leave clauses are common and there is general acceptance and understanding of the reasons for such garden leave being imposed, none of which reflects negatively on the affected individual.
For all these and the other reasons given above, the order made by Michael Bowes QC will be continued until the expiry of the 12 month notice period on 4th July 2014.
Net Affinity Ltd -v- Conaghan & Ors
[2011] IEHC 160 Dunne J.
The Issues
In the written legal submissions furnished to the court on behalf of the plaintiff, it was submitted that three questions arose for consideration on this application, namely:-
1. “Whether the prohibition on working for a competitor is void as being in unlawful restraint of trade.
2. What measures are required to enforce the protection of confidential information/intellectual property?
3. Whether the first defendant is in breach of her duty of confidence/contract of employment.”
It seems to me that in considering those three questions there are a couple of observations to be made. If the non-compete clause is not void as being an unlawful restraint of trade, then the question that will arise for consideration is whether injunctive relief should be given to enforce that clause. If the non-compete clause is found to be an unlawful restraint of trade, the issue as to the protection of confidential information/intellectual property remains to be considered. In the event that a conclusion is reached that measures are required to enforce the protection of such information, the question arises as to whether the plaintiff is entitled to the injunctive relief sought herein.
The final question raised by the plaintiff relates to whether or not there has been a breach of the duty of confidence/contract of employment by Ms. Conaghan. Net Affinity has submitted that her conduct to date justifies the making of an order preventing her from working for Avvio pending the trial of the action or for 12 months. There is no doubt, and it is not in dispute between the parties that Ms. Conaghan on leaving Net Affinity retained material/documentation of a confidential nature belonging to Net Affinity. There is an explanation from Ms. Conaghan as to how this occurred. She also retained some documentation which says is not confidential but over which Net Affinity claims intellectual property rights. There is an issue between the parties as to whether Net Affinity has such intellectual property rights over some of the documentation retained by Ms. Conaghan. Let me say at this point that insofar as Ms. Conaghan retained documentation which she prepared during the course of her employment, even if that documentation or material was created in part by down loading and collating material from the internet, it seems to me that such documentation or material would be the intellectual property of the plaintiff, her employer. In making that observation at this stage, I do so without having seen the documentation or material concerned and it may be that on an examination of that documentation or material at the trial of the action, a different view will be reached, but for the purposes of this application I accept that the documentation retained by Ms. Conaghan includes documentation/material of a confidential nature and documentation/material over which Net Affinity has intellectual property rights. I have already observed that the affidavits sworn by Mr. Cotter on behalf of Net Affinity are replete with suspicion while those sworn by Ms. Conaghan give an explanation for how documents came to be retained by her, down loaded by her, copied by her and deleted by her. She has reiterated in a number of affidavits that she would not use confidential information belonging to Net Affinity. Thus, it is clear that at any trial of the action, there will be a significant issue as to whether or not Ms. Conaghan has been in breach of the duty of confidence owed to Net Affinity and has been in breach of her contract of employment.
I note at this point that during the course of the hearing before me, one of the issues that arose was the date upon which Ms. Conaghan was due to commence work with Avvio. I have referred to this dispute already and my views on that issue. There is no doubt whatsoever that Ms. Conaghan, a person who had previously worked in the recruitment business, was aware of the possibility when she handed in her notice that she would be asked to leave her employment there and then and that she would not be expected to work out her notice. It is clear that she took a number of steps in order to deal with that possibility. Indeed it is those steps that are the subject matter of these proceedings. Having said that it was clear from her letter of resignation that she was giving one month’s notice to Net Affinity and that accordingly, it is difficult to see why or how Mr. Cotter could have believed that she was taking up employment with Avvio immediately upon her leaving Net Affinity. I mention this issue again for two reasons, first, because it was such an issue during the course of the hearing before me and secondly because I think it is important to bear in mind that at this point there is no evidence whatsoever to suggest that Ms. Conaghan has provided any material belonging to Net Affinity either of a confidential nature or over which Net Affinity has intellectual property rights to Avvio. She has not yet commenced employment with Avvio.
The Non-compete Clause
A number of authorities were open to me in relation to restraint of trade/non-compete clauses. Counsel on behalf of the plaintiff referred to McEllistrim v Ballymacelligot Co-Operative Agricultural and Dairy Society Limited [1919] A.C. 548 at p. 560 where the classic test was set out by Lord Birkenhead as follows:-
“A contract which is in restraint of trade cannot be enforced unless (a) it is reasonable as between the parties; (b) it is consistent with the interest of the public.”
Reference was also made to the decision in Herbert Morris Limited v. Saxelby [1916] A.C. 688, in which Lord Parker stated at p. 707:-
“It will be observed that in Lord McNaghten’s opinion, two conditions must be fulfilled if the restraint is to be held valid. First, it must be reasonable in the interest of the contracting parties, and, secondly, it must be reasonable in the interest of the public. In the case of each condition he lays down a test of reasonableness. To be reasonable in the interest of the parties the restraint must afford adequate protection to the party in whose favour it is imposed; to be reasonable in the interest of the public it must be in no way injurious to the public.
With regard to the former test, I think it is clear that what is meant is that for a restraint to be reasonable in the interests of the parties it must afford no more than adequate protection to the party in whose favour it is imposed.”
That latter sentence is frequently cited as being the test applicable to restraint of trade clauses.
Both parties in the course of their submissions referred to the judgment in the case of Stenhouse Limited v. Philips [1974] AC 391 in which Lord Wilberforce said at p. 400:-
“The accepted proposition that an employer is not entitled to protection from mere competition by a former employee means that the employee is entitled to use to the full any personal skill or experience even if this has been acquired in the service of his employer: it is this freedom to use to the full a man\’s improving ability and talents which lies at the root of the policy of the law regarding this type of restraint. Leaving aside the case of misuse of trade secrets or confidential information . . . the employer\’s claim for protection must be based upon the identification of some advantage or asset inherent in the business which can properly be regarded as, in a general sense, his property, and which it would be unjust to allow the employee to appropriate for his own purposes, even though he, the employee, may have contributed to its creation. For while it may be true that an employee is entitled – and is to be encouraged – to build up his own qualities of skill and experience, it is equally his duty to develop and improve his employer\’s business for the benefit of his employer. These two obligations interlock during his employment: after its termination they diverge and mark the boundary between what the employee may take with him and what he may legitimately be asked to leave behind to his employers.”
Having referred to the decision in Stenhouse Limited v. Phillips there was a degree of divergence between the parties in relation to their submissions. Counsel on behalf of the plaintiff referred again to a passage from the judgment of Lord Parker in the Herbert Morris Limited v. Saxelby case where it was stated at p. 709:-
“Where ever such covenants have been upheld it has been on the ground, not that the servant or apprentice would, by reason of his employment or training, obtain the skill and knowledge necessary to equip him as a possible competitor in the trade, but that he might obtain such personal knowledge of and influence over the customers of her employer, or such an acquaintance with his employers trade secrets as it would enable him if competition were allowed to take advantage of his employer’s trade connection or utilise information confidentially obtained.”
Counsel placed a great deal of emphasis on that passage and effectively said that in this case Ms. Conaghan has such personal knowledge of and influence over the customers of Net Affinity as would enable her, if competition were allowed, to take advantage of the employer’s trade connections or that she could utilise information confidentially obtained.
She also placed reliance on a passage from the judgment of Lord Denning M.R. in the case of the Littlewoods Organisation Limited v. Harris [1978] 1 All E.R. 1026, where having referred to the passage just referred to from the Herbert Morris case, Lord Denning M.R. went on to say:-
“It is thus established that an employer can stipulate more protection against having his confidential information passed on to a rival in trade. That experience has shown that it is not satisfactory to have simply a covenant against disclosing confidential information. The reason is because it is so difficult to draw the line between information which is confidential and information which is not; and it is very difficult to prove a breach when the information is of such character that a servant can carry it away in his head. The difficulty is such is that the only practical solution is to take a covenant from the servant by which he is not to go to work for a rival in trade. Such a covenant may well be held to be reasonable if limited to a short period. That appears from the judgment of Croft J. in Printers and Finishers Limited v. Holloway [1964] 3 All E.R. 731 at 736 . . .
‘although the law will not enforce a covenant directed against competition by an ex employee it will enforce a covenant reasonably necessary to protect trade secrets . . . if [the managing director] is right in thinking that there are features in [the plaintiff] process which can fairly be regarded as trade secrets and which [their] employees would inevitably carry away with them in their heads, then the proper way for the plaintiffs to protect themselves would be by exacting covenants from their employees restricting their field of activity after they have left their employment, not by asking the court to extend the general equitable doctrine to prevent breaking confidence beyond all reasonable bounds.’”
Again much reliance was placed on that passage by counsel on behalf of Net Affinity. I was referred to a number of other UK authorities including C. Alsmith Glaziers (Dunfermline) Limited v. Michael John Greenan [1993] S.C.L.R. 231, Johnson and Bloy Holdings Limited and Johns and Bloy Limited v. Wolstenholme Rink Plc and Fallon [1987] I.R.L.R. 499 and to a number of other decisions. Particular emphasis was placed on the decision in the case of T.F.S. Derivatives v. Simon Morgan [2004] E.W.H.C, 3181. That is a decision of the English High Court. It concerned a non-compete clause. The clause in that case set out in the course of the judgment of Mrs. Justice Cox is lengthy and detailed. The plaintiff company in that case was involved in inter dealer brokering of “over the counter” physical and derivative products.
It was noted at para. 11 of the judgment:
“It is common ground that in the market there are a finite number of clients operating, predominantly banks and other financial institutions. While TFS Brokers will not work exclusively for those clients, the brokers endeavour to develop strong client relationships and to develop their knowledge with a view to solidifying and building upon TFS’s position in the market. . . . the nature of the job is such that it is extremely important for the brokers to build up good relations with their trader contacts within TFS’s client organisations. The market in which the brokers are dealing is a specialist one, and the number of traders operating in it is relatively small. It is essential for the brokers to cement their relationships with the traders. If a solid relationship can be established, the broker will usually be able to count on that trader for repeat business.”
The judgment was opened in extensio to the court. At para. 40 it was noted:-
“If a restrictive covenant applying after employment has terminated is held to be unreasonable, then it is void and unenforceable. The court cannot read down such a clause in an effort to render it reasonable and enforceable. In certain circumstances, however, if only a discrete phrase within a particular covenant is held to be unreasonable, individual words or phrases may be ‘blue-pencilled’ or severed, provided that what is left makes independent sense without the need to modify the wording and that the sense of the contract is not changed.”
It would also be useful to look at paras. 37 to 39 of that judgment. Cox J. noted:-
“Firstly, the court must decide what the covenant means when properly construed. Secondly, the court will consider whether the former employers have shown on the evidence that they have legitimate business interests requiring protection in relation to the employee\’s employment. In this case, as will be seen later on, the defendant concedes that TFS have demonstrated on the evidence legitimate business interests to protect in respect of customer connection, confidential information and the integrity or stability of the workforce, although the extent of the confidential information is in dispute in relation to its shelf life and/or the extent to which it is either memorable or portable.
Thirdly, once the existence of legitimate protectable interests has been established, the covenant must be shown to be no wider than is reasonably necessary for the protection of those interests. Reasonable necessity is to be assessed from the perspective of reasonable persons in the position of the parties as at the date of the contract, having regard to the contractual provisions as a whole and to the factual matrix to which the contract would then realistically have been expected to apply.
Even if the covenant is held to be reasonable, the court will then finally decide whether, as a matter of discretion, the injunctive relief sought should in all the circumstances be granted, having regard, amongst other things, to its reasonableness as at the time of trial.”
There was an interesting discussion in the course of that judgment as to the role of “garden leave”. In this case an open offer was made on behalf of Net Affinity to Ms. Conaghan that Net Affinity would be prepared to pay the salary of Ms. Conaghan for a period of six months before she took up employment with Avvio. There is no provision for “garden leave” in the contract of employment. However, the first question I have to consider is whether the non-compete clause in this case is reasonable in the sense that it is no more than is reasonably necessary for the protection of the plaintiff.
Counsel on behalf of Ms. Conaghan and Avvio urged on the court that the appropriate authority to consider in assessing the non-compete clause was the decision of the High Court in the case of Murgitroyd and Company v. Purdy [2005] 3 IR 12, a decision of Clarke J. As appears from the head note, the plaintiff company was engaged in the provision of intellectual property services. The defendant was employed by the plaintiff as a European patent agent under a written service agreement which provided that it was to last for a period of three years and could be renewed for a further three years. The service agreement also contained a non- competition clause which provided that the defendant would not work within the Republic of Ireland for a period of twelve months following the termination of his employment of his own account and in competition with the plaintiff company. The defendant left the plaintiff employment and immediately commenced practising. The plaintiff sought various interlocutory injunctions against the defendant and a preliminary issue arise as to the enforceability of the non-compete clause contained in the service agreement. In the course of his judgment, Clarke J. referred to the twofold test derived from the decision in McEllistrim v. Ballymacelligot Co-Operative Agriculture and Dairy Society [1919] A.C. 548 at p. 562 and considered in regard to the first test i.e. reasonableness inter partes, the comments of Lord Wilberforce in Stenhouse Limited v Phillips referred to above. Clarke J. then went on to say:-
“The test seems to be, therefore, as to whether in all the circumstances of the case both the nature of the restriction and its extent is reasonable to protect the goodwill of the employer. Clearly certain clauses which preclude solicitation come within that definition provided that they are not excessively wide. In certain other cases clauses have been upheld which have prohibited employees setting up a similar business within a specified distance of an employer’s establishment. See for example Marian White Limited v. Francis (1972) I W.L.R. 1423. But it is clear that the duration of the prohibition and the geographical scope of same are important matters to be considered having regard to the nature of the work in question and the structure of the business.”
He continued:-
“In those circumstances it does not seem to me that a geographical restriction based upon the jurisdiction of the Irish state is unreasonable having regard to the way in which the business operates in Ireland.
Having regard to the specialised nature of the business I am also satisfied that a period of 12 months is not unreasonable.”
Counsel on behalf of the defendants placed particular emphasis on the next paragraph at p. 21 of the judgment where Clarke J. stated:-
“However, it is also clear that a more restrictive view is taken of covenants by employees than is taken of covenants given on sale of a business. Covenants against competition by former employees are never reasonable as such. They may be upheld only where the employee might obtain such personal knowledge of, and influence over, the customers of his employer as would enable him, if competition were allowed, to take advantage of his employer’s trade connection. Kores Manufacturing Co. Ltd. v. Kolok Manufacturing Co. Ltd. [1959] Ch. 108.
In those circumstances I have come to the view that the prohibition in this case on all competition is too wide. A prohibition on dealing with (in addition to soliciting of) customers of the plaintiff would, in my view, have been reasonable and sufficient to meet any legitimate requirements of the plaintiff. The wider prohibition which restricts dealing with those who might be, but are not, such customers is excessive.”
The anti penultimate paragraph of that judgment seems to me to be off relevance also. Clarke J. stated:-
“There may be types of business where it is not practical to distinguish between customers and non-customers. This is not one of them. On the evidence, the number of customers is small and identifiable. A prohibition on dealing with those identified customers would be sufficient to prevent the defendant taking advantage of the plaintiff’s trade connections. The wider restriction which prohibits competing for business in which the plaintiff might have an interest but where the client was not an existing customer, could not be directed to that end but to the wider aim of restricting competition as such.”
It does seem to me that there is a difference of emphasis discernable between the judgments of Clarke J. in the case of Murgitroyd and Company Limited v. Purdy and the judgment of Cox J. in TFS Derivatives v. Morgan. The judgment of Clarke J. has clearly set out the applicable law in this jurisdiction and I see no reason for preferring the judgment of Cox J. in the TFS Derivatives case over the judgment of Clarke J. in Murgitroyd. Accordingly, I propose to consider the clause in this case in the light of the judgment in Murgitroyd and Company Limited v. Purdy.
The non-compete clause in this case is not limited at all in its scope geographically. There is a temporal limitation for a period of twelve months after termination of contract. The extent to which a temporal limitation may or may not be reasonable depends on the facts of any given case. In this case, I would have no issue with a period of twelve months.
There are two aspects of the clause that cause me concern. The first of those is that there is not geographical limited contained in the clause. One could imagine a situation where Ms. Conaghan might seek employment outside this country in a similar business to that which is run by the plaintiff. Assuming for the sake of argument that such a business operated only booking engines for hotels in the United States, having regard to the terms in which the non-compete clause is phrased, she would be precluded from taking up such employment even though that employment would not be competing in any sense with that of the plaintiff’s business. If Ms. Conaghan was to take up employment in this country with a company which operated a business similar to that of the plaintiff, but which, for example, operated booking engines for hotels in France, likewise Ms. Conaghan would be precluded by virtue of the non-compete clause from taking up such employment. She is completely precluded by the clause from working “for any individual or company that provides or plans to provide services similar to that which is provided by [Net Affinity]. To my mind, the clause at issue in this case is far too wide to protect the legitimate requirements of Net Affinity. It is a clause which does in fact prohibit all competition by Ms. Conaghan in the area of services provided by Net Affinity. As has been made clear in the judgment of Clarke J. in the case of Murgitroyd and Company Limited v. Purdy such a clause is too wide. In those circumstances, I have come to the conclusion that the non-compete clause is void and unenforceable.
That does not conclude the matter. Mr. Cotter in the course of a series of affidavits in this case has raised serious concerns as to the manner in which Ms. Conaghan acted immediately prior to and subsequent to the 14th February, 2011. I have already referred to these matters at length above. In addition, counsel on behalf of Net Affinity has submitted that although it may not be possible to enforce the non-compete clause, the court should nonetheless prevent Ms. Conaghan from taking up her employment with Avvio for a period of time in order to protect confidential information acquired by Ms. Conaghan during the course of her employment. That confidential information is not confined to the documentation or material that was the subject of the various down loads referred to previously. It includes what was described by counsel as Ms. Conaghan’s “know how” and customer connections. I accept that as a matter of principle that the day to day interaction by an employee with clients or customers of an employer may be such as to require such injunctive relief where there is evidence that a close relationship has been built up between the customer and employee and such relationship is an important element of the employer’s business as in the case of T.F.S. Derivatives referred to above. In the course of the submissions, I was referred to a number of cases where such the granting of such relief was considered, including the well known case of Faccenda Chicken Limited v. Fowler and Ors. [1985] 1 All E.R. 724, Lansing Linde Limited v. Kerr [1991] 1 All E.R. 418 and Printers and Finishers Limited v. Holloway and Ors. [1964] 3 All E.R. 731.
I was also referred to the decision in the case of Norbrook Laboratories (GB) Limited v. Adair [2008] IRLR 878. In that case Elizabeth Slade Q.C. sitting as a Deputy Judge of the High Court, stated at para. 63 of her judgment as follows:-
“I hold that the identity of customers with relevant contacts, potential customers and five star customers would be of value to a competitor and, in the circumstances of this case as in Lansing Linde Ltd, is confidential. Such knowledge is not in the public domain and would assist a competitor to target their sales efforts. It would assist in making them in the words of Lord Atkinson at page 704 in Herbert Morris \’more formidable competitors\’. The information relating to discounts, net prices, records of sales and their movements over time also fall into this category as do marketing strategies including information given about product comparisons.”
Elizabeth Slade Q.C. also dealt with customer connection in the course of her judgment and found that Norbrook had established that it has a legitimate interest in protecting its confidential information and customer connections built up or maintained by the defendant in that case on behalf of the plaintiff. The injunction given in that case was one for a period of a year preventing Ms. Adair from soliciting or transacting business in competition with the business of Norbrook from any persons, corporations or bodies who within the period of two years preceding the date of termination of her employment had been customers of Norbrook and where Ms. Adair had dealings with such customer. As I have already said, there is no doubt that Ms. Conaghan retained confidential information of the company Net Affinity on leaving her employment. In this regard, I am referring specifically to the documentation and material described in the affidavits as having been down loaded from the company laptop. In addition, I accept that Ms. Conaghan had and retains information by virtue of her employment regarding specific clients of Net Affinity and their arrangements with Net Affinity which would be of benefit to a competitor of Net Affinity. It does seem to me that in the circumstances of this case it is appropriate to grant injunctive relief to prevent Ms. Conaghan from breaching her duty of confidentiality to Net Affinity as set out in express terms in her contract of employment. I do not, however, think that it is necessary in order to protect the legitimate interests of Net Affinity to grant an injunction against Ms. Conaghan which would have the effect of preventing her from taking up employment with Avvio. In the course of the affidavits herein, Mr. Cotter indicated that Net Affinity had some 95 clients. I appreciate that Ms. Conaghan has information and knowledge of the terms of the arrangements between those clients and Net Affinity in terms of pricing and other relevant information such as discounts that may have been provided to various clients of Net Affinity. However, as I have said, I do not think it is necessary to go so far as to prevent Ms. Conaghan from taking up her employment with Avvio. It is however, important in my view, to ensure that for a period of time Ms. Conaghan should not approach, solicit or deal with any existing customers of Net Affinity. It seems to me that the relevant period of time in this regard should be a period of twelve months. I say that on the basis that it is clear from the affidavits herein that contractual arrangements between Net Affinity and its clients are such as to involve annual contracts which are renewable accordingly. Given that customers will renew their contracts with Net Affinity over the period of twelve months it seems to me that that is the period during which Net Affinity is entitled to have protection.
There is strictly speaking no evidence before me that Ms. Conaghan has passed any documentary material or confidential information of the type that could be down loaded to Avvio. Nonetheless, during the course of her employment with Avvio, confidential information which is encompassed by the phrase, customer connections, of the type I have described above would be available to Avvio via Ms. Conaghan. If it were the case that another employee of Avvio approached, solicited or dealt with an existing customer of Net Affinity it would be virtually impossible to establish that the contact between Avvio and the existing customer did not arise from some form of contact through Ms. Conaghan. To that extent it seems to me that it would be appropriate to grant injunctive relief against Avvio which would likewise prevent Avvio from soliciting, approaching or dealing with any existing clients of Net Affinityfor a period of twelve months.
During the course of the hearing there was a discussion about target sales on the part of Net Affinity. Net Affinity and Avvio are involved in similar businesses. They each have a similar type of product on offer to the same general clientele. It is clear from the affidavits sworn herein by Mr. Reeves on behalf of Avvio that both Net Affinity and Avvio attend the same sort of trade events. They compete for the same type of customer. They are entitled to compete. There may be cases in which it is appropriate to impose a restriction to prevent a breach of confidentiality on an employee taking up employment elsewhere such that the employee cannot work for a competitor for a period of time but it does seem to me that if a court is asked to consider such a restriction that, just as in the case of considering what is appropriate in the context of a restraint of trade clause, the court should impose a restriction which is no more than is reasonably necessary in order to protect the employer’s legitimate interest. I am satisfied that to grant an injunction in the terms sought by the plaintiff in these proceedings would be more extensive than is reasonably necessary for the purpose of protecting the employer’s interest and it is for that reason that I am not prepared to go that far. The injunctive relief I have indicated seems to me to be appropriate to meet the circumstances of the case. For that reason I do not propose to grant any further or more extensive injunctive relief.
Murgitroyd and Co. Ltd. v. Purdy
[2005] IEHC 159 Mr. Justice Clarke 1st June, 2005.
This case first came before the court when the plaintiff company sought various interlocutory injunctions against the defendant. That application was the subject of a judgment delivered by me on 14th April, 2005. The most urgent, and indeed difficult, of the questions which arose at the interlocutory stage concerned the case made by the plaintiffs to the effect that the defendant was bound by a non competition clause in his contract of employment which they sought to enforce, initially by interlocutory order. As indicated in my judgment on that occasion I came to the view that the balance of convenience would not favour the grant of an interlocutory injunction in respect of non competition provided that that aspect of the case could be made ready for trial in a very short period of time. In those circumstances I directed that a preliminary issue should be tried as to the applicability and enforceability of the non competition clause. That issue has now come on for trial and this judgment is, therefore, the final judgment in respect of that aspect of the plaintiff\’s case. In the course of a discussion with counsel for both sides immediately following the delivery of my judgment on 14th April it was agreed that there were three issues as to the applicability and enforceability of the non competition clause. Before setting out those issues it is necessary to put same into context by outlining both the non disputed facts and the contentions of the parties in respect of disputed facts.
Factual Context
As set out in my judgment of 14th April, 2005 the plaintiff company is engaged in the provision of intellectual property services, having eight offices spread throughout Europe. The company hired the defendant who is a European patent agent to work out of the plaintiffs Dublin office. An initial letter of engagement dated 7th February, 2001 was followed by a written service agreement dated 19th February, 2001. Clause 2.2 of that agreement provided that the service agreement was to last for an initial three year period which was specified as commencing on 30th September, 2001.
That same clause of the agreement provided for the possibility of a renewal for a further three years in the following terms:-
\”On the Company receiving a written renewal request from the Executive in any September during the course of this agreement and thereafter unless and until the executive\’s employment hereunder shall be determined by either party given to the other written notice as aforementioned.\”
In the context of the agreement the defendant is \”the Executive\”. So far as this preliminary issue is concerned it is also important to note that the service agreement provided at clause 11 as follows:-
\”Undertaking
The Executive will not within the Republic of Ireland during the period of 12 months following determination of his employment hereunder on his account and in competition with the company carry on any business which competes with the business of the company or any associated company having intellectual property work as one of its principal objects existing as of the date of termination of the executive\’s employment hereunder and with which the executive shall have been directly or indirectly concerned PROVIDED THAT nothing contained in this clause shall preclude the executive from holding at any time any shares or loan capital (not exceeding one per centum of the shares or loan capital of the class concerned for the time being in issue) in any company whose shares are listed or dealt in on a recognised Stock Exchange and nothing in this Agreement will affect the Executive\’s right to accept employment as an employee in another firm of patent attorneys\”.
It is therefore common case that the defendant commenced his employment with the plaintiff on terms that included the above non competition clause. It is also common case that on 20th December, 2004 the defendant notified the plaintiff that he intended to leave the plaintiff\’s employment. On foot of that notice his employment ended on 19th January, 2005. Immediately thereafter the plaintiff commenced practising as \”Purdy and Associates\” at premises at Mespil House, 37 Adelaide Road, Dublin 2. It is not contested that in establishing the above practice the defendant is competing with the plaintiffs in a manner which would be in breach of the above clause 11 should that clause remain part of the agreement between the parties as of the date of termination of the defendants employment and be enforceable.
The Issues
The three issues which therefore arise are as follows:
(a) It is suggested by the defendant that on 18th or 19th February, 2002 he, the defendant, called Mr. Keith Young, Chief Executive of the plaintiff company, on his mobile phone and informed him that he wished to opt out of the service contract. It is contended by the defendant that an agreement was reached on that occasion to the effect that he would continue in employment but not under the service agreement. This is denied by the plaintiffs.
(b) Secondly the defendant places reliance upon the fact (which is common case) that the renewal of the service agreement contemplated by clause 2.2 thereof did not in fact occur. In the circumstances the defendant contends that the service agreement ceased to have any effect on the expiry of the three year term set out in its terms and thus that his continued employment after the expiry of that term in September 2004 was not on the basis of the service agreement. While accepting that there was no formal renewal of the service agreement as contemplated by the above clause the plaintiff contends that the appropriate interpretation of the continuance of the defendant in employment after the expiry of the three year period was that all of the terms and conditions previously applicable to his employment under the service agreement were to continue save that the agreement was no longer for a fixed period but indefinite.
(c) Thirdly the defendant contends that even if he loses on the above two issues so that as of the date of the termination of his contract of employment the non competition clause was still part of the terms of his employment that clause is unenforceable as being an unreasonable restraint of trade.
I deal with each of those matters in turn.
The Renegotiation
There is a significant measure of agreement between the parties as to the background facts relevant to this issue. Mr. Young is the Chief Executive of the plaintiff company and also company secretary. He agrees that he had a discussion with the defendant in February 2002 at which the defendant indicated that he did not wish to continue to be bound by the service agreement. What appears to between Mr. Young and Mr. Purdy is that Mr. Purdy asserts that Mr. Young agreed to release him from the service agreement whereas Mr. Young suggests that he indicated that he had no opposition to Mr. Purdy being released from the service agreement provided that Mr. Purdy entered into an appropriate form of contract of employment. It is common case that some days (or perhaps a small number of weeks) afterwards a standard form contract of employment was forwarded by Mr. Young to Mr. Purdy. It is also common case that this was never in fact executed by Mr. Purdy and, indeed, that the failure to execute was not simply an administrative failure to sign a document which represented the terms agreed between the parties. Mr. Purdy\’s evidence is that having taken an initial brief look at the contract when he received it he was then distracted by other work and did not return to the matter until the issue was raised during 2004 in circumstances to which I will return. It is clear that Mr. Purdy sent an email to Mr. Young indicating that he had, at that time (that is to say in 2004) just signed the agreement and that it had been sent to Mr. Young in the company\’s internal post. However it seems clear that he did not in fact sign it and that his email was somewhat premature. It is also clear from his evidence that having read the agreement he was not satisfied to sign it. He indicated that one unspecified provision contained in the draft agreement was such that he would have been prepared to agree to it. In those circumstances it is clear that the absence of a formal executed employment agreement was not simply a mere technical oversight on the part of the parties but stemmed from an absence of agreement as to the terms applicable.
Against that background it is necessary to assess the competing accounts as to what happened in February 2002. In support of the defendant\’s contention he draws attention to the fact that at various times in the middle of 2004 the plaintiff company and in particular Mr. Young acted as if under the impression that Mr. Purdy was employed under a contract of employment rather than under a service agreement. In particular attention is drawn to email records which appear to show an acceptance by Mr. Young of that position. However Mr. Young gave evidence that those records were created while he was on holiday and when he did not have access to his files.
Attention is also drawn to the existence of certain records of employees that were prepared by management in the course of negotiations which sought to \”buy out\” the entitlements which certain employees had as to a free motor car. The entitlements of those who were employed under a service agreement differed from those who were employed under a contract of employment and employee status under that heading was, therefore, of some importance to the position of the buy out of motor car rights. In the relevant document prepared in the middle of 2004 Mr. Purdy is described as being employed under a contract of employment.
There can be little doubt, therefore, that in or around the middle part of 2004 Mr. Young was of the impression that Mr. Purdy was employed under a contract of employment rather than a contract of service. In many cases that fact would be of vital importance if not decisive. However it is important to emphasise, on the facts of this case, that what is between the parties is the question of whether, as Mr. Young asserts, it was indicated to Mr. Purdy that he could terminate his service contract provided he entered into a standard form employment contract or, as Mr. Purdy asserts, the contract of service was simply discharged. Given the narrowness of that issue, coupled with the fact that Mr. Young had, it is common case, sent Mr. Purdy a copy of a standard form of contract, it does not seem to me that the fact that Mr. Young may well have been under the impression that Mr. Purdy had moved to a contract of employment is of great weight in determining the narrow issue which exists between Mr. Young and Mr. Purdy. It should finally be noted that there was evidence, which I accept, that the amount of pay to which the motor car rights of various employees was commuted differed between on the one hand those employees who were on a contract of employment and, on the other hand those who had a service agreement. Those with a service agreement received a larger sum. Mr. Purdy received the larger sum. It would thus appear that by the time the matter was resolved the undoubted confusion which existed in Mr. Young\’s mind (partly contributed to by the failure of Mr. Purdy to respond either way to the furnishing to him of the standard form contract of employment) had been resolved in favour of the view that Mr. Purdy was employed under a service agreement.
The other matter relied upon by the defendant concerns the response of senior management in the plaintiff company to his departure. Evidence was given of various communications at around the time of his departure which wished him well in his new venture. However I accept Mr. Young\’s evidence that it was his understanding (rightly or wrongly) that Mr. Purdy intended to take some time out before setting up his new venture. It is also probably correct that it was only when a number of clients of the plaintiff company moved their business to the defendant that particular attention was paid to the obligations of the defendant under his contract. In all the circumstances I do not believe that it is appropriate to infer from the well wishes to the defendant at the time of his departure an understanding on the part of his employer that he had been absolved from his obligations under the service agreement.
On the other hand there are, in my view, considerable difficulties with the defendant\’s case on this issue. The case which he made in evidence at the full hearing of this preliminary issue was to the effect that subsequent to his discussions with Mr. Young he believed himself to be employed on foot of the original letter of engagement of 7th February, 2001. He did not make that case in the affidavits sworn at the interlocutory stage. However it is difficult to see how that could be the case. The letter of engagement is, in its terms, subject \”to the following terms and conditions and those of a three year service agreement (draft enclosed)\”. The letter goes on to state that Mr. Purdy\’s employment might be terminated \”as outlined in the service agreement\”. It is therefore impossible to disentangle the letter of engagement from the service agreement. It is hard to see how Mr. Purdy could have been released from the service agreement but still subject to the letter of engagement. Furthermore, it is common case that no agreement was reached as to the terms of any contract of employment. If Mr. Purdy\’s account is, therefore, to be accepted it was agreed by Mr. Young that he would continue in employment without any specific terms of employment.
In all the circumstances I have come to the view on the balance of probabilities that what was offered to Mr. Purdy, and what he accepted, in February 2002 was that he could terminate the service agreement on condition that he entered into a standard form contract of employment (or such a contract with variations that might be agreed in advance between him and the plaintiffs ). While the plaintiffs, and in particular Mr. Young, may have been under the mistaken impression that such a contract had in fact been completed that was never, in fact, done. The reason why it was not done was that Mr. Purdy, as he himself said, found certain of the terms too onerous. Therefore the offer that was made to him was never accepted in the full sense of the word. It was, at most, an agreement to agree whereby, provided terms for a contract of employment could be agreed and such an agreement put in place he, Mr. Purdy, would be released from the service agreement. On the basis that no terms for a contract of employment were in fact ever agreed I am therefore satisfied that any tentative arrangement entered into between the parties in February 2002 did not amount to a concluded agreement which had the effect of releasing the defendant from the service agreement.
The Continuance of the Agreement in 2004
The next point relied upon by the defendant is to draw attention to the fact that the service agreement was never formally extended as contemplated by clause 2.2 thereof when it came to its natural expiry in September 2004. On all the evidence it seems clear that there were no changes whatsoever in the practical terms and conditions under which the plaintiff worked and was remunerated immediately before the termination date specified in the service agreement and immediately thereafter. The work which he did, the pay and conditions to which he was entitled and received, and all other aspects of his employment continued as if nothing had changed. In those circumstances, and in the absence of any agreement to the contrary, it seems to me that the only inference to draw from those facts is that the implied agreement of the parties was to the effect that there would be no material change in the defendant\’s terms of employment save that he could no longer be bound by the fixed period of the service agreement (such a fixed period having expired). His contract must, therefore, necessarily be taken to be one which could have been terminated only on reasonable notice or otherwise in accordance with the written terms of the service agreement. Subject only to that necessary modification I am satisfied that all of the terms and conditions which applied prior to the expiration of the service agreement were continued in force immediately thereafter and thus continued in force up to the date of termination of Mr. Purdy\’s employment. It is also noteworthy that clause 2.2 speaks of the possibility of renewal \”in any September during the course of this agreement and thereafter\” (my emphasis) until notice is given. The agreement itself, therefore, contemplates its continuance after the termination date until notice of termination.
I am therefore satisfied that as of the date of that termination the terms of the service agreement and in particular the terms of the anti competition clause remained operative.
Enforceability
The final issue which arises is as to the extent to which the non-competition clause may be said to be enforceable having regard to the well established principles concerning contracts in restraint of trade. A restraint on a person working or being engaged in one or more lines of business is by definition a restraint of trade. It is well settled that such a term will not be enforced by the courts unless it meets a two fold test:-
(a) it is reasonable as between the parties; and
(b) it is consistent with the interests of the public
McEllistrom v. Ballymacelligot Co-op (1919) AC 548 at p. 562.
In relation to the first test i.e. reasonableness inter partes, in the leading case of Stenhouse (Australia) Ltd. v. Phillips [1974] A.C., 311, Lord Wilberforce said:-
\”The proposition that an employer is not entitled to protection from mere competition by a former employee means that the employee is entitled to use to the full any personal skill or experience even if this has been acquired in the service of his employer: it is this freedom to use to the full a man\’s improving ability and talents which lies at the root of the policy of the law regarding this type of restraint. Leaving aside the case of misuse of trade secrets or confidential information … the employer\’s claim for protection must be based upon the identification of some advantage or asset inherent in the business which can properly be regarded as, in a general sense, his property, and which it would be unjust to allow the employee to appropriate for his own purposes, even though he, the employee, may have contributed to its creation\”.
The test seems to be, therefore, as to whether in all the circumstances of the case both the nature of the restriction and its extent is reasonable to protect the goodwill of the employer. Clearly certain clauses which preclude solicitation come within that definition provided that they are not excessively wide. In certain other cases clauses have been upheld which have prohibited employees setting up a similar business within a specified distance of an employer\’s establishment. See for example Marian White Limited v. Francis (1972) I WLR 1423. But it is clear that the duration of the prohibition and the geographical scope of same are important matters to be considered having regard to the nature of the work in question and the structure of the business.
In Halsbury 4th Ed., Vol. 47, the authors note in para. 31 that where a business is carried on by a small number of people and with customers widely distributed, a very large area will be allowed and a wider restraint may be reasonable in a business carried on by agents or correspondence than in one necessitating constant attendance in person. For example, all of England was regarded as an acceptable area of restriction for an accountant in Isitt & Anor. –v- Ganson [1899] 43 Sol. Jo. 744.
Having heard the evidence presented on behalf of the plaintiff as to the nature of the business in Ireland I am satisfied that there are only 10 (or perhaps 11 if one includes the defendant) patent attorneys operating in Ireland and that they all operate from Dublin. No difficulty would appear to be encountered in servicing the demands of the Irish business from Dublin. In those circumstances it does not seem to me that a geographical restriction based upon the jurisdiction of the Irish state is unreasonable having regard to the way in which the business operates in Ireland.
Having regard to the specialised nature of the business I am also satisfied that a period of 12 months is not unreasonable.
However, it is also clear that a more restrictive view is taken of covenants by employees than is taken of covenants given on sale of a business. Covenants against competition by former employees are never reasonable as such. They may be upheld only where the employee might obtain such personal knowledge of, and influence over, the customers of his employer as would enable him, if competition were allowed, to take advantage of his employer\’s trade connection. Kores Manufacturing Co. Ltd. –v- Kolok Manufacturing Co. Ltd. [1959] Ch. 108.
In those circumstances I have come to the view that the prohibition in this case on all competition is too wide. A prohibition on dealing with (in addition to soliciting of) customers of the plaintiff would, in my view, have been reasonable and sufficient to meet any legitimate requirements of the plaintiff. The wider prohibition which restricts dealing with those who might be, but are not, such customers is excessive.
There may be types of business where it is not practical to distinguish between customers and non-customers. This is not one of them. On the evidence, the number of customers is small and identifiable. A prohibition on dealing with those identified customers would be sufficient to prevent the defendant taking advantage of the plaintiff\’s trade connections. The wider restriction which prohibits competing for business in which the plaintiff might have an interest but where the client was not an existing customer, could not be directed to that end but to the wider aim of restricting competition as such. As pointed out in Kores that is not a permissible end.
In those circumstances I must view the anti-competition clause as an unreasonable restraint of trade. On that basis I must determine the preliminary issue by finding that the anti-competition charge, while applicable, is unenforceable.
Approved: Clarke J.