By Darren Clayton, Doyle Clayton Solicitors, London


Restrain me. Now!

A client in the catering industry once asked me to draft a number of detailed post-termination restrictions into a draft contract of employment. The apparent aim was to prevent a new 'key employee' from later joining a possible competitor and damaging his business. He asked that the covenants prevent the employee from working for any competitor within Greater London, and from soliciting or dealing with any key 'clients', for a period of 12 months. He was adamant that only such extensive restrictions could protect him.



Fortunately, being an awkward soul, I asked a few more questions before spending too much time on the work, since the person in question turned out to be a counter assistant or 'barista' in a London coffee shop (no, not that one). No doubt the coffee was excellent and perhaps there was valid concern that the competition may hide cameras in the bagels, but I had to inform my client politely that such restrictions were unlikely to be enforceable in this case.



His rather heavy-handed approach is, of course, only matched by the abject failure of other employers to even consider the question of protecting themselves from a raid on their key staff and, often more importantly, from having to compete with them after they have left - positively bristling with confidential information, client contacts and derivative business plans. With today's vogue for relatively short notice periods, this can mean that a client's right hand one day could be ringing their competitor's till on the next.



So where does the balance lie? Certainly these restrictions need serious thought, since the starting point remains that such restrictions are unenforceable on the grounds of public policy, unless they go no further than is necessary to protect an employer's legitimate business interests. It is, however, an urban myth that they are never enforceable, and it is also fair to say that the courts, if anything, are becoming both more generous in their review of such clauses. Equally, in the darkness of their own padded cells, some employment practitioners mutter that these days the courts seem sometimes to have become a little too relaxed about granting the interim injunctions that all too often despatch the matter.



A recent example of what some regard as an increased liberality in the area came with the Court of Appeal case of Beckett Investment Management Group Limited and ors v Glyn Hall and ors [2007] EWCA Civ 613. The case involved numerous questions relating to the construction of restrictive covenants, including the pithy question of how 'group companies' should be protected, since the employee had been employed by a holding company (which did not itself have any clients) and the employer sought to enforce restrictions to protect its subsidiary companies. Equally, the trial judge at first instance had not only adopted an inhibited consideration of corporate personality but had also been troubled by the 'arbitrary' nature of the 12-month duration of certain of the restrictions.



Despite some poor wording in the clauses, and the fact the court could not re-write them, the Court of Appeal in construing the wording did not share the judge's inhibitions and felt no need to adopt a 'purist approach' to the question of corporate personality (and the rather erratic use and non-use of the words 'subsidiary company' throughout the clauses). At the same time, it felt that all fixed time periods were essentially arbitrary and focused instead on evidence of the group's difficulties in replacing the employee and the 'industry standard' in this area when allowing the 12-month restriction.



Perhaps, then, the time has never been better for the bolder use of such covenants, but practitioners should not relax too much. The backbone of this area of law is, of course, access to confidential/proprietary information. The need for confidentiality to be protected has long been recognised and in every contract the law will imply a basic duty of confidentiality into an employee's contract - for many employees this obligation is likely to be enough. However, it will only extend to what may be called genuine trade secrets or information which is not only confidential but proprietary in nature. For our 'barista', the location of the kettle would therefore be unlikely to be covered. But what about the employer's 'secret blend' of coffee, client list, or events for which our caterer has been asked to tender?



Reliance on the implied right does not give the employer the chance to have a specific say about what their real concerns are, and for this reason most employers would be advised to draft out clearly an express confidentiality clause in their employees' contracts of employment. This could clearly identify the categories of information that are protected and also ensure that employees are obliged to return all papers and property on leaving. They may, of course, fail to comply, but at least then the employer has the chance to threaten court action with conviction and in appropriate cases to seek an enter and search order.



But how much further should the employer go? Should they add in layers of further restrictions, or will this detract from the genuine cases where protection is needed? Undoubtedly, the answer is for the employer to consider each case individually and apply restrictions only when they are really needed. The scatter-gun approach is so often exploited by the employee as evidence of the employer's lack of true concern about their actions and in many cases represents a missed opportunity to decide what is really needed to protect the business.



Take our coffee waiter example. What the employer really wanted to do was stop someone poaching a valued staff member. She was good at her job and perhaps popular with customers. The way to protect the business was therefore to keep her in employment by ensuring that she is treated well and paid fairly. The assets valued were perhaps really her 'stock in trade' and not something which was proprietary to the business. In short, she is allowed generally to choose where she works and, at the risk of heresy, the potential fee that could have been paid to me would have been better paid to her as a bonus (even if I might have spent it with more flair).



However, if she were sufficiently senior to be really involved in the company's development plans and genuinely had access to confidential information, then the effort to set out a few sensible post-termination restrictions would have been sensible and effective.



So what could be done? A starting point is to ask why a confidentiality clause will not be enough. If the answer is that an employee cannot un-know what she knows and that it will give a competitor an unfair commercial advantage in sifting their own plans, the employer could, of course, consider a non-compete clause. In appropriate cases they could also consider adding clauses preventing her from soliciting or dealing with the company's clients, or from inducing other staff members to cross over with her to the 'dark side'. Indeed, if you forgive the pun, there is a veritable menu for our coffee waiter provided the restrictions can be justified.



One thing is certain: the days when the 'add them in and it will frighten them anyway' approach was effective is over and most legal advisers are now sufficiently bold to challenge covenants that are not customised to fit real concerns. However, where covenants are sharply designed and carefully drafted, few would wish to risk challenge unnecessarily and without protection from the new employer in the form of an indemnity.



The serious questions of duration and geography remain and it is usually best to take the most limited view of what the employer really needs if they are intent on enforcing the restrictions. Despite a slightly more generous approach being taken to wording these days, courts will not re-write a bad covenant (for example, to make the duration shorter or the geographical areas smaller) to make them enforceable, as they do in some parts of the US. Given the cost of preparing and using them, it is a pity indeed (and perhaps a tad embarrassing) when they are found wanting. Equally, despite the Beckett case, care should be taken to deal with the dynamics of group companies and also the future changes that may happen within a group (or if a part is sold).



For most, though, the best advice is to think simple and really target the concerns that the business genuinely has from the outset. However, any covenants should be refreshed regularly to ensure that when they are construed - that is, with regard to the position at the date they were written and the circumstances at the date they are enforced - they are still seen to be fresh and relevant, and to avoid the confusion that can still be caused by rusty wording and knowledge. The client company is also best advised to keep the nature of their covenants in mind. For some reason, the fact that a chief executive cannot actually remember the covenants when giving evidence always fails to impress.