Employment law clinic No 8 Anti-competition restraints

The challenge A company has heard rumours that one of its senior sales
people has been making preparations to leave the company and set up in
competition with it. She has been approaching other staff asking them to join
her and she may have been soliciting the company’s customers. Jill Kelly
partner, Thomson, Snell & Passmore examines the issues.

Legal issues

– Express contractual restraints on competing with the company after the end
of her employment can be enforced as long as they do not attempt to limit the
employee’s actions more than is reasonably needed to protect the company’s
legitimate interest in its client base, its staff and its confidential
information.

– Express restraints will not be enforced if the employee is dismissed in
breach of contract. They will not be enforced unless the employee has agreed to
them, usually by signing the relevant document.

– Employees are also bound by implied duties which prevent them from taking
more than limited steps in preparing to leave and compete while still in
employment. For example, they may not solicit the company’s customers or
suppliers but they are allowed to acquire premises and set up a limited
company.

– Unless the employee has agreed to express limitations on her use of the
company’s confidential information after the end of her employment, the law
does not go far to protect the company. She will be prohibited from using or
disclosing trade secrets, but not more general confidential information.

– The employee is prohibited, under an implied duty, from taking with her in
written or electronic format lists of the company’s information, such as lists
of clients, or from memorising them.

– If the company acts promptly, it may be able to apply to the court
successfully for an injunction to prohibit the employee from breaching express
post-termination restraints on unfairly competitive activity. If an employee has
breached implied duties while still in employment to gain an unfair head start
after she leaves the company, a "springboard" injunction may prevent
her from competing with the company for a limited period of time after the end
of employment.

– The company must satisfy itself that the rumours about the employee are
justified and that it can actually produce evidence to support any allegations
against her. It should investigate if other staff members will give useful
statements and if customers and suppliers have been solicited. An investigation
of the employee’s WP documents, e-mails and mobile phone calls, on company
equipment, can often bear fruit, subject to DPA and HRA considerations.

– Although the company may want to dismiss her immediately, this could
result in claims of wrongful and unfair dismissal. Other options such as
disciplinary suspension and/or invoking a garden leave clause may protect the
business more effectively from unfair competition.

– Applying for an injunction is very expensive in terms of legal fees and
management time consumed. Such applications can be unpredictable in their
results. If the company loses, it will have a liability for the employee’s
legal fees as well as its own.

If it is successful, it will have to give an undertaking to the court to pay
the employee damages if the court should later decide, at a full trial, that
the injunction should not have been granted.

HR Issues

– This means that the company must be convinced it has strong reasons for
seeking an injunction. These may be that the employee could seriously damage
the business of the company if allowed to compete freely or that the company is
anxious to set an example to any other employee tempted to do the same thing.

– However, the company will usually be in a stronger position than the
employee to fight litigation. Issuing injunction applications or even seriously
threatening them will often result in the employee voluntarily agreeing to an
acceptable level of restraint on competing activities.

– Another option is suing the employee for damages for breach of contract.
To be successful, the company would have to prove to a court that it had
suffered financial loss as a result of the breaches of contract and quantify
these losses. It is very difficult to do so which means that damages are
usually only claimed as an add on if a company is already issuing proceedings
for an injunction.

– Using company resources to cement client relationships may be more
effective than taking legal action.

Jill Kelly, Partner, Tunbridge Wells law firm, Thomson, Snell &
Passmore

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