The Court of Appeal has recently emphasised the need to act quickly if you expect the Court to grant injunctive relief following breach of a restrictive covenant by an employee.
In Planon Ltd v Gilligan, the Court of Appeal dismissed an appeal of the High Court’s refusal to grant an interim injunction enforcing a non-compete clause.
Whilst the Court of Appeal upheld the decision made by the High Court, it did conclude that the High Court had taken the wrong approach when considering the enforceability of the non-compete covenant.
In view of this, what tips do we have for those wishing to rely on restrictive covenants?
Restrictive Covenants
Restrictive Covenants are clauses in contracts which restrict an individual’s activity once they leave their employment. They typically prevent that individual from poaching other employees, soliciting clients or working for a competitor for a specified period of time. The starting point to keep in mind is that these clauses are void and unenforceable unless the business seeking to rely on them can show that they are reasonably necessary to protect a genuine business interest. When considering such cases the Court has to balance the freedom of an individual to earn a living in their chosen profession, against the genuine interests of a business which wants to protect its goodwill and income.
Injunctions
If a restrictive covenant is breached then the business may want to apply for injunctive relief from the Court to prevent the former employee from continuing the breach. An injunction is an equitable remedy which is granted at the discretion of the court. There is always the risk that the court will not grant an injunction, even if the non-compete clause is considered enforceable. The court will always consider the competing interests of the parties when exercising its discretion, known as considering the “balance of convenience”.
The Court will also consider whether damages (ie money) are an adequate remedy if the injunction is not granted. That is, can the Claimant be compensated by the defendant with money at the end of the trial? If damages are an adequate remedy then the injunctive relief will not be granted. Likewise, the Court will consider whether the defendant can be compensated in damages by the Claimant (for lost earnings) if the claim ultimately failed and it turned out that they hadn’t been entitled to the injunction.
Decision in Planon Limited v Gilligan
Planon employed Mr Gilligan from February 2015 as a sales manager. Mr Gilligan’s employment contract contained post-termination restrictions, including a non-compete clause. The clause prohibited Mr Gilligan from being employed by any business which was competing with Planon for a period of 12 months from the date of termination of his employment. This was a significant restriction on Mr Gilligan’s ability to earn a living in his chosen profession so had potential to have its enforceability challenged.
In July 2021, Mr Gilligan terminated his employment contract with Planon and on 1 September 2021 he began working for a competitor, ServiceNow. This was brought to Planon’s attention the following day. Some pre-action correspondence followed.
Planon applied for an interim injunction on 22 October 2021 seeking an order that Mr Gilligan be prevented from working in his new role until the full claim was determined at trial. Mr Gilligan argued against the grant of the interim injunction on the grounds that:
- The non-compete clause was an unreasonable restraint on trade and went further than reasonably necessary to protect Planon’ s legitimate business interests.
- He and his family would suffer disproportionate harm if the injunction was granted, and he was effectively prevented from working until August 2022.
The High Court ruled that an interim injunction should not be in granted. The refusal was on the grounds that the effect of the non-compete clause was to prevent Mr Gilligan from being able to work for any employer in the software market for 12 months. This meant that Mr Gilligan would be unemployed for the period of restraint. Damages would not be adequate to compensate Mr Gilligan for this loss of income if the injunction were granted.
Planon appealed. The Court of Appeal dismissed the appeal, however the reasons for refusing to enforce the clause differed from the High Court’s.
Enforceability of the non-compete clause
The Court of Appeal held that the Judge had erred in approaching the enforceability of the non-compete covenant as to whether Mr Gillian would be unable to work during the period of restraint. This was not enough, on its own, to determine the validity of the non-compete clause and the “balance of convenience”. That is, the High Court hadn’t considered some of the other issues that might mean that a 12-month restraint of trade could be reasonable.
The effect of delay
It was considered that the Application for injunctive relief had not been pursued quickly enough. Planon learned of Mr Gillian’s new role on 2 September but did not issue until 22 October. This seven-week delay meant that Mr Gillian was already settled in his new role and weighed against granting injunctive relief.
Further, seven months had passed by the time the case was heard by the Court of Appeal. There was only four months of the original 12-month restrictive covenant left to run. Any damage which may have been caused to Planon would already have occurred. The Court of Appeal again felt that this weighed against granting the injunction and the “balance of convenience”.
Damages as an adequate remedy
It was considered unrealistic for Planon to argue that damages would be an adequate remedy for Mr Gilligan if the interlocutory injunction was granted but later found to be unenforceable at trial. Mr Gilligan had a family and a mortgage, and the likely effect of an interim injunction would be to deprive him of his income until August 2022. Although Planon would be in a position to compensate loss under the cross-undertaking in damages, the Court of Appeal held that restraining Mr Gilligan from taking up employment for so many months may result in damage that could not be compensated in money alone.
Practical tips for employers seeking injunctive relief as to a non-complete cause
In view of the Planon decision, tips include:
- Good drafting – a common mistake is to include very wide restrictive covenants in employment contracts. This risks the restrictive covenants being deemed unenforceable. The restrictive covenant must go no further then is “necessary to protect legitimate interests”. The Court will not temper a restrictive covenant that is considered to be wide in scope: the whole clause is void. That is, the Court won’t impose a six -month restriction where the contract said 12.
- Tailored contracts - consider what restrictions are appropriate on a case by case basis, acknowledging that they will vary depending on the seniority of the employee involved.
- Make sure Contract is signed – it will be very difficult to enforce a restrictive covenant unless you can show that the clauses were brought to the attention of the employee and agreed. Ideally this will be by way of a signed contract. If new restrictive covenants are introduced during the course of employment then try to ensure that something is given to the employee in return to agreeing them – such as a promotion or pay rise; or they may be unenforceable.
- Act quickly - take legal advice as soon as you become aware of any breach of suspected breach of a restrictive covenant. Whilst its sensible to try to avoid legal proceedings by, for instance, seeking undertakings – Planon demonstrates the risks of letting that pre-action correspondence continue for too long. If you intend to seek injunctive relief then it ought to be sought quickly.
- Evidence – take steps to ensure that employees do not delete any data from their work mobile telephones or laptops before they leave the business and ensure that all of their records are preserved. There may be evidence to support breaches of their terms of employment and intended breaches of restrictive covenants. IT investigators can be employed to search for relevant material that the employee has sought to delete.
How we can help
For advice on the drafting of restrictive covenants to ensure that your business’ interests are protected, please contact your usual member of our Employment team.
If you are looking to enforce restrictive covenants then please contact Helen Otty, Partner in our Litigation team, or your usual member of our Litigation team.
