Enforcing restrictive covenants: a high-risk strategy backfires.

21st September 2022 | Barney Laurence | recruitment, litigation, employment

In a recent High Court case, Partner Barney Laurence at Sherrards successfully defended two recruitment consultants, and their new employer, against a claim by their former employer to stop them competing and misusing confidential information. It was a classic case of emotion, rather than evidence of wrongdoing, that drove the Claimant to bring the matter to the High Court. The case was also legally flawed.

The facts, in brief

 “John” and “Paul” worked for the Claimant, but they left and joined a new recruitment company, “X Ltd” (the names are obviously fictional to protect confidentiality).

X Ltd is a rival recruitment company based in the same building as the Claimant. The two companies both offered IT consultancy, but also had very different businesses in other respects: X Ltd offered recruitment services in the optical field, an area the Claimant did not specialise in at all. This proved to be a critical difference.

The Claimant brought an injunction application by which it attempted to stop John and Paul working for X Ltd, stop them from soliciting members of the Claimant’s staff to leave, and stop them from misusing confidential information. It also sought orders against X Ltd preventing it from inducing John and Paul to breach their obligations.

John and Paul’s employment contracts with the Claimant each contained post-termination restrictive covenants against (1) competition generally; (2) dealings with client and candidates; and (3) soliciting employees to leave. It was these covenants that the Claimant sought to enforce, although as is explained below, there were some important differences between the covenants in John’s and Paul’s respective contracts.

The Claimant tried to infer that the Defendants had acted unlawfully just because of the circumstances. Those circumstances included the fact that John and Paul had both left the Claimant’s employment around the same time, and then both joined X Ltd. There was also grave suspicion that John had taken away a notebook when he left the Claimant, which the Claimant said contained information about its clients, and that as such John was misusing the Claimant’s confidential information.

It all went very wrong for the Claimant.

John

John was a senior recruiter. He had been recruited away from the Claimant by a third party recruiter (and not as a result of any targeted attack by X Ltd, or any conspiracy between John, Paul and X Ltd).

John told the Claimant upon leaving that he was going to join X Ltd to set up an IT division (the Claimant had an IT Division and so on the face of it the Claimant had cause to be concerned about John joining X Ltd). Despite being told this, the Claimant waited about a month – and until after John had already started working for X Ltd – before applying to the Court to stop him working there. That was the Claimant’s first problem, but it was only one of the hurdles it faced.

John recognised – on good advice from Sherrards – that there was at least an arguable case that the restrictive covenant in his contract with the Claimant might be capable of stopping him from working for X Ltd running its new IT Division, and so, taking a sensible approach, John was assigned to a completely different division of X Ltd for the duration of his covenants and both John and X Ltd gave undertakings to the Claimant to this effect, but also gave undertakings that John would not act in breach of the other covenants by contacting the Claimant’s clients or trying to poach its staff. In effect, John was taken out of competition. The Claimant refused to accept this and so applied to Court for an injunction, seeking a total prohibition on John doing any work at all for X Ltd, despite the fact that that is not what they were entitled to ask for because the restrictive covenant in John’s contract did not go that far (and if it did, it would have been too wide to be enforceable).

Come the hearing, the Court dismissed the application against John. It found that the Claimant was not entitled to stop John from working for X Ltd altogether, because that is simply not what John’s covenant extended to. The law does not permit an employer to restrain its employee from engaging in activities that do not compete with that in which the employee was engaged during its employment, and if that is what John’s covenant did (it didn’t), the covenant would have been unenforceable. In other words, the Court took the view that it was arguable that the covenant would stop John from working in IT Recruitment, but that this was not an issue in this case given that John had been assigned to a different division of X Ltd.

The case against John was therefore a classic case of the Claimant “overreaching” – that is, seeking protection that goes beyond what it is entitled to under the covenant. It is to an extent understandable why the Claimant did not want John to continue working for X Ltd at all, but it did not have a proper foundation for doing so, and so it lost.

Paul

The position of Paul was different. He was only a trainee recruitment consultant when he worked for the Claimant, far less senior or experienced than John. He was recruited to X Ltd via a legitimate ad placed via Indeed and, again, there was no evidence that he had been enticed by X Ltd or that he had conspired with John or X Ltd to leave the Claimant.

The Claimant – like with John – sought an injunction from the Court to stop Paul working for the Claimant altogether; not just in an area that was in competition with the Claimant. For the same reasons as with John, the Claimant failed: the covenant in Paul’s contract did not operate to stop him working for X Ltd altogether, and so the Claimant simply had no basis for an injunction to this extent.

But another (major) difference between Paul and John was that the non-compete covenant in Paul’s contract was for 9 months, whereas the same covenant in John’s was for just 6 months. In other words, the Claimant clearly thought it appropriate to restrict its trainees for longer than its senior members of staff. This oddity was never explained by the Claimant (despite a 29-page witness statement adduced in support of the application), and it proved to be a point that was fatal to the Claimant’s application. The Court, at the hearing, took the view that the non-compete covenant in Paul’s contract was simply not enforceable: firstly because it could not be justified in relation to a trainee recruiter at all, but even if it could it went much further duration-wise than would have been permissible, particularly bearing in mind that the same covenant in John’s contract was for a shorter duration.

But that was not the only reason why the Claimant’s case fell down. Even had the Court taken the view that the non-compete covenant in Paul’s contract was enforceable, there was no evidence that Paul was in fact in breach of it. When Paul took up employment with X Ltd, it was into X Ltd’s “Optical” division; an area of recruitment in which (1) the Claimant simply does not operate; and (2) therefore Paul clearly did not operate when he worked for the Claimant. This was the final nail in the coffin in respect of the Claimant’s attempt to enforce the non-compete covenant against Paul. The Claimant had adduced no evidence at all that Paul was engaged in the same kind of activity with X Ltd to that in which he was engaged when he worked for the Claimant. The Claimant was relying entirely on suspicion, and tried to persuade the Court that it would “do no harm” to grant an injunction. The Court robustly disagreed and refused to grant the injunction.

Equally there was simply no evidence that Paul had contacted clients or tried to poach staff members and so the Claimant’s claim for an injunction on those fronts was also flatly rejected.

X Ltd, John and Paul 

There was no evidence whatsoever of John and Paul conspiring (themselves or with X Ltd) to leave the Claimant together. In fact, John was recruited via a third-party recruiter and Paul was recruited via a direct job advertisement in Indeed. The evidence bore all of this out.

What about the claim that John had misused confidential information?

When he left, John took an orange notebook with him. This formed the basis of the Claimant’s application for wide-ranging, extremely draconian, orders that its confidential information be delivered-up, that it be granted computer imaging orders so that it could carry out a forced examination of electronic data, and confessional-style witness statements under compulsion. Such orders are granted only extremely rarely, and when they are granted it is in only the most serious and clear-cut of cases.

Again, the Claimant’s case failed.

 

1. John’s witness evidence explained that the notebook was his (a point admitted by the Claimant) and that he’d brought it with him to his employment with the Claimant.

 

2. The notebook contained information that John had placed into it prior to his employment with the Claimant. The Claimant did not attempt to explain if or how John had shared that information with the Claimant, or how the Claimant had acquired some sort of rights to the information.

 

 

3. The Claimant failed to identify what of the information in the notebook amounted to confidential information – that is, information that amounts to trade secrets, as opposed to what is called “mere” confidential information).

 

4. The Claimant’s employment contract with John contained a “confidential information” clause, but it was plainly unenforceable (because it tried to render all sorts of non-confidential information as “confidential”.

 

5. The Claimant’s evidence was generally wholly unsatisfactory.

 

6. Overall, there was simply no factual basis whatsoever for the Claimant’s claim that there was anything sinister in relation to the disappearance of the notebook.

 

What’s the take away?

The Claimant’s decision to proceed was ambitious and super high-risk. The Claimant’s claim was based on wholesale reliance upon suspicion, as opposed to evidence. Yet the Claimant took a strong-arm approach, doubtless in the hope that the pressure of the situation would force John, Paul and X Ltd to give the Claimant what it wanted. That strategy backfired spectacularly. The Claimant clearly did not expect a fight.

It is perhaps understandable that the Claimant was deeply unhappy that John and Paul had left and joined a rival recruitment company. But it is very dangerous to allow cases like this to be driven by high emotion and anger. What is required in these cases is a very careful, considered approach to all the circumstances, but particularly the evidence. It seems all of this was lacking in this case.

Claimants need to be confident (1) that the restrictive covenants in question are likely to be enforceable; and (2) that the evidence to support the injunction application is there and is sufficiently strong. If the case is beset with difficulties in either of those respects, it is likely that the requisite tests applicable to injunction applications will not be able to be met, with the result that the application fails. Given the extremely high cost associated with injunction applications, failure at the first hurdle tends to prove to be a very expensive lesson indeed.

The Claimant was represented by a highly-reputable law firm and a Queen’s Counsel. Sherrards saw-off the case in conjunction with Jonathan Cohen QC (now KC) of Littleton Chambers, widely reputed as one of the best in his field.