Restraint Of Trade And Restrictive Covenant

Within restraint of trade, the whole point of a restrictive covenant is that contractual terms are written down in the contract to when the employee’s employment is ended, they have certain limits on any of their future employments prospects.

At first instance courts held any restrictions as void as it was affecting a man’s freedom and it was until the case of Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co it was first accepted. Here it was decided that the clause can only come into place if it was reasonable with certain strict limitations. In any instance employer cannot place a restraint on his employee purely because he might think he will become a competitor. The employer must be pursuing a restraint entirely to protect his legitimate interest or from the employee putting him in jeopardy i.e. Valuable confidential information acquired by employee

The first step identifying what restraint clause it is. There are four types restraint covenants that are considered to be used a lot

Non-Solicitation Restraints;

Non-Dealing Restraints;

Both these clauses after termination of employment prevent the employee from actively contacting clients, customers, suppliers without the knowledge of their ex-employee for their own advantages

Non-Competition Restraints;

This restraint clause prevents an employee from setting up a competitive business or giving vital competitive information out.

Non-Poaching Restraints

This restraint clause ensuring that any key personnel do not leave their employment after the departure of another key worker,

For Wendy’s restraint clause part A it would be a non-competition restraint as Delfridges restricting from working in any department store sector in London i.e. Jarrod’s to where she may join and supply confidential key information about Delfridges to them.

For part b of Wendy’s restraint clause, it would be a non-solicitation restraint duly because Delfridges do not want her to persuade others to leave the company as she done or even so bribe them

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For Louise’s restraint clause part A it would seem again it is a non-competitive clause whereby Delfridges do not want her setting up a similar competitive business or even aiding with Delfridges competitive rivals Jarrod’s.

For part b of the restraint clause is a non-solicitation restraint, restraining Louise from contacting any Delfridges customers/ client after termination of her clause.

The next step is the restraint clause having to be reasonable which has to be proved in the circumstances by the employer towards the court. To establish it is reasonableness, the employer must show he wants to protect his legitimate interest and secondly his legitimate interest is in jeopardy due to his employee.

Legitimate interest can be divided into three categories:

Trade Secrets and Confidential Information;

Under Wendy’s restraint clause part a, Delfridges do not want her leaving employment and sharing any trade secrets with other departments across London. Wendy in her position as Ms Turner’s mentee has access to the company’s supplier lists, and the stock and prices of the present fashion line and the forthcoming fashion line for the next season.

Trade Connections;

For Louise’s restraint clause part b, the clause restrict her from contacting customers after termination of employment from where at Delfridges she used to personally meeting with customers to determine their needs.

Maintaining a stable workforce

For Wendy’s part b of the restraint clause in order for Delfridges to maintain a stable workforce, Wendy is restrained from soliciting with other fellow ex-employees to leave Delfridges.

Employer would be relying on protection when employee has maybe knowledge of trade secrets, i.e. customers or any objective knowledge obtained from the employers workplace or maybe knowledge on trade connections i.e. names of customers. For example Delfridges are using their restraint clause in order to protect their legitimate interest trade secrets on the fashion industry or maybe any vital customers/ clients that use their company. It is the subjective knowledge of the employee that the employer cannot use a restraint clause against. Subjective knowledge being the employee’s own skill and mental ability. In lousies context subjective knowledge would be her knowledgeable in respect of trends in couture and her opinions which are widely respected within the fashion industry. Also any skill that Louise acquires, such as being a personal shopping meeting people’s tastes.

There is also what the type of category of information to be considered, one being information that is easily required due to its easy accessibility i.e. common knowledge in the industry. In Wendy’s perspective common knowledge would be key strategic information of the business operation that was acquired on the graduate management development programme. Another type of information that the employee must treat as confidential where he must not disclose to others about it only until he leaves employment where the law allows him to use his full knowledge and skill. This is where the employer can put in place a restraint clause. This sort of information in Wendy’s instance where she has access to company’s supplier lists, and the stock and prices of the present fashion line and the forthcoming fashion line for the next season.

Thirdly there is information that is so confidential such as trade secrets, once learnt by the employee he cannot lawfully use them for his benefit or anyone else’s. Trade secrets were first outlined in the Court of Appeal by Neill LJ.

Mr Poulton suggested that a trade secret is information which, if disclosed to a competitor, would be liable to cause real (or significant) harm to the owner of the secret…..  

Trade connections may be anyone from current customers/ clients to past and future clients depending on the facts

When it comes establishing that Delfridges legitimate interest is in jeopardy due to employees, Delfridges need to show that their legitimate interest are open to such exploitation by Wendy or Louise that a restraint clause is needed. For instance Delfridges may show how Wendy has access to valuable stock lists or upcoming fashion prospects which could ruin their upcoming season for them. For Louise Delfridges may state that their customers may be at risk because of Louise’s special relationship/

From here the courts would examine what legitimate interests are involved in the Delfridges operation and how the employee’s activities fit in with the legitimate interests. If found that the employee has no activities around the legitimate interests than the covenant can be held as void as there is no jeopardy going on.

When determining the trade secrets might be in jeopardy, it must be shown by Delfridges that employee's had access to this information, were able to understand the information, make use of the information or the employee might reveal the secret to any rival employer. In Wendy’s case it is quite clear as being Ms Turner’s mentee she has access to some of the company’s confidential information.

For determining the trade connections factors the courts examine

The degree of contact with the client, any influence applied over the client, any support placed on the customer or any special relationship with the client. Considering Louise’s circumstances personally meeting with customers to determine their needs would be considered as a special bond.

As soon as Delfridges have shown that there is a legitmate interest to be protected and it is in jeopardy, then they are able to put forward a covenant whereby it would be assessed for its reasonableness. Where it would be considered that does Wendy’s and Louise’s covenant protect the employer’s legitimate interest? Or whereby the restraint being too wide i.e. Louise restraint clause part a may be somewhat an issue for her. If convenant restricts employee further than necessary then covenant is deemed as void.

In any instance a restraint clause doesn’t last longer than the trade secrets or confidential information shelf life, if confidentiality of the secret gets out beforehand than the shelf life is limited meaning the restraint clause time duration becomes smaller.

For trade connections a restraint clause duration time is no longer until the employer finds an effective replacement. When such an issue arises, the nature of the ex-employee’s duties is considered and even his level of prestige.

When the clause is deemed to be unreasonable, there is still a chance to save that clause or part of it by either judicial interpretation of the clause or the blue pencil rule (severance).

Judicial interpretation being the courts being able to make changes to it so the clause is not rally wide in context of the employee. When considering this the courts also think about the intentions of the parties at the time for instance the parties at the time mistakably creating a clause too wide. This was first outlined in Home Counties Dairies v Skilton

But if employers intestinally create a wide covenant, they are not able to argue they intended a narrower scope for the covenant, the courts will not accept and the covenant would be put down as excessive. This was brought up

In Delfridges case, considering Louise’s part a restraint covenant, restricting her to work in the fashion industry anywhere in the United Kingdom may be somewhat of a problem to her. Her knowledge and skill is mainly on fashion and without it she is sort of useless. Stating the whole of UK her home location, she would not be able to get another job with expertise only in fashion. Now when Delfridges considered this they may have mistakably not thought about it at the time making it too wide. But if it was on purpose, Delfridges did not want anyone other fashion industry to use her expertise then the covenant would be deemed as void and unreasonable. Maybe using judicial interpretation and altering the UK to London for Louise the restraint covenant would seem more reasonable.

The Severance rule is the basis where there are two separate promises or in the covenant. Each promise will be examined individually. If one promise is established void or unreasonable, then that specific promise can be severed so the remaining promises can be used and applied. The blue pencil being the courts removing any words or sentences that made the restraint clause void or unreasonable in any way.

At first the courts only recognise two types of legitimate interests, trade connections and trade secrets. In the case Hanover Insurance Brokers Ltd v Schapiro, the courts refused to acknowledge non poaching covenants. Two reasons why they didn’t uphold employees not a legitimate interest Primacy Of Freedom Of Trade “…the employee has the right to work for the employer he wants to work for if that employer is willing to employ him."

. Reason two being The Excessive Scope Of The Covenant

The indiscriminate specification of subjects within the clause extended to those employees who would not pose a threat to the stability of the employer’s business interests if they left to work for a competitor.

An exception in the case of Ingham v ABC Contract Services Ltd, the courts held where it was necessary to protect the stability of an employer’s workforce.

They have a legitimate interest in maintaining a stable, trained work force in what is acknowledged to be a highly competitive business.

In this case the court of appeal focused on the industry that the employer worked in which was consultancy. This time however the courts did not look at the scope of the covenant which applied to all directors, managers and servants. Directors and managers were still upheld as losing them can cause some damage to the employer’s business interest. Courts failed to consider the servant which for non-poaching applies to any employees regardless of their status. This making a high water mark.

Alliance Paper Group Ltd v Prestwitch, whereby the covenant was considered on two bases, the defendant as a managing director and as a negotiator of the sale. The courts found legitimate interest did exist as the employer merely wants to protect his investment. Considered scope of covenant’s again in this case deciding to follow inghams principle as directors were perfectly capably in their position to negotiate the employer’s investment via profits or stability.

The determination of whether a clause seeking to protect the interest would be upheld would be a question of fact.