Protecting your business

Daff Richardson

Manches Thames Valley

Pharma, healthcare and life sciences companies are often vulnerable to unfair competition from former employees. There are straightforward steps which such companies can take to protect their business interests, and in this article we look at some recent cases, and consider their practical relevance.

Restrictive Covenants

The service agreements of your key directors and employees should contain well-drafted, relevant restrictive covenants. Contrary to commonly-held assumptions, post-termination restrictions will be enforceable where they protect a business interest of the employer, and are no more onerous than is reasonable. However the employer does need to ensure that the restrictions are apt, and that there is adequate evidence of breach.

Three recent cases concern alleged breaches of non-solicitation and non-competition provisions.

In Towry EJ Ltd v Bennett and others [2012] EWHC 224 (QB) the High Court held that former employees of Towry (which provided financial advisory services), which had recently purchased the employees’ former employer, had not breached contractual non-solicitation provisions following their move to a competitor. Towry sued the former employees when requests were received from the competitor for transfer of funds on behalf of clients who had previously been advised by the individual defendants. Towry argued that the former employees were in breach as they had solicited clients to transfer their investments to the competitor. The claims were dismissed as the facts showed there had been no actual solicitation by the defendants and no inducement by the competitor. The case highlights the importance of evidence in cases of alleged breach and of having comprehensive provisions including non-dealing restrictions. This is particularly relevant in circumstances where you fear that ex-employees may seek to target your customer base.

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“This is particularly relevant in circumstances where you fear that ex-employees may seek to target your customer base.”

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In Baldwins (Ashby) Ltd v Maidstone [2011] EWHC B12 (Mercantile) the High Court held that the seller of an accountancy business was in breach of a restrictive covenant in a share sale agreement. The covenant prohibited him from canvassing, soliciting or endeavouring to entice away from the buyer anyone who had been a client of the business within the two years prior to completion. It was held that there must be a positive intention to target and approach a client in order for there to be a breach. The evidence pointed to the existence of a secret agreement between the seller and a competitor of the buyer to solicit business from the client base of the buyer to the competitor’s advantage. It was confirmed that there had been an active and positive intention to solicit and the buyer had shown that the seller solicited five clients away from it, causing losses in each case of at least one year’s gross fees. The buyer was entitled to judgment for that sum. This case serves as a useful reminder that restrictive covenants can be used in business sale agreements, and may be very relevant in the fast moving world of start-ups and high growth companies.

In Phoenix Partners Group LLP v Asoyag [2010] EWHC 846 (QB) a financial broker was found not to be in breach of a restrictive covenant which prevented him competing with any business carried on by Phoenix. His former employer had ceased trading in the markets in which the broker was dealing in his new role and so it could not be said that he was competing with any part of their business. This case highlights that in determining whether there has been a breach of a covenant, regard will be had to the circumstances at the time the alleged breach occurred, as well as to the circumstances at the time of drafting. The wording of the covenant could also have been stronger: the fact that it related only to present activity rendered it useless in these circumstances. This case is also a reminder that covenants should be drafted specifically in the context of the employer’s business.

Injunctions

An aggrieved employer can go to court to seek an injunction, requiring the former employee, and often their new employer, to cease the offending activity. However, the case must be based on a breach of a contractual or common law duty, and injunctions will not be granted lightly. The employer must move swiftly, and must be able to show that damages alone would not be an adequate remedy.

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“A recent Court of Appeal case emphasises the paramount importance of inclusion of contractual restrictive covenants in employment documentation…”

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A recent Court of Appeal case emphasises the paramount importance of inclusion of contractual restrictive covenants in employment documentation when seeking to prevent a former employee from using confidential information in a new role. In Caterpillar Logistics Services (UK) Ltd v Huesca de Crean [2012] EWCA Civ 156, an outgoing employer failed to get a interim injunction to prevent a former employee from using confidential information that she had acquired during her time working for them, when she moved to a new job. The employer was also refused a “barring order” to prevent her entering into a commercial relationship between her former and new employer on the basis that this type of order was limited to solicitors and other professionals, who owed certain fiduciary duties to their clients, which was not the case here. The right way to prevent her activity would be through restrictive covenants: however the employer had failed to include any in her contract. A good deal of expense and trouble could have been saved by appropriate wording in her employment contract.

An injunction was granted in The Hedgehog Golf Company Ltd v Frank Hauser [2011] EWHC 689. A former director of the company was prevented from revealing confidential information, including details of its patents for a device which attached to the wheels of a golf trolley. The company was concerned that if left unrestrained the former director would disclose information to others, as he had previously shown a disregard for the rights of his fellow directors. More significantly, he had expressed an intention to “destroy” the company in correspondence with a consultant, had said he would assist a third party against whom the company had previously brought patent infringement proceedings, and said he would contact their competitors. He had also given a witness statement in support of a third party’s patent proceedings, the contents of which revealed certain information about the claimant company. The circumstances in this case were such that the court granted a perpetual injunction against the former director.

Springboard relief

In two recent cases, the courts have been willing to grant “springboard” injunctions to employers. This type of injunction is designed to prevent the offending employee from benefitting from any unfair business head start in their new role, gained through breaches of the duties they owed to a former employer (for example carrying out competing activity or breaching confidentiality obligations before the end of the employment contract). The injunction puts the employee back in the position they would have been in had they not breached their duties and helps the former employer to repair any damage done. It is particularly useful to employers who are unable to rely upon any restrictive covenants and could act to prevent the employee from dealing with the outgoing employer’s customers or from hiring any former colleagues, for example. These type of injunctions can therefore be extremely useful where things have gone wrong before the employee’s employment has ended.

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“These type of injunctions can therefore be extremely useful where things have gone wrong before the employee’s employment has ended.”

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In QBE Management Services (UK) Ltd v Dymoke and others [2012] EWHC 80, the High Court granted springboard relief for twelve months following an application from the employer, QBE, for an interim injunction to enforce garden leave and other post termination restrictions, on the belief that three of its employees had been headhunted by a competitor. It was revealed that the employees had in fact planned the resignations of a number of other employees and to move as a unit to a new competitor, taking with them the client base of QBE. Whilst still employed, the employees had used their seniority within the company to influence others to join them in their team move, and had continued to benefit from access to QBE’s confidential information which had helped them to secure financial backing for their new company. They had also begun to solicit customers. QBE were also awarded damages to cover their costs in relation to the breach.

A springboard injunction was granted, pending trial, in Clear Edge UK Ltd and another v Elliot and others [2011] EWHC 3376. The evidence pointed to three employees of Clear Edge, who all had niche specialist knowledge of the company’s gas filtration business, having solicited each other to join a competitor company together. They concealed their departure from their employer and retained confidential information belonging to Clear Edge in order to assist them in their new roles. The court granted the springboard injunction in order to prevent the employees from joining the competitor, as they had gained an unfair competitive advantage through their threatened misuse of confidential information and their group defection. These were considered as breaches of duty and fidelity to their former employer. It was also an arguable breach of fiduciary duties.

Conclusion

Employers can take practical steps to protect their business interests, particularly by making sure that all relevant employees are subject to appropriate confidentiality obligations and post-termination restrictions which are drafted clearly and precisely, to protect the employer’s interests. Appropriate restrictions (often for a greater duration) should also be included in business sale or investment documents.

If competitive behaviour is suspected during employment, it should of course be investigated, and appropriate disciplinary action taken (as well as any remedial steps needed to smooth customer relations). If post-termination activity is suspected, then legal action can be taken, provided there is sufficient evidence of the alleged breaches. It is essential to move swiftly and to take advice at an early stage.

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About the author:

Daff heads the employment law department at Manches, giving strategic advice to employers, including business protection. She frequently advises employers and employees about restrictive covenant issues.

Daff also advises employers and senior executives on boardroom disputes, and executive appointments and terminations. The individuals she has advised include senior figures in life sciences, publishing, IT, academia and medicine.

Daff is a member of our multi-disciplinary life sciences team, one of the largest in the Thames Valley, which has a national reputation in this sector and acts for a spectrum of businesses ranging from small innovators to industry leaders.

Do you have appropriate confidentiality obligations and post-termination restrictions at your organisation?