How the courts apply the strict rules surrounding non-compete clauses

Employers worry about employees, particularly senior managers, defecting to a competitor and taking confidential information, clients or key staff with them.

Information about a competitor’s business plans, clients or price lists can be highly attractive for a recruiting business or to an individual hoping to set up business in competition with their current employer. Restrictive covenants are clauses in contracts of employment or other agreements which restrict an employee’s ability to act in competition with the employer for a fixed period after the end of employment. These clauses will be void for restraint of trade (and unenforceable) unless the employer can show it has a legitimate proprietary interest to protect and the clause goes no further than is reasonable to protect it.

In Law by Design v Ali, the employee was a solicitor who worked for a small boutique law firm which did employment law work, mainly for NHS employers in the North West. Over the years, the employee was promoted to director and the senior management team. In January 2021, she signed a service agreement agreeing not to compete with the employer for 12 months following her termination, in relation to those parts of the business in which she was involved within the last 12 months of her employment. She also agreed not to poach clients or staff or misuse confidential information. In return for signing the agreement she received a significant pay rise. She indicated to a colleague at the time that she didn’t ‘like’ the 12-month restriction but wanted to take the money. Just a few months later, in May 2021, the employee resigned to work for a much larger competitor. In the last 12 months of employment, she had worked almost exclusively for NHS clients who had been assigned by the employer (rather than being self-generated). She said the non-compete clause was too wide, lasted too long and was unenforceable.

The High Court found that the non-compete clause was reasonable. The clause was limited to those parts of the business in which the employee had worked in the year before her termination. The 12-month duration was also reasonable for the business to find another lawyer to replace the employee. That new recruit would want to work for a small firm in a specific geographical region and then be required to work out their notice period. The employee conceded that it would take the employer 12 months to achieve this. The High Court also granted an injunction to enforce the covenant. The employee had recently agreed the clauses in the months before her departure. She didn’t like but accepted the terms in return for more money. She was an experienced employment lawyer used to dealing with such clauses and understood the bargain. The employee had told the new employer that she planned to move ‘her’ clients to the new firm unless the covenants were enforceable. The non-compete clause was necessary due to the difficulties in policing and enforcing the confidentiality covenants. The employee was free to join a firm that did not compete with the employer for NHS client work in the North West, in order to legitimately protect the employer’s business.

This case gives insight into how the courts apply the strict rules surrounding non-compete clauses in situations where they are needed the most. In this case, the employee was a senior employment lawyer who knew exactly what she was agreeing to when she agreed the terms of the service agreement, and 12 months of restriction, in return for a big pay rise. The non-compete clause was restricted to the kind of work she did in the region where the employer operated. It was not too wide and did not stop her working elsewhere for other clients including NHS bodies. The employee’s intention in this case was to move about a third of the employer’s revenue to a new employer. The Courts enforced the employer’s reasonable covenant aimed at protecting its business interests in a reasonable way. The employee had banked on this small employer not having the financial resources or the stomach to fight her move to a bigger business and was ultimately proven wrong.

For further advice on non-compete clauses, please contact Oliver Tasker who will be able to advise.