The court considered the law relating to post employment restrictive covenants. Gloster J said: ‘(1) Covenants in Restraint of Trade are prima-facie unlawful and accordingly are ‘to be treated with suspicion’ see per Laddie J in Countrywide Assured Financial Services Limited v Smart ChD 7 May 2004.
It is for the covenantee to identify a legitimate business interest that is capable of protection.
It is for the covenantee to show that the covenant extends no further than is reasonably necessary to protect that interest and the court will enforce the covenant only if it goes no further than is reasonably necessary to protect the trade interest or other legitimate interest of the previous employer: see, for example Scott LJ (as he then was) in Scully UK Limited v Lee [1998] 1 ICR 259
The Court will scrutinise more carefully covenants in employment contracts, as opposed to ordinary commercial contracts where it will more readily uphold the covenant as being agreed between parties of assumed equal bargaining power.
A covenant should be assessed for its validity at the date upon which the contract was made.
A covenant will be upheld if the employer can show that it has been designed to protect his legitimate interests that, properly construed, the covenant extends no further than is reasonable necessary to protect those interests: see Mason v Provident Clothing Supplies Limited [1913] AC 724; Herbert Morris v Saxelby [1916] 1 AC 688.
If a covenant can be construed in two ways, one of which leads to its invalidity, then the Court should prefer the alternative construction: see Turner v Commonwealth and British Minerals Limited [2000] 1 IRLR 114 at para. 14.
A covenant should be interpreted in the context of the agreement as a whole so as to give effect to the intention of the parties.
The legitimate interests which justify the imposition of a covenant in restraint of trade are (i) trade connection, (ii) trade secrets or confidential information akin to a trade secret; (iii) staff stability.
Trade connection is established where it can be shown, by virtue of his position with the employer, the employee will have recurrent contact with customers or, as in this case, suppliers, such that the employee is likely to acquire knowledge of and influence over the customers or suppliers.
An employer has a legitimate interest in maintaining the stability of his workforce.
In order to determine whether an item of information is a trade secret or confidential information akin to a trade secret, the Court should have regard to a number of factors as described by the Court of Appeal in Faccenda Chickens v Fowler [1987] 1 Ch 117 at pages 137B to 138H, including the nature of the employment and the nature of the information itself. It is clear that this must be a trade secret or information of such a highly confidential nature as to require the same protection. This was explained by Lord Shaw in Herbert Morris v Saxelby (supra) at page 714 as follows: –
Trade secrets, the names of customers, all such things which in sound philosophical language are denominated objective knowledge – these may not be given away by a servant; they are his master’s property, and there is no rule of public interest which prevents a transfer of them against the master’s will being restrained. On the other hand, a man’s aptitudes, his skill, his dexterity, his manual or mental ability – all those things which in sound philosophical language are not objective, but subjective – they may and they ought not to be relinquished by a servant; they are not his master’s property; they are his own property; they are himself. There is no public interest which compels the rendering of those things dormant or sterile or unavailing; on the contrary, the right to use and expand his powers is advantageous to every citizen, and may be highly so for the country at large. This distinction, which was also questioned in argument, is just as plain as the other.
An excellent concrete example of the latter point may be found in the present case. The second head of the injunction claimed is ‘from divulging or communicating . . information as to the customers or affairs of the plaintiff company and from otherwise divulging or using such information’. This [is] purely objective, and it was with exact correctness made the subject of a separate claim’
A trade secret has also been defined as information used in a business, the disclosure of which to a competitor would be liable to cause real or significant harm to the owner of the information and the dissemination of which has either been limited or not encouraged: see Lansing Linde v Kerr [1991] 1 WLR 251 at 260B to D per Staughton LJ. Other factors include whether the employer impressed upon the employee the confidentiality of the information (the attitude of the employer towards the information provides evidence which may assist in determining whether the information can properly be regarded as a trade secret); whether the relevant information can be easily isolated from information which the employee is free to use; and whether it is information, the use of which a man of average intelligence and honesty would regard as improper.
It is clear that an area or non-competition covenant may be justified where the interest to be protected is trade secrets or confidential information akin to a trade secret, notwithstanding that there is an obligation present in the contract not to divulge confidential information post termination. Such a covenant, the authorities show, may be justified because it can be difficult for a former employer to police compliance with an obligation relating to trade secrets or confidential information akin to a trade secret. In addition, such a covenant can be justified by the fact that there are serious difficulties in identifying precisely what is, or what is not, a trade secret, or confidential information akin to a trade secret; see Littlewoods Organisation v Harris [1997] 1 WLR 1472 at pages 1479A-E, where Lord Denning said:
‘But experience has shown that it is not satisfactory to have simply a covenant against disclosing confidential information. The reason is because it is so difficult to draw the line between information which is confidential and information which is not: and it is very difficult to prove a breach when the information is of such a character that a servant can carry it away in his head. The difficulties are such that the only practicable solution is to take a covenant from the servant by which he is not to go to work for a rival in trade. Such a covenant may well be held to be reasonable if limited to a short period.’
Likewise in CR Smith Glaziers Limited v Greenan (1993) SLT 1221, the court said at page 1223F:
‘. . it is well established that a prohibition against disclosing trade secrets is practically worthless unless it is accompanied by a restriction upon the employee possessed of secrets against entering the employment of competitors.’
See also Printers and Finishers Limited v Holloway [1965] 1 WLR 1 at page 6; Faccenda Chicken Limited v Fowler [1987] 1 Ch 117 at pages 137G-138G; Turner v Commonwealth and British Minerals Limited [2000] IRLR 114 at para 18; Kall-Kwik Printing v Rush [1996] FSR 114 at page 124. However, the courts will scrutinise their covenants with particular care because of their broad anti-competition effect, enquiring whether a lesser form of restriction (for example a non-solicitation clause) might not have given the employer sufficient protection and have been a more proportionate form of embargo than one which bars out competitive employment in the whole of the United Kingdom; see Office Angels Limited v Rainer-Thomas [1991] IRLR 214 paragraphs 45-58 and Countrywide Assured Financial Services Limited v Smart (supra).
In any event, a balance has to be struck between the degree of protection legitimately required by the Claimant (which is permissible) and the degree of restriction or legitimate use of skill and knowledge and legitimate competition (which is impermissible); see Office Angels (supra) at para 58. In considering the anti-competitive effect of the area covenant, the court should consider whether the existence of the provision would diminish the Defendant’s prospects of employment; Stenhouse Australia Limited v Phillips [1974] AC 391 at page 124C-D.
In cases where a restrictive covenant is sought to be enforced the trade secret (or confidential information akin to a trade secret) must be particularised sufficiently to enable the court to be satisfied that the employer has a legitimate interest to protect, but no more than that; see Scully UK Limited v Lee (supra) [1998] IRLR 259 at para 23.
The covenant to protect the use or disclosure of trade secrets (or confidential information akin to a trade secret) does not depend upon the employee taking documents or memorising the contents of documents. It can properly apply to trade secrets (or confidential information akin to a trade secret) which the employee may carry away in his head; see, eg, Polly Lina Limited v Finch [1995] FSR 751 at page 757.’
Judges:
Gloster J
Citations:
[2004] EWHC 2799
Jurisdiction:
England and Wales
Cited by:
Cited – Intercall Conferencing Services Ltd v Steer QBD 15-Mar-2007
The claimant company sought an interim injunction to prevent the defendant, a former employee, from working for a competitor in breach of a clause in his contract and from divulging any confidential information. The defendant said that the . .
Cited – Kynixa Ltd v Hynes and others QBD 30-Jun-2008
Complaint of breaches of employment contracts and shareholders’ agreements. . .
Lists of cited by and citing cases may be incomplete.
Employment, Contract
Updated: 28 April 2022; Ref: scu.269954
