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Understanding the Operation of Non-Compete Clauses in England and Wales

May 10, 2024

Employers often use post-termination non-compete clauses in contracts of employment to restrict departing employees.

Their main purpose is to protect the employer’s legitimate business interests, such as trade connections, trade secrets and the maintenance of workforce stability. However, the enforceability of these clauses hinges on their reasonableness and necessity in protecting these interests without unduly restraining trade.

Their reasonableness is determined with reference to six key principles set out in the Court of Appeal's judgment in Office Angels v. Rainer-Thomas and O'Connor [1991] IRLR214.

Key Principles GoverningNon-Compete Clauses

1. Legitimate Business Interests are Protected  

There must be an established proprietary interest of the employer that is capable of protection, such as trade connections with customers or suppliers, trade secrets and confidential information, and the maintenance of the overall stability of the workforce. The non-compete clause is only justified if these specific interests are at risk.

2. Assessing Reasonableness at the Time of Contract Signing

The clause must be reasonable at the time the contract is signed, taking into account the circumstances prevalent at that moment. This principle ensures that changes occurring after the contract signing, such as employee promotions, cannot affect the intent and reasonableness of the clause.

3. Differentiating Between Employment and Commercial Contracts

The nature of the contract influences the level of scrutiny of non-compete clauses. Clauses within employment contracts are often viewed more critically than those in commercial agreements, given the typically unequal bargaining power between an employer and employee.

4. Protection Beyond Mere Competition

The clause should not solely aim to prevent competition but should protect against the misuse of confidential and sensitive information that could offer an unfair advantage to a competitor. In other words, an employer would need to establish that the former employee’s knowledge of and exploitation of trade secrets, customer lists, or other confidential data for personal gain or the benefit of a new employer could have a detrimental effect on its business.

5. Ensuring no more than Adequate Protection

As ruled in Herbert Morris Ltd v Saxelby [1916], a non-compete clause should not offer more protection than is necessary. It must be carefully constructed to safeguard the interests of the employer without going too far.

6. Severability should be a Tool of Last Resort

This principle can be relied upon when drafting wider covenants than reasonably necessary, but only as a last resort given its reliance can lead to significant legal costs.

Enforcement Steps that are taken

When it comes to enforcement, employers typically begin with a solicitor’s letter demanding compliance and warning of legal action if this is not forthcoming. If the employee does not comply, the employer might apply for an interim injunction to prevent the employee from joining a competitor until the case can be fully resolved in court. An employer may also add the competitor as a defendant, on the grounds that they are encouraging the breach of contract.

Should an interim injunction be granted, the employee might face significant legal costs, and equally, if the injunction is not obtained, the employer may be responsible for the costs. Due to the high stakes and costs involved, many disputes are resolved through negotiation or mediation, where one outcome may be a reduction in the period of the non-compete.

Non-compete clauses are a powerful tool for employers but must be used judiciously to balance the protection of business interests with the rights of employees to pursue their careers post-termination. Employers and employees must tread carefully to ensure fair and legal compliance with established legal principles.

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