Working For The Competiton

 Signing a contract of employment with a new employer is usually a positive event in a person’s career.    Whatever the profession it signifies new prospects and an opportunity to take a step up the career ladder.   Many new employees will be looking forward to the new challenges that their new job provides as well as thinking about what they can bring to the business that they’re about to join.

 

In most cases, consideration of what happens when the job comes to an end could not be further from the employee’s mind.  However, in today’s job market, gone are the days when an employee will spend their entire career with one employer.

That said, employers usually draft employment contracts, particularly for those in senior roles, in a way that restricts what their employees can do when their job comes to an end, for whatever reason.

“Restrictive Covenants” are common features of employment contracts.   These can take many different forms.   They can prohibit ex-employees soliciting the employer’s customers, they can seek to prevent an ex-employee poaching other employees, they can take the form of confidentiality clauses designed to stop ex-employees divulging details of their former employer’s business.  One particular form of restrictive covenant, which has recently drawn the attention of the Royal Court, purports to restrain ex-employees from working for a competitor of their former employer, usually for a set period – say 12 or 24 months.

This type of restrictive covenant, known as an “anti-compete” clause can cause particular difficulties in a relatively small place like Jersey.   In the professions, seniority often goes hand in hand with increased specialisation.   If a senior employee ceases to work for a particular employer, the job opportunities that are then open to that individual may well be within a relatively narrow band of businesses.    Their skills and experience are likely to be of most value to competitors of the former employer.   Does the fact that there is an anti-compete clause in their contract mean that they have to stay at home twiddling their thumbs until the period has expired?  Not necessarily.

Just because an employee has signed up to a restriction which seeks to limit what they can do afterwards does not mean that the employer can enforce such a restriction.  No doubt many employers take the view that the terms of the contract are sacrosanct and enable them to exercise control over ex-employees even after they have ceased to take home a pay packet.   Some contracts go as far as getting the employee to agree that the restrictive covenants are enforceable, no doubt with the intention of avoiding any legal argument at a later stage.  In most cases it is the employer who has the bargaining power and who puts the contract in standard form before its employees for signing.

The employer may feel they have good reason to be confident.   A central principle of Jersey contract law is the French maxim “la convention fait la loi des parties”, which effectively means that the terms of the agreement to which the parties have signed up are given very great weight indeed.   Restrictive covenants in employment contracts, however, are an important exception to that maxim.

There is good reason why this should be the case.  A person’s right to earn a livelihood is considered very important from a legal perspective.  Equally important is to ensure that the law is not used to stifle the sort of competition which is both necessary and healthy in the commercial world.  The need to encourage competition is particularly acute when one has a large and powerful business which dominates a particular sector.

Jersey contract and employment law, which in this area closely mirrors that of England and Wales, has been astute to ensure that the Courts are not used by employers, who may well be powerful and wealthy enough to afford to bring legal proceedings, to stifle competition.

If any employer seeks to enforce a non-compete covenant against an ex-employee, the Courts will proceed very cautiously indeed.   It is certainly not the position that the Royal Court will rule that the employee signed up to the condition and is therefore bound by it.  The employer is likely have to justify why the non-compete clause is necessary.   It will have to show that there is confidential information that the ex-employee has which it needs to protect.

The crucial distinction that the Royal Court will consider is the line between knowledge and information that belongs to the employer that it is entitled to protect and the general skills and experience of the employee.   A clear case would be where an employee becomes privy to trade secrets during the course of his or her employment.  The recipe for Coca Cola or the precise blend of Colonel Sanders’ KFC chicken coating are obvious examples.  An employer would be legitimately aggrieved if an ex-employee ran off with this knowledge and took it to another soft drinks manufacturer or even to the local take-away.   Equally an employer would be aggrieved if an ex-employee walked out the door to a competitor and handed them their hard earned customer list.

On the other hand an employee may, in the course of his or her employment develop their skills and experience to such an extent that they become a more marketable commodity in the job market.  A Coca Cola employee on the production line may become particularly adept at repairing a piece of equipment on that production line when it goes wrong.   He or she may develop systems that make the production line work more efficiently.   Such an employee gains experience which is not unique to the production of Coca Cola.   Similarly an advocate at a law firm might have the benefit of a wide and varied caseload which enables him to develop and hone his courtroom skills.  The fact that he has become a very accomplished courtroom performer does not justify his firm preventing him from going to work for a competitor law firm.

When one ventures into the complexities of modern business, the distinction becomes a difficult one to draw.   It was this issue with which  the Royal Court had to grapple in the case of CPA Limited v. Keogh and another, in which judgment was handed down at the beginning of May.

In that case the Plaintiff was a large and well-known company, based in Jersey, but whose activities spanned 200 jurisdictions worldwide.  It offers patent services.   Both of the defendants were ex-employees of the company.    The first defendant was a senior patent attorney.   The second defendant had been a senior employee in the Plaintiff’s treasury function. Their contracts of employment contained “anti-compete” clauses which restricted them from working for a competitor for 12 months after they ceased to be employed by the Plaintiff.   There were a number of other restrictive covenants in their contracts, including prohibitions on disclosing confidential information or poaching customers, but those were irrelevant to the case.   The “anti-compete” covenants were the focus of the arguments before the Royal Court.

Having left the Plaintiff’s employment both defendants went to work for a business which was said to be in competition with the Plaintiff.  They did so before the “non-compete” covenants had expired.   There had been correspondence between both defendants and the Plaintiff on this issue prior to the Court proceedings in which each defendant had made it clear that as far as they were concerned, the non-compete covenants did not apply.

Nevertheless each defendant was served, without notice, with an injunction preventing them from working for their new employer.  The Plaintiff’s lawyers had gone to the Bailiff ex parte, which means without giving notice to the defendants, and obtained injunctions against them.  These were interim injunctions which bound the defendants until the matter could be finally decided by the Royal Court.   In practice it would take many months before a final decision would be arrived at.  The interim injunctions were therefore very important because by the time the Royal Court finally decided the matter, the 12 month restricted period would have expired, in the case of the first defendant, and all but expired in the case of the second.   If the interim orders remained in place the Plaintiff would effectively have got what it wanted without a full trial taking place.   Faced with that order, which had been imposed without first hearing from the defendants or their lawyers, they applied to discharge the injunctions.

The Royal Court took the view that the way in which the Plaintiff had gone about obtaining the injunction was not appropriate.  It thought that the defendants should have been brought to Court and given an opportunity to put their case before they were prevented from earning a livelihood.  The Court said “we can think of nothing more drastic than removing a person’s employment or means of livelihood from them and there must be very good reason to do so without notice”. .    The Court ruled that the simple fact that the injunctions had been obtained without the defendants being heard was sufficient to discharge them.  This provides a salutary lesson to employers as to the consequences of running off to Court and getting an order without allowing the defendants to put their case.

The Court then went on to consider whether, having heard from both sides, it should re-impose the injunctions. Because of the length of time that the matter would take to come to trial, the Court, somewhat unusually where interim injunctions are concerned, considered who was more likely to win at trial.

The key issue for the Court was whether either of the defendants had information which could properly be considered the property of the Plaintiff and which the Plaintiff needed to prevent them disclosing, whether advertently or even inadvertently to a competitor – i.e. their new employer.

It was clear that the first defendant had occupied a senior and prominent legal position with the Plaintiff.  In this position he was involved in many different aspects of the Plaintiff’s business.  He knew how the Plaintiff’s business worked.  Did this mean that he was in possession of “trade secrets” or other information that belonged to the Plaintiff?  The Royal Court found this a difficult question to answer (and it has to be borne in mind that it was working from the witness statements before it and did not hear evidence – something that would only happen at trial).

What the Royal Court did make clear is that a Plaintiff must be specific about the information that justifies the protection of a non-compete covenant.   Quoting an English case the Royal Court said that “it is not sufficient for the employer to assert a claim that he is entitled to an accumulated mass of knowledge which he regards as confidential”.  It does not follow that just because someone occupies a very senior role that they can legitimately be prevented from working for a competitor.  The argument made on behalf of the first defendant was that the Plaintiff could not show any information (such as trade secrets) worthy of protection.  Although the Court did not finally decide the matter it thought that there was “very considerable force” in that argument.

The Court had much less difficulty with the case of the second defendant.  She was a highly experienced and respected banking professional who had gained an enviable reputation working for businesses on the Island over her thirty five year career.  The Court found that it was that experience that she brought to the Plaintiff’s treasury function.  It thought it highly unlikely that the Plaintiff would be able to show, at an eventual trial, that she took away with her information which belonged to the Plaintiff and which justified the protection of an injunction based on the non-compete clause.

In the second defendant’s case the court did not re-impose the injunction because, although it had ten months or so still to run, it did not think that the Plaintiff would be able to justify it at trial.  Effectively it was not likely to be in the public interest to restrain her from earning a livelihood based on the skills she had acquired throughout her career.

Although the Royal Court considered the first defendant’s case to be more finely balanced, it concluded that the injunction should not be re-imposed, not least because at the time of judgment it only had two and a half months or so left to run. Ultimately the Royal Court lifted both injunctions and the defendants were able to return to their work with the Plaintiff’s competitor.

What lessons emerge from this case?  Just because there is a restrictive covenant in an employment contract does not mean that the Royal Court will enforce it.   The Court will look very carefully as to whether it is in the public interest and it will consider whether the employer really requires protection.   What’s more the Court will expect to hear both sides before taking the drastic step of imposing an injunction.  Employers should think very carefully before obtaining injunctions ex parte.  There has to be a real urgent basis for doing so.  If there isn’t there is a risk that the injunctions will be discharged on that ground alone.  If this happens the employer is likely to find itself saddled with paying the ex-employee’s costs as well as compensating them for the period when the injunction has prevented them from working.   Equally, employees served with legal papers alleging breach of a restrictive covenant should not panic but seek specialist legal advice as a matter of urgency.

Advocate Simon Thomas and Dilly Wright, Legal Assistant represented both of the defendants in this case.

 

Simon Thomas
Advocate
simonthomas@bakerandpartners.com

 

Dilly Wright
Legal Assistant
dillywright@bakerandpartners.com
 
May 2015

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