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Court upholds 12 month non-compete restriction

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The High Court held that a 12 month non-compete restriction entered into as part of a sale of goodwill against a financial adviser was enforceable. The court allowed this long post-termination restriction on the basis that the goodwill agreement in place between Mr Cooper and Merlin was nearer to a business sale agreement than an employment contract.

Before working for Merlin, Mr Cooper had developed an extensive client list. Merlin Financial Consultants Limited hired Mr Cooper as a financial adviser. Mr Cooper and Merlin entered into two agreements. The first, an employment contract, contained a post-termination restriction preventing Mr Cooper from competing for six months after the termination of his contract but only prevented Mr Cooper from contacting clients introduced by Merlin. The second, a goodwill agreement, allowed Merlin to purchase the goodwill of Mr Cooper’s client base and receive future income from it. It contained a 12 month post-termination non-compete clause. However, there were drafting errors in the goodwill agreement as it did not define the clients that Mr Cooper was restricted from dealing with.

After working for Merlin for some years, Mr Cooper gave notice in order to set up a business with another former employee of Merlin. He was not placed on gardening leave. On the last day of his employment, Merlin wrote to Mr Cooper reminding him of his post-termination restrictions. Mr Cooper responded informing Merlin that he intended to continue to work for the clients he had brought to Merlin. Mr Cooper’s solicitors subsequently wrote to Merlin challenging the validity of the post-termination restrictions.

Merlin brought a claim for breach of contract against Mr Cooper claiming damages for loss of business. The High Court held that the non-compete restrictive covenant was enforceable against Mr Cooper and that he pay damages to Merlin. It found that the fact that the goodwill agreement did not define the clients that Mr Cooper was restricted from dealing with did not affect the validity of the restrictive covenant. While the court can be reluctant to grant long post-termination restrictions on employees, it found that a 12 month post-termination restriction was reasonable in this case because the goodwill agreement was nearer to a business sale agreement than an employment contract and therefore the parties had better equality of bargaining power.

Merlin claimed damages for two years after Mr Cooper left on the grounds that had he not breached his contract, they anticipated that they would have retained 100% of his clients in the first year and 70% in the second. However, the High Court did not agree with this quantification as even if Mr Cooper had complied with his non-compete clauses, some of the clients would have been likely to leave in any event because of their pre-existing connection with Mr Cooper.

Interestingly, the court did not accept Mr Cooper’s arguments that Merlin could have mitigated its loss by placing him on gardening leave and applying for an injunction to prevent his contact with clients. The High Court held that Merlin had acted reasonably and that it had been entitled to make use of Mr Cooper’s skills rather than place him on gardening leave and disrupt the service to its clients.

Merlin Financial Consultants Ltd v Cooper [2014] EWHC 1196 (QB)

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Repeating a restrictive covenant in an undertaking

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The High Court held that it was not proportionate to order an injunction against the former employees of Capgemini to enforce their post-termination restrictions. The restrictions, if enforced, would have prevented the employees from working for a competitor of Capgemini who had been awarded the contract that Capgemini had lost. The court, with a view to the fact that there was no prospect of Capgemini regaining the contract and the pending expiry of the restrictive covenants, held that damages were an adequate remedy and refused to grant the injunction.

The defendant, Mr Krishnan, and two of his colleagues were employed by Capgemini India Private Ltd and Capgemini Financial Services UK (‘Capgemini’). Their contracts had a post-termination restriction preventing them from dealing with customers with whom they had had business dealings or whose confidential information they had had access to in the last six months of their contract for six months after the end of their employment.

The employees were working on a Vision Plus Service for First Data and their contracts were due to end in March 2014, however, the employees resigned on notice in August 2013 when Capgemini lost the Vision Plus Service contract to Infosys Ltd. After their resignations, they began work for Infosys. Capgemini wrote to the employees in January 2014 seeking undertakings that they would observe the post-termination restriction and advising that they would seek an injunction if they would not. The employees, after seeking advice from lawyers, gave Capgemini these undertakings to avoid the financial risks of the injunction proceedings (which could have included the costs of Capgemini). Infosys then told the employees that they would meet the costs of litigation on their behalf. The employees therefore subsequently and subsequently informed Capgemini that they were withdrawing their undertakings.

Capgemini issued a claim for an injunction to prevent the employees from working for Capgemini which the High Court refused to grant. It held that the real point for it to consider was whether Capgemini had proved that it was appropriate to protect its interests with an injunction and that while it was arguable that the employees had commercially sensitive information, because Capgemini had lost the Vision Plus Service contract and there was no chance of it being recovered (even if the employees abided by their undertakings) it would not be useful or proportionate to issue an injunction. The High Court also had regard to the fact that the post-termination restrictions were near their expiry and was unconvinced by Capgemini’s assertion that their losses could not be compensated by damages.

Capgemini India Private Ltd v Krishnan and others [2014] EWHC 1092 (QB)

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Court order allows imaging and inspection of ex-employees’ computers

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The High Court granted an order allowing an employer to appoint a computer expert to inspect and take images of the computers of two former employees after information came to light in the course of tribunal proceedings that, in breach of their employment contracts, the employees had misused confidential information belonging to their employer during their employment.

Ms Turley and Mr Buckley were employees of Warm Zones, a not for profit company who delivered energy advice to households. During their employment, they had access to Warm Zone’s database which contained information about householders. Their employment at Warm Zones ended and they joined a competitor of Warm Zones, UK SS Renewal Energy Services Limited (UK RES).

Ms Turley had brought employment tribunal proceedings against Warm Zones following her dismissal. During the course of these proceedings, Warm Zones discovered documents which suggested that Ms Turley and Mr Buckley had details of their database information and that they had or were prepared to disclose this to UK RES whilst they were employees of Warm Zones.

Warm Zones applied for an interim injunction to inspect and image the computers of Ms Turley and Mr Buckley. Despite claims from Ms Turley and Mr Buckley that they were talking up the data in their possession, the High Court granted the injunction holding that there was commercial value in the database and that damages would have been an inadequate remedy. The fact that the searches were undertaken at Warm Zone’s expense is likely to have influenced the court’s decision to give the injunction.

Warm Zones v (1) Sophie Turley (2) Alex Buckley [2014] EWHC 988 (QB)

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Court refuses musicians specific performance of their contracts

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Musicians in a play at the National Theatre made an application to the High Court for specific performance of their contracts (i.e. that the High Court should make an order that they be reinstated rather than simply get damages) after their dismissals following a decision that their performances would be replaced by recorded music. The High Court refused to grant the application because such orders should only be granted in exceptional cases and on this occasion, the musicians’ interests would be adequately protected by damages.

The musicians were hired by the National Theatre in March 2009 to play their instruments for the production of War Horse. These contracts stated that the arrangement could be terminated by: (i) two weeks notice from the musicians to the National Theatre; (ii) two weeks notice from the National Theatre to the musician of the closure of the production; or (iii) one week’s notice to the musician within 26 weeks of press night. In March 2013, the National Theatre decided for creative reasons to use recorded rather than live music. After negotiation, the musicians’ roles were drastically reduced but their contracts were not terminated. One year later, the National Theatre sent letters to the musicians giving them notice of the termination of their contracts on grounds of redundancy in two weeks. The reason for this redundancy was the decision to use recorded music in productions.

The musicians made a claim to the High Court for breach of contract and sought specific performance of their contracts. Specific performance is a remedy which requires the party breaching a contract to perform its obligations under it, rather than financially compensating the other party. The High Court refused this application but found that the musicians had a strong claim for breach of contract given that the termination reason was not listed in their employment contracts. It refused a remedy of specific performance on the grounds that the musicians’ case was not an exceptional one and there had been a loss of confidence between the National Theatre and the musicians because of the dispute.

Interestingly, the National Theatre also made the argument that an order for specific performance would interfere with its right to artistic freedom (which is protected under article 10 of the European Convention of Human Rights (ECHR): the right to freedom of expression) and prevent it from continuing the play in the way they thought artistically preferable. Article 10(2) allows an individual’s rights to freedom of expression to be restricted to protect the rights of others. However, the High Court held that it would not be necessary or proportionate to interfere with the rights of the National Theatre to protect the rights of the musicians’ freedom of expression as the musicians could still continue to play their instruments elsewhere.

Ashworth and others v the Royal National Theatre [2014] EWHC 1176 (QB)

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Court of Appeal rules that poor treatment of vulnerable migrant workers because of their immigration status was not race discrimination-outs?

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The Court of Appeal has held that the poor treatment of vulnerable migrant workers because of their immigration status is not race discrimination.

Miss Onu was a Nigerian migrant worker who was exploited by her employers who failed to pay her minimum wage, did not provide appropriate accommodation and told her that if she tried to leave she would be arrested and imprisoned. Miss Onu brought race discrimination claims. After bringing these claims, her employer had telephoned her sister and said that ‘she would suffer for it’ resulting in Ms Onu bringing a victimisation claim.

The EAT held that Ms Onu had not been discriminated against directly because of her race and found that her poor treatment was not the immediate cause of her treatment which had been because of her subordinate position and earlier life. It upheld Ms Onu’s victimisation claim holding that the fact that her employer had not directly referred to Ms Onu’s discrimination claim in his call did not mean that there was no victimisation.

Mrs Taiwo was working on a Nigerian domestic worker visa for a Nigerian man and his wife. She was paid less than minimum wage, subjected to verbal and physical abuse, denied breaks and had poor living and working conditions. She resigned claiming direct and indirect race discrimination. These claims were rejected by the tribunal which held that: (i) there was no direct race discrimination because she had not shown that the treatment she received was because of her nationality, rather, the reason was her status as a vulnerable migrant worker; and (ii) there was no indirect race discrimination because she did not show that people of Nigerian origin were more likely to be employed on a domestic visa in comparison to persons of non-Nigerian origin. The EAT upheld both of these arguments.

On appeal, the Court of Appeal held that there was no race discrimination in either case. In relation to direct race discrimination, it found that on the facts it was clear that the employers were influenced by their employees’ immigration status in their treatment of them and whilst there was sufficient evidence of this, that did not amount to a finding that they were mistreated because of their nationality. The Court of Appeal also upheld the EAT’s decisions in both cases that there was no indirect discrimination. Indirect race discrimination occurs where an employer operates a provision, criterion or practice which although theoretically applicable to all nationalities, in practice affects one or more groups worse. The court said the mistreatment of migrant domestic workers was not a provision, criterion or practice and therefore the terms of the Equality Act 2010 would not extend to it. However, the Court of Appeal did uphold Ms Onu’s claim for victimisation and held that the tribunal ought to have considered that he was aware of the race discrimination proceedings when he made the call to Ms Onu’s sister.

Onu v Akwiwu and another; Taiwo v Olaigbe and another [2014] EWCA Civ 279

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EAT holds TUPE transfer has taken place after share sale

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Normally, a share sale would not constitute a TUPE transfer because the identity of the employer does not change. However, the courts have accepted that there may be a transfer of an undertaking to a holding company or a sister company following a share sale. In this case, the control exercised by the parent company of the purchaser of the target’s shares and extensive integration exercises carried out by it led to the judgment that there had been a TUPE transfer.

In this case, Jackson Lloyd (Jackson) had 400 – 450 employees who undertook the repair and maintenance of social housing. The annual election of employee representatives had not taken place ahead of the transfer so no employee representatives had a mandate on the date the shares were sold. The shares in Jackson were purchased by Mears Ltd, whose parent company was Mears Group plc (Mears Group). No consultation process took place. Following the share purchase, Mears Group employees were appointed to the Jackson board and a team from Mears Group was deployed to Jackson’s sites to oversee the integration process. An integration consultant was tasked with reviving the Jackson brand using Mears Group’s systems, policies, procedures, methods and services.

The EAT held that the acquisition of Jackson’s shares by Mears Limited did not amount to a TUPE transfer but Jackson’s employees had subsequently been transferred to Mears Group by way of a business transfer. The tribunal pointed to the fact that Mears Group had imposed major changes on Jackson including its own systems and that Mears Group had control over Jackson.

Jackson Lloyd Ltd and Mears Group plc v Smith and others UKEAT/0127/13

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Court overlooks drafting error to enforce restrictive covenant

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In Prophet plc v Huggett [2014] EWHC 615, the High Court overlooked a drafting error to enforce a 12 month restrictive covenant which, if interpreted literally, would have been unenforceable. The clause restricted the employee from being engaged or employed in connection with products he was involved with during his employment. As these exact same products would not be sold by a competitor, the clause was effectively useless but the court treated this as a drafting error adopting what it believed to be the true intentions of the parties to cover products similar to those that the employee had dealt with whilst employed.

Mr Huggett was a sales manager who was a software developer and supplier in the fresh produce industry. He was responsible for developing new business and managing existing company accounts. His contract, if read literally, prevented him from working for a competitor in connection with products that he had sold whilst at Prophet. Following a request from Mr Huggett, Prophet released him from his 12 week notice period because he said that he had been offered a role heading up European marketing in food manufacturing. However, it emerged that he would be working for a direct competitor of Prophet.

Prophet brought proceedings against Mr Huggett; however, on a literal construction of the restrictive covenant, Prophet were unprotected because none of their products would be sold by a competitor. The High Court held that by inserting the words ‘or similar thereto’ after the reference to products sold by Prophet a commercially sensible result could be reached and that this was the probable true intention of the parties.

While the courts will not uphold a covenant purely for the purpose of protecting an employer from competition, it will uphold covenants where they are necessary to protect trade secrets or confidential information. In this case, the court found that Mr Huggett, who had transferred confidential documents to himself, lacked credibility and the court was not assured that he had not copied confidential documents and it was likely that he had retained some memory of confidential information.

The court also queried the usefulness of the general principle that injunctions will only be granted where damages are not be adequate in employment law given that damages would be unpredictable and in each instance Prophet would have to establish a separate claim. Arguments about financial hardship caused by a 12 month injunction were raised by Mr Huggett, however the court found that he had already accepted this risk by agreeing to the restriction in his contract.

Prophet plc v Huggett [2014] EWHC 615

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Error in employer’s letter to disabled employee not relevant when considering objective justification

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In Crime Reduction Initiatives (CRI) v Lawrence UKEAT/0319/13, the EAT held that a poorly drafted letter inviting the claimant to a disciplinary meeting when it should have referred to a capability meeting which had the effect of deterring her from attending was not relevant to the question of whether her employer had been objectively justified in deciding to dismiss her.

Ms Lawrence was suffering from post-natal depression and occupational health at CRI assessed her as having a long term disability and unable to return to work. CRI then began a capability procedure. Unfortunately, the letter inviting Ms Lawrence to this hearing was phrased as though it were an invitation to a disciplinary procedure. Ms Lawrence declined to attend the meeting which proceeded in her absence and afterwards her employer dismissed her on the grounds of ill-health.

Following her dismissal, Ms Lawrence brought a claim for unfair dismissal and discrimination arising from disability. The tribunal upheld her unfair dismissal claim on the basis that the letter had discouraged her from attending her capability hearing. On a majority ruling, the tribunal also upheld her discrimination claim on the basis that the dismissal was not objectively justified because it was not a proportionate means of achieving a legitimate aim. It held that although it had a legitimate aim of managing its workforce and delivering a service, Ms Lawrence had not been consulted appropriately. However, the tribunal found that Ms Lawrence would have been fairly dismissed if she had attended the meeting so only made a basic award for her unfair dismissal and an injury to feelings award of £750.

On appeal, the EAT confirmed the decision in HM Prison Service v Johnson [2007] IRLR 951 that procedural questions are irrelevant to dealing with objective justification. It held that the letter was procedural and did not relate to the decision to dismiss Ms Lawrence and, given that the tribunal had made a finding that the dismissal was inevitable and pursuant to a legitimate aim, it was not relevant to a ruling on objective justification.

However, employers should be wary of such letters as had the employee argued that the letter was a detriment rather than the decision to dismiss, the case could have been decided differently.

Crime Reduction Initiatives (CRI) v Lawrence UKEAT/0319/13)

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