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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 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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6 month restriction on approaching clients did not need to be limited to customers with whom the employee had contact

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In Coppage and another v. Safetynet Security Limited a post-termination restriction purporting to prevent an employee for six months after his employment ended from soliciting all customers of the business during his employment was reasonable, and therefore enforceable, despite not being limited to those who were customers for a limited period of time before termination and with whom he had contact.

Failure to limit restrictions in this way is often a “killer blow” rendering the restriction too wide and therefore unenforceable. Not so in this case. The Court of Appeal, considering the facts, felt that the relatively short restriction (six months) was reasonable and proportionate and the employee was ordered to pay damages of £50,000 as a result of his breach.

Detail

Mr Coppage commenced employment with Safetynet Security Limited in 2009. In 2010, he was promoted to director and entered into a new contract of employment. That contract included a post-termination restriction which sought to prevent Mr Coppage from soliciting customers of Safetynet (where the term “customer” included all customers of Safetynet during Mr Coppage’s employment and not just those who had been customers shortly before termination and with whom he had dealt).

Two years after his promotion, Mr Coppage resigned from his employment and appeared to induce a colleague to do the same. Mr Coppage’s colleague set up a competitive business with Mr Coppage apparently, but not officially, at the helm.

Mr Coppage made 135 calls and sent 175 texts to customers following his resignation allegedly enticing them to transfer their business to the new company. Five customers did so. The Court held that this was in breach of his non-solicitation clause and Mr Coppage’s fiduciary duties, and awarded damages of £50,000.

Mr Coppage appealed to the Court of Appeal, arguing that the failure to limit his restriction to customers with whom he had dealt during a limited period of time before his termination rendered the restriction unreasonable and unenforceable. The Court of Appeal dismissed this argument. It was satisfied that the restriction was reasonable and necessary to protect Safetynet’s legitimate interests. The fact that Mr Coppage’s restriction was, in the Court’s view, short (six months) was particularly relevant.

We suspect the fact that Mr Coppage had launched such a ferocious attack on his former employer’s business would also have weighed heavily in the Court’s mind. It is still safer to limit the customers that an employee should not approach to those with whom the employee has had recent material contact but this case shows that if that is not done, all is far from necessarily lost.

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12 month garden leave clause valid

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In JM Finn & Co v Holliday, the High Court granted an injunction to keep an employee on garden leave for his 12 month notice period. They rejected the suggestion that not sending an employee market information whilst on garden leave was a breach of contract. Whilst 12 months is a long period, the fact that the employee had received a three fold salary increase when agreeing to a 12 month notice period was relevant.

Detail

Mr Holliday joined JM Finn in 1999 as an investment adviser. In 2008, Mr Holliday signed revised contract terms including a triple salary increase, a 12 month notice period, a garden leave clause and restrictive covenants. In 2013, Mr Holliday got a new job with another stockbroking firm and resigned. When JM Finn instigated his garden leave clause for his notice period, he claimed that JM Finn had committed a repudiatory breach of his contract (by not sending him market knowledge briefing notes) and therefore the garden leave/restrictive covenants were invalid and his employment was terminated with immediate effect.

JM Finn successfully applied for an injunction to enforce the restrictions in Mr Holliday’s contract. The High Court said:

Mr Holliday’s repudiatory breach argument was deployed only to avoid his notice period and garden leave obligations; and
In deciding whether to grant the injunction to keep Mr Holliday on garden leave for his 12 month notice period, the judge said that: (i) Mr Holliday agreed to 12 months in 2008; (ii) he had sought legal advice on it and did not argue for a shorter notice period; (iii) it was accompanied by a tripling of his salary; and (iv) a contractor Mr Holliday worked closely with was also on a 12 month notice period.

The Court held that 12 months garden leave was reasonable because JM Finn needed the time to protect its legitimate business interest, which was maintaining a connection with a client base that Mr Holliday had built up over 14 years. The court found that there was a strong risk that Mr Holliday would be able to ‘woo’ his former clients if he were allowed earlier contact with them.

In addition, it rejected Mr Holliday’s argument that his skills would atrophy whilst on garden leave as he would still be able to maintain his market knowledge.

It also rejected his argument that being placed on garden leave would harm his reputation as this was a common practice.

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