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Protecting your Business Secrets …Non-compete Covenants and Other Matters
By Christopher J Sherliker

One issue which regularly causes concern for clients is the effectiveness of non-compete covenants, whether in contract employment or business sale agreement, so it may help to have an understanding of the issues before they become a potential problem. Jonathan Silverman explains…

Perhaps it may help if I first illustrate the difficulties of drafting an effective non-compete clause in employment contracts by considering two leading cases.

In Systems Reliability, a worldwide restriction on practising for 17 months was upheld, whereas in Office Angels, a clause preventing ex-employees from working within 1.2 square miles was deemed void as not “appropriate or necessary”. It was relevant that the Claimant’s office was in the City of London itself.

Seemingly poles apart - so where do we go from here?

The apparent anomaly of these cases identifies the need to exercise care when drawing up such clauses. The individual circumstances of a particular case have to be taken into account each and every time. Always consider the facts and what you genuinely need to protect, and then brief us accordingly.

It isn't just the area of restriction; similarly the length of time a restriction is in place has a bearing on whether the Courts will uphold it as reasonable.

Remember that the onus is always on the party seeking to enforce non-compete covenants to satisfy a court that the terms should be enforced – not the other way around.

Making a restriction on not practising within an area is often allowed, but the area defined by the clause must be reasonable considering the particular circumstances of the case. Making the area wider than necessary could place the willingness of the Courts to uphold the clause in jeopardy.

The keyword that recurs is "reasonable". So the interpretation of a clause is imposed against a specific set of circumstances in each case. The type of work involved, the area of restriction, the position of the parties at the time the contract was made, industry custom, the length of restriction and the employee’s place in the company are all taken into account by the Courts.

Whilst you may be reluctant to incur the cost or risks inherent in applying for injunctive relief, it is always worth having a non-compete clause in an employment contract since, without an effective restraint of trade clause, your ex-employee can happily approach known clients with no threat of legal redress; causing havoc or even putting the whole future of the business at risk. Sadly we've seen too many cases of that in recent years.

A cover-all clause for all employees is not, however, the answer. You will face a real problem in Court trying to enforce non-compete clauses seeking to apply blanket restrictions on all of your employees without reference to the different jobs or positions that each has within the company. Quite simply, one size does not fit all; there must be a rational justification for taking covenant from each specific employee.

Ideally, the clause should be redrafted not only for each level of employee, but also for each employee individually, and checked to make sure it is compatible with their specific work and the situation. What business data do they process? What access to customer contacts do they have? And at what level?

Remember the courts may delete words to make sense of the clause, but they will not make substantive alterations.

On balance, the Courts tend to favour the side of the employer, whilst the employee is working for the company but, once he has left, the employee has on his side the right to work and the concept of fair competition.

Do not forget other options:

Confidentiality agreements, although different, have the same aim, namely the protection of the employer’s business. These agreements go hand in hand with non-compete clauses in the arsenal of safeguards with which the employer seeks to surround himself.

While the level of an employee’s skills and knowledge will be material to enforceability, other requirements to prove confidentiality include that the information must have the necessary quality of confidence and also be imparted in circumstances importing an obligation of confidence.

Finally there must have been an unauthorised use of the information causing detriment to the party who communicated it.

Given the difficulties inherent in enforcing non-compete clauses and confidentiality agreements, what other methods can you use to protect your business and business secrets?

Perhaps more difficult to enforce than in the past, a clause entitling you to put an employee on garden leave – where the employee remains on the payroll but does not work for a period of time after “leaving” – can still be a very valuable way to protect you from a disgruntled or overambitious (soon-to-be) ex-employee.

On a practical level, do not forget to guard your IT system so that it is clear who has logged on. This is especially important now, bearing in mind the level of communication carried out solely by email, so also provide a right to check employees’ email.

Inevitably, every business will have to cope with staff turnover, but the key is to try and ensure that the business does not walk out of the door at the same time as a key employee.

Added: 20th December 2010

Christopher J Sherliker is a partner for Silverman Sherliker LLP who provide legal solutions across a spectrum of requirements.  Find out more about Silverman Sherliker LLP.

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