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Firm's non-competition covenant 'too broad to be enforceable'

Posted: 26th June 2013   In: Business Employment

Non-competition covenants can be a helpful way to protect your business by restricting an employee’s ability to set up a rival company and poach some of your customers.

They have to be drawn up with great care, however: if the restrictions are not tight enough they may not be effective; but if they are too restrictive they may be judged unenforceable, as happened in a recent case before the High Court.

It involved a firm of financial advisers and one of its employees who was subject to a covenant which prohibited him from “directly or indirectly being engaged or concerned in any business or activity of a direct competitor”.

The employee’s work involved him having access to information about the firm’s clients. He resigned and started working for another company whose business included the provision of financial services.

Shortly afterwards, two of the old firm’s clients moved to the employee’s new company. Four of the staff who had worked with him also joined him.

The firm sought to enforce the covenant to prevent the former employee from working for his new firm for another six months. The employee submitted that the covenant was unenforceable as a restraint of trade.

The court found in favour of the employee. It held that a covenant must be shown to be no wider than reasonably necessary to protect a firm’s legitimate business interests.

In this case, the covenant was unreasonably broad. It not only prevented the employee dealing with clients when working for a competitor, it also prevented him being involved in management, regulatory compliance, training, research into new products and other fiscal planning services.

There was no justification for such general restrictions. The covenant was a restraint of trade and was unenforceable.

Please contact Sarah Liddiard if you would like more information about the issues raised in this article or any aspect of protecting your business.

Posted by: Sarah Liddiard
Corporate Commercial
Luton Office