Why the government’s proposal to limit non-competes to three months may not be the end of the story
12 October 2023
A new High Court decision suggests that employers may still have scope to protect their interests after an employee’s employment has ended, even if non-compete clauses are limited by the government to three months.
Earlier this year we wrote about the potential implications of the government’s plan to limit the length of non-compete clauses in employment contracts to three months. In a new case that will be of particular interest if the government does legislate to limit the length of non-competes, the court considered whether to issue interim injunctive relief to enforce a three-month non-compete clause in an employment contract and number of interesting points arose.
Application to enforce a non-compete clause
City Site Solutions Limited (City Site), a recruitment agency in the construction sector, brought an application for an urgent injunction against three former employees and a newly created company they set up to compete with City Site. By the time of the hearing two of the employees had given undertakings not to compete, so no further relief was required against them.
Liam Baker, the first defendant (and most senior employee) resisted the application. He argued that the post-termination restrictions (PTRs), including the non-compete clause, weren’t effective for two reasons: because he had never signed the contract and was still negotiating the terms of an exit bonus at the time of his departure; and even if there was a contract, City Site had materially breached it, so he had a claim for constructive unfair dismissal, and the PTRs shouldn’t apply to him.
Liam Baker also argued that the correct legal test for deciding the enforceability of the PTRs was that for a mandatory injunction; which course is likely to involve the least risk of injustice, as set out in the Nottingham Building Society v Eurodynamics case, rather than the classic American Cyanamid test: (i) is there a serious issue to be tried; (ii) are damages an adequate remedy; and (iii) where does the balance of convenience lie.
Interim injunctive relief granted
The Court found, with a high degree of assurance, that at final trial City Site would be likely to establish that Liam Baker was subject to the terms of his unsigned employment contract. Between September 2021 (promotion to Business Development Manager) and June 2023 (resignation) there was no communication about the employment contract, only discussions about a second contract and the terms of an exit bonus. During this time Liam Baker continued to work for City Site and in his letter of resignation did not question the terms of his employment contract.
The Court also found that there was ‘considerable force’ in City Site’s position that Liam Baker’s constructive dismissal claim was nothing more than ‘a self-serving attempt to avoid the effect of the express PTRs’, particularly given the significant evidence of the defendants’ wrongdoing. The Court was not satisfied that there was a compelling case to undermine the likelihood that City Site would establish the enforceability of the PTRs at trial.
Further, the court was satisfied that City Site satisfied either test (American Cyanamid or Nottingham Building Society) to be granted interim relief.
Tactics for employers to consider
One point that isn’t addressed expressly in this judgment, is that the non-compete clause (unlike the rest of the PTRs) only had three months to run and a decision on interim relief was, in effect, a final decision on that clause. This is because practically it would be very unlikely (even with an order for a speedy trial) to have a final hearing before the non-compete clause expired. Where the interim application is effectively seeking final relief (because of the limited time left to run on the PTRs), the Court usually applies a higher threshold when deciding whether to grant the injunction. It considers the underlying merits of the claim, not just whether there is a serious issue to be tried. In another recent case featuring the recruitment industry, the employer was still successful in seeking an interim injunction under the higher threshold test, because the evidence against its former employee was so strong (for more detail see our article on the case here).
As and when the government’s planned limit comes into force, the City Site decision could be helpful for employers as an example of where the lower threshold of American Cyanamid will still apply at the interim application stage if only one of the covenants expires within three months and the rest continue to apply for longer allowing sufficient time for a speedy trial to be listed.
City Site also sought a ‘springboard injunction’ preventing the defendants from taking ‘unfair advantage’ of the unlawful use of City Site’s confidential information. The Court acknowledged the potential overlap between Liam Baker’s non-compete clause and the springboard sought, so City Site was granted an initial springboard to run until one-month following provision of affidavit evidence about City Site’s confidential information. However, it was left open to City Site to apply for further springboard relief which could extend beyond the expiry of the three-month non-compete clause. This offers employers hope that, where employees misuse confidential information as was the case here, the Court may grant springboard injunction to give further relief, even after the three month non-compete clause has expired.
City Site Solutions Limited v Baker and others – judgment available here.