Protecting your Crown Jewels
The power of contractual restrictions preventing former employees from wreaking havoc with customers and sensitive commercial information is often underestimated.
Some clients say to me that they did not think that such restrictions could be enforced. Others assume that they can "cut and paste" restrictions from elsewhere or that general wording can do the trick.
At the risk of sounding like a lawyer trying to drum up business, I need to stress the importance of properly drafted restrictions. The courts will only enforce restrictions if they are reasonable and no more extensive than is needed to protect genuine business interests; they are not permitted to stifle competitive activity.
Useful restrictions include those preventing poaching of customers and colleagues. The anti-customer poaching restrictions can prevent approaching customers and also dealing with them. The other important restriction in relation to high level employees prevents them from working for a competitive business or setting up in competition. These are in addition to restrictions preventing the misuse of confidential information for the benefit of a competitive business.
The most common pitfalls against enforceability are as follows:
- The restrictions are for too long a period which cannot be justified in terms of business protection, e.g. they allow too much time for the employer to recruit a replacement employee and to re-cement relations with that customer;
- Restrictions often prevent outgoing employees soliciting or dealing with customers with whom they have had no previous contact. This is generally unenforceable because the restrictions are designed to protect against the employee making use of business relationships developed during their employment;
- The area of restriction in relation to non competition restrictions is too wide and reaches areas where the employer does not operate. It is therefore important to think about where the customer base and competitors are located when deciding upon the ambit of a restriction. For example, if a business has no dealings in Scotland then a UK wide restriction is unlikely to work.
- Periods of restriction are often in addition to garden leave periods with the result that the cumulative period is excessive, any period of garden leave needs to be subtracted;
- The drafting does not distinguish between senior and junior employees; non competition (rather than customer "non poaching") restrictions are generally unenforceable against junior employees and the time periods and geographic ambit of restrictions should also take into account seniority;
- The enforceability/reasonableness of restrictions is assessed at the time they were agreed and not when they are enforced. So, if restrictions are excessive and unenforceable because an employee was too junior at the time the restrictions are agreed, it does not matter that the restrictions are appropriate when the employer seeks to enforce them because by that time the employee has been promoted; they will still be unenforceable.
In conclusion, neglecting to think about and tailor restrictions to your business and the employees concerned can be the difference between enforceability and serious damage to your commercial interests.
Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.