Non-compete clause unenforceable due to short notice period during probation
The High Court has ruled an employer’s claim that post-termination restrictions are needed to protect client relationships and client confidential information can be undermined if the employee’s employment can be terminated on short notice (including during a probationary period) (Quilter v Falconer).
Mrs Falconer’s employment contract with Quilter had a nine month non-compete restriction and 12 month non-dealing and non-solicitation restrictions. She was employed subject to a six month probationary period, during which either party could terminate the employment on two weeks’ notice.
Mrs Falconer was recruited by Quilter as a financial adviser to take over a book of 181 clients from one of Quilter’s employees who was retiring. She quickly became unhappy in the new role and just before the end of her probationary period, she gave notice to leave Quilter in order to work for a competitor, Continuum. She was placed on garden leave for her two week notice period. During her brief time at Quilter, only 120 of the 181 clients had been transferred to her and before being placed on garden leave she had only contacted 40 of them.
Quilter knew she had gone to work for Continuum but did not act on this, seemingly being content to let Mrs Falconer work for Continuum as long as she did not provide advice to their clients. Nearly five months’ later, when it became clear that she was advising their clients, Quilter sought an injunction and brought claims against Mrs Falconer and Continuum to enforce the non-compete and the client restrictions.
By the time the trial took place, Quilter had only incurred loss of client revenues of £39,000, but continued to fight the case to full trial because of the legal costs involved (Quilter’s legal fees alone were close to £500,000).
Was the non-compete enforceable?
The High Court ruled that the nine month non-compete restriction was wider than reasonably necessary to protect Quilter’s client relationships and client confidential information and it was, therefore, unenforceable. A less onerous non-dealing with clients restriction would have adequately protected Quilter’s client relationships and client confidential information.
Probationary period and short notice period affect enforceability
Quilter had accepted in Court that it took 12 months or more to build a personal relationship with and become a trusted adviser of a client (and merely having access to a client book did not automatically mean that a relationship existed or would be built).
The Court noted that it is necessary to assess whether a covenant is reasonable at the time it is entered into. The fact that Mrs Falconer was subject to a six month probationary period and that her employment could be terminated on two weeks’ notice during that time made it foreseeable that her employment might end after only a short period, when she would have had little opportunity to build up client relationships. The short notice period also suggested the employer did not consider it needed protection. The High Court indicated that the shorter the notice period, the less important to the company the employee’s services would appear to be and the more junior her position was likely to be.
More senior employees subject to same/shorter restrictions
The High Court also noted that employees senior to Mrs Falconer had the same or shorter restrictions, despite having greater access to confidential information. Quilter had not been able to explain why it needed longer restrictions for Mrs Falconer, a more junior employee with less access to confidential information. The High Court found that this indicated that Quilter had given Mrs Falconer an “off the shelf” and “one size fits all” contract used for more senior employees without considering its suitability.
It was also relevant that non-compete restrictions were not standard in this industry for employees such as Mrs Falconer. Neither Continuum nor Mrs Falconer’s previous employer, Tilney, included non-compete restrictions in their contracts. This suggested they were not reasonably necessary.
Non-dealing restriction would have provided adequate protection
The High Court ruled that the non-compete restriction was also too wide because it prevented Mrs Falconer advising clients who had never been clients of Quilter. Quilter had no legitimate interest in preventing this. Its legitimate business interests in its client relationships and client confidential information could have been properly protected simply by using a less onerous non-dealing restriction, as it was easy to identify the clients Mrs Falconer had dealt with during her time at Quilter. The High Court also found that the geographical scope of the non-compete was too wide as it effectively prevented Mrs Falconer from working anywhere in the UK where Quilter (a nationwide firm) had offices, even if she had not had dealings with any of its clients in that area. Quilter was only entitled to protect its clients in the region where Mrs Falconer had worked while employed by Quilter.
What about the non-dealing and non-solicitation restrictions?
The High Court ruled the non-dealing and non-solicitation restrictions were also unreasonable and unenforceable.
They covered clients with whom Quilter had terms and conditions of business at any point during the 18 months prior to the termination of Mrs Falconer’s employment (i.e. including the full year before Mrs Falconer had even started work for Quilter), provided Mrs Falconer had had material personal contact with them or was materially concerned with them.
The Court noted this would prevent her from dealing with or soliciting a client with whom terms of business had been in place long before her employment commenced and terminated and with whom she had had contact on only one occasion. It also noted that the restrictions prevented her from dealing with or soliciting anyone in the book of clients she had taken over, even if she had never met or spoken to them as she would still have been “materially concerned” with them.
This was wider than they needed. The Court noted that client reviews took place on a six-monthly or annual basis. A restriction which only covered Quilter’s clients in the six or 12 month period before termination might have been justified but the 18-month period was too long.
Confidential information and other breaches
Despite this, the High Court found that Mrs Falconer had breached her employment contract with Quilter in relation to other matters. She had scanned confidential information into her personal laptop, had not shown Continuum her post-termination restrictions (despite her contract requiring her to do so), had attended an induction seminar at Continuum during working hours while on garden leave and had also contacted Quilter’s clients while on garden leave.
Although the High Court found that Mrs Falconer had breached her contract, it ruled that her new employer, Continuum, had not induced this breach. Quilter’s claim for inducement against Continuum was undermined by the fact that Continuum had sought a regulatory reference for Mrs Falconer from Quilter’s HR department. Quilter had provided the reference but had not seized this opportunity to make them aware of her post-termination restrictions.
What does this mean for employers?
The Court’s view of this case was substantially influenced by the fact that lengthy and broad post-termination restrictions applied to Mrs Falconer even if she left her employment relatively quickly, and that she was employed on a short notice period. Although the Court’s decision might yet be appealed, it is noteworthy when considering how contracts should be drafted.
Employers might wish to consider including drafting so that post-termination restrictions do not apply until after an initial period of employment has passed or consider reducing the length of the restrictions for an initial period. This is especially relevant where the contract includes a provision for probation during which the employment can be terminated on short notice. Employers should also consider longer notice periods for employees who are subject to post-termination restrictions.
It is settled case law that a Court will assess the reasonableness of a restriction at the time the employee agrees to it. On this basis, even if an employer is seeking to enforce a restriction after many years of employment, the fact that employment could have been terminated on short notice during a probationary period might in future be argued to make the restriction unenforceable as it was unreasonable at the time it was entered into.
The case also serves as a reminder that contracts should be tailored to suit each role and the level of confidential information the employee will have access to. A one size fits all approach does not work.
Employers would also be well-advised to make employees’ new employers aware of any existing post- termination restrictions that could affect their future employment activities.
What else does the future hold?
The government is considering reforms to non-compete restrictions and has recently issued a consultation paper looking at two proposals:
- Changing the law so that non-compete restrictions are only enforceable if the employer continues to pay remuneration during the restricted period
- Banning non-compete provisions altogether
It is also considering reforms to non-solicitation, non-dealing and non-poaching restrictions.
Click here for further information.
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