Case update (2): Restrictive covenants – non-compete clauses

Background: Post-termination restrictive covenants are clauses which restrict an ex-employee’s ability to compete with the employer for a certain period. These clauses will be void (for being in restraint of trade) and unenforceable unless the employer can show it has a legitimate business interest to protect and the clause goes no further than is reasonable to protect it.

These covenants are generally contained in employment contracts, directors service agreements, settlement agreements or commercial contracts (such as shareholder agreements). Usually covenants in shareholders agreements are more likely to be considered reasonable and enforceable than in employment contracts because they are negotiated in a commercial context and there is a relative equality in bargaining power between the shareholders.

There are different kinds of restrictive covenant depending on what business interest an employer is aiming to protect. To stop employees joining a rival or setting up in competition a ‘non-compete’ clause is needed. As these clauses can be very restrictive on an employee’s ability to find work, they are generally more difficult to enforce than other restrictive covenants, such as those which restrict dealing with customers or soliciting employees.

If an ex-employee is not willing to comply with a non-compete clause, the employer can seek an injunction from the court to enforce compliance. However, the court will only do so if the clause goes no further than reasonable to protect its legitimate business interest.

Facts: The employee, Ms Ali, was employed by Law By Design Ltd (a small boutique law firm focusing on employment law work for mainly NHS employers in the North West of England).

In 2016, Ms Ali entered into a shareholders agreement that included a non-compete restrictive covenant. This said that she could not be engaged, concerned or interested in, or assist, a business which competes, directly or indirectly, with a business of the company in an area in which it had operated in the previous 12 months.

In 2018, Ms Ali was promoted to director and in January 2021 she signed a new service agreement which contained a 12-month non-compete clause. Ms Ali received a substantial pay rise in return for signing the agreement. The non-compete clause prevented Ms Ali’s involvement in a ‘restricted business’ for 12 months after the end of employment (meaning ‘any company in competition with Law By Design in the areas Ms Ali had been involved to a material extent in the 12 months prior to the termination of employment’). This was a narrower non-compete restriction than in the shareholders agreement.

In May 2021 Ms Ali resigned (with six months notice) to work for a national law firm which also provided services to NHS clients in the North West of England.  She also  prepared a seven-page business plan in which she referred to ‘transitioning’ clients generating annual fee revenue of around £250,000 (over a third of its annual turnover) from Law By Design to her new employer.

When Law By Design asked Ms Ali to agree to comply with the non-compete restrictive covenants in both her shareholder and service agreements, she refused on the basis they were unenforceable due to their broad scope and duration. Law By Design applied to the court to enforce both covenants.