Data Security & Employee Breaches (.communicate, November 2006)

An ex-employee who has been privy to client details and trade secrets may be an attractive asset to a competitor. The natural response is to look for contractual protection.  Can restrictive covenants help?

Restrictive covenants are by definition anti-competitive, in restraint of trade and, on the face of it, contrary to public policy in allowing free movement of labour. If an ex-employee contests such a covenant the onus is on the employer to justify it.

Generally, an employer is not entitled to protection against mere competition from ex-employees. So, where a non-compete clause is enforced, it is to protect a “legitimate business interest” – for example, client connection or confidential information – and not simply to stifle or prevent competition.

Standard types of restrictions used by employers include:

• Restrictions on the former employee working for a competitor.
• Non-solicitation clauses: Aimed at preventing the former employee from poaching clients/customers of the former employer;
• Non-dealing clauses: These prevent a former employee from dealing with former clients/customers, regardless of which party approached the other;
• Non-solicitation of staff clauses: Usually restricted to employees that the former employee had material dealings with for a set period prior to the termination of employment.

The employer must also think about the:

1. Geographical area of any restriction,
2. Length of time of the restriction;
3. Type of interest being protected. A firm’s business secrets may be granted greater protection than information regarding its customers.

If an employer believes an ex-employee has breached a restriction, the usual remedy is for interim (temporary) interdict, which is a holding order until evidence can be heard at a later date. The court asks whether there is a serious claim on the face of it (the “prima facie case test”). Even if there is, the court also asks whether the ‘balance of convenience’ favours granting or refusing the order. Relevant factors might be:

1. Whether damages at a later date would be a sufficient remedy
2. Delay
3. The overall conduct of both parties.

The most recent authoritative Scottish case is the 2004 decision of P R Consultants ( Scotland ) Limited v Mann. A PR company sought interdict against a former employee. The contract prohibited both soliciting and enticing away clients of the company and also working “on the account or business of or otherwise contracting or dealing with such clients”.  The Court favoured a commonsense approach and the case establishes the following general principles for Scottish restrictive covenants:

1. A covenant in restraint of trade is deemed unenforceable unless it is reasonable in the interests of the parties and in the public interest.
2. Covenants between an employer and employee will be viewed more strictly by the court than other forms of covenant where some financial consideration has passed.
3. For a restraint to be reasonable it must afford no more than adequate protection.
4. An employer is not entitled to seek protection against mere competition from a former employee. Trade secrets and old established customers may be legitimate objects of concern.
5. An employee may have acquired additional skills and knowledge through his employment but that belongs to him and cannot be protected by the employer.
6. An employee has a duty of confidence, but once employment terminates the duty is restricted to not disclosing trade secrets and trade information.
7. The proper approach is to ascertain what legitimate interest the employers are entitled to protect and then to see if restraint is required.

As ever, each case depends on its own facts and therefore appropriate advice should be taken at the appropriate time – now there’s a real “Lawyer’s answer”!

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Paul Motion

(Article created in November 2006 and may not have been updated at time of reading.)