Software supplier preserves sensitive business information with a poorly drafted restrictive covenant
Employers that need to prevent ex-employees from working for competitors will welcome the High Court’s decision in the case of Prophet v Huggett. Here an injunction was granted against a former employee even though the drafting of the post-termination restrictions in his contract made them meaningless.
Huggett was employed as UK sales manager for Prophet, a software developer and supplier in the fresh produce sector. He was responsible for bringing in new business and managing relationships with existing clients. His contract of employment contained restrictive covenants preventing him from using the company’s confidential information, soliciting its customers and competing with it. The contract clause prohibited Huggett from competing with the company for 12 months post-termination “in any area and in connection with any products… with which he/she was involved whilst employed”.
In December 2013, Huggett resigned to join one of the company’s direct competitors. He was initially disingenuous about the reason for his resignation and withheld the name of his new employer, but did eventually confess. Naturally, his former employer was outraged.
Employer and employee exchanged some correspondence, in which the company tried to deter its ex-employee from working for the competitor, warning him that if he did so, it would seek a court injunction restraining him from being involved in competing activities for 12 months. In January 2014, his ex-employer lodged High Court proceedings against Huggett.
The court held that the non-compete restrictions in Huggett’s contract did not restrain him from developing and supplying Prophet’s software products because no competitor organisations would ever be selling them; they would have their own products to sell. It was accepted that this was a clear drafting error in the clause. The court decided that the restriction was intended to prohibit Huggett from competing in the fresh produce sector with the same “or similar” products to those developed and supplied by Prophet. In a move away from the hard-line approach usually adopted in such matters, the court found that inserting the words “or similar” into the clause was a minimal change which was necessary to produce a commercially sensible result.
The court then had to decide whether the slightly re-worded clause was reasonable and enforceable. It clarified that a restriction aimed at absolutely preventing an employee from working for a competitor will generally not be reasonable, and might only be so if it was reasonably necessary to protect confidential information. This will be a question of fact for courts to assess based on the strength of witness evidence.
Although both employer and employee accepted there was only a modest risk of Huggett abusing Prophet’s confidential information, his evidence was seriously undermined because he had downloaded confidential information (including details of the company’s clients, prospective clients and other leads) onto a hard drive before returning his company laptop, even though he had subsequently deleted most of it.
The court held that it was perfectly feasible that Prophet could be in competition with Huggett’s new employer for deals with the same prospective clients and leads, and could use his knowledge of this information for the benefit of his new employer. This was an important and legitimate business interest requiring protection. Huggett argued that, even if this were the case, the enforcement of his re-worded non-compete restriction would prevent him from working for 12 months and would cause his family financial hardship.
The court was unsympathetic to this argument, and held that Huggett had willingly accepted this risk by agreeing to the restriction when he signed his employment contract with Prophet.
While this case provides reassurance to employers that a common sense business approach will probably prevail when enforcing restrictive covenants, it is important to remember that restrictions are incredibly fact-specific and there is no universally acceptable wording. It is always better for employers to invest in carefully - and correctly - drafted restrictions at the outset of an employment relationship, to avoid becoming embroiled in costly and time-consuming litigation further down the line.
Victoria Clark is an associate in the employment team.
Source: People Management, 4 April 2014
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