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Restrictive covenants in employment contracts - the tide is turning

22 July 2014

A High Court case has recently demonstrated that the courts are more willing to uphold restrictive covenants.

Employers will welcome the recent judgment of the High Court in Prophet plc v Huggett in which it took a highly flexible approach to the interpretation of a non-compete clause. When read in its original form, the clause made no sense; the former employee was prohibited from working in a competing business “in connection with any products…which he was involved with whilst employed”. Prophet was a software developer so there could never be an occasion in which a former employee would use its products; rather, if they joined a competitor, they would be working on competing, similar products.

Historically, the courts have only used the “blue pencil” test to delete words in order to make a clause narrower and, therefore, more reasonable. What was surprising in this case was that the judge was prepared to amend the clause by adding the words “or similar thereto”. This widened the restriction to cover software products similar to Prophet’s thereby making it enforceable. Consequently, Mr Huggett was prevented from working for a competitor for 12 months.

This is the latest in a line of cases in which the courts have been more willing to uphold restrictive covenants. This trend has been driven in part by cases involving more senior, sophisticated employees who have had more equality of bargaining power over their terms of employment. However, there does appear to be a more general move towards taking a common-sense approach to such cases. This belies the often perceived wisdom that restrictions are unenforceable. This case shows that the courts will even strive to uphold non-compete clauses, which they have described as “the most powerful weapon in the employer’s armoury”.

That is not to say that employers can now take a lax approach to drafting their restrictive covenants. The courts will still expect to see that a legitimate business interest is being protected, and that the restriction goes no further than is necessary to protect that interest. These components are unlikely to change for the foreseeable future. It is therefore important for employers to review their restrictions and consider if their nature and duration is appropriate to their business and for each employee to which they apply.

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Matthew Clayton MA LLM (Cantab), CIPP/E
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Mathew Clayton
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