Monday 7 April 2014

The Enforced Covenant

Despite the oft repeated myth of recruitment consultants that restrictive covenants are seldom enforced or are unenforceable, the reported cases tend to tell a different story. Another such case emerged from the Chancery Division in March - often they are in Queen's Bench.K3 stood behind him and was prepared to undertake to the court that
David Donaldson QC the judge
It concerned Mr Huggett, a sales manager in the software for the fresh produce industry.  He does not get a good press for credibility in the report, but tellingly his new employer was prepare to undertake that
(1) until 2 January 2015 it will not permit or encourage the Defendant to act in breach of the Clause 20 covenants against solicitation and dealing and disclosure or use of confidential information (2) it will pay to Prophet any award of damages or costs ordered by the court arising out of this matters, if not previously satisfied by Mr Huggett.
It was to no avail, the former employer Prophet got its injunction to enforce the broader Clause 19 covenant preventing Mr Huggett working in a competing business for one year, despite considering the hardship  involved and the possibility that damages could be an alternative remedy under the Shelfer principles, that are now increasingly discussed post Enforcement Directive in relation to IP matters and which have recently been considered by the Supreme Court in Coventry v Lawrence another nuisance case. In this case the discretion was not exercised.

The covenant was interpreted generously. As drafted, a proviso said it would only operate to prevent the employee being involved in a business selling the Prophet products, which indeed he would not. As enforced it prohibited Mr Hugget from being involved in the provision of business process computer software designed for the fresh produce industry. The judge would have been happier with adding or similar to the original wording but Mr H's counsel does not seem to have been able to disagree with the Prophet amendment.

The court was persuaded that this covenant was reasonably necessary to protect trade secrets or confidential information. Technically a business  cannot be prevented from competition by an ex-employee.  Note that partners (not paying NICs) are not employees but owners and don't have that protection. To most of us the effect of this covenant was a non-compete clause. The trade secrets were just details of a producer on the market for such software. Nevertheless it was held reasonable. The fact that Mr Huggett had downloaded a large quantity of Prophet data did not help the credibility of his arguments that the databases were of little significance. The judge concluded that the risk was real, not fanciful, but that it did not greatly exceed the low threshold. Even so Mr Huggett cannot now work for a year to protect these nebulous secrets.

No doubt he wishes he could have mediated a compromise rather than encountering the black and white result of a court judgement.