The High Court recently found that a 12-month non-compete clause in a solicitor’s employment contract was enforceable. The Court did not, however, enforce the non-compete restriction in the shareholders’ agreement to which the solicitor was a party, which was drafted in a slightly different way. The High Court was of a view that the non-compete restriction in the shareholders’ agreement was wider than was reasonably necessary to protect the law firm’s legitimate interests.
Background
Ms Saira Ali, a solicitor, was employed by the firm Law by Design Ltd (LBD Ltd) for eight years. She was also a shareholder of the firm. In 2016, she entered into a shareholders’ agreement in exchange for 3% of the shares in LBD Ltd. The shareholders’ agreement contained restrictive covenants, including a 12-month non-compete restriction.
Following the departure of two key members of staff in 2019, LBD Ltd sought to secure a period of stability and growth by offering Ms Ali a significant salary increase in exchange for her entering into a new employment contract, containing new restrictive covenants, including a 12-month non-compete restriction.
Less than three months after signing the new employment contract, Ms Ali tendered her resignation. She was required to work out her notice period. She secured employment with a competitor of LDB Ltd, Weightmans LLP, to commence upon the expiry of her six-month notice period. LBD Ltd issued a claim for interim and final injunctive relief.
Drafting of the non-compete restrictions
The non-compete restriction in the employment contract read as follows: “[Ms Ali] covenants with [LBD Ltd] that she shall not… for 12 months after termination, be involved in any capacity with any business concern which is (or intends to be) in competition with any restricted business…” For these purposes, “restricted business” means “those parts of [LBD Ltd] with which [Ms Ali] was involved to a material extent in the 12 months before termination". The definition of “restricted business” limited the operation of the restriction to only those parts of LBD Ltd’s business with which Ms Ali was involved to a material extent prior to her departure. In the High Court’s view, this limitation was necessary to ensure that the scope of the covenant was reasonable.
Conversely, the same limitation did not feature in the drafting of the non-compete restriction in the shareholders’ agreement, which stated: "Each B shareholder [i.e. including Ms Ali] severally undertakes with each other shareholder and, as a separate undertaking, with [LBD Ltd] that he will not… during the restricted period… carry on or be engaged, concerned or interested in, or assist, a business which competes, directly or indirectly, with a business of [LBD Ltd] as operated at any time during the relevant period…” For these purposes, “restricted period” means the 12 months following cessation and “relevant period” means the 12 months prior to cessation. Accordingly, the restriction purported to prevent Ms Ali from joining a firm which competes with any part of LBD Ltd’s business, even those parts of LBD Ltd’s business with which Ms Ali had no material involvement and in relation to which she did not have access to, or possess, confidential information. In the High Court’s view, this made the non-compete restriction in the shareholder’s agreement wider than is reasonably necessary for the protection of LBD Ltd’s legitimate interests and, therefore, unenforceable.
Nature and duration of restriction considered necessary
The Court chose not to exercise its discretion to withhold injunctive relief, despite recognising that Ms Ali was in financial difficulty. It considered that, in the circumstances of this case, the non-compete covenant is, “a necessary and practicable solution to the difficulty of policing and enforcing the confidentiality covenants” in both the shareholders’ agreement and the employment contract. The Court also considered that the duration of the restriction, 12 months, is a reasonable period for the protection of LBD Ltd's legitimate business interests, given the length of time needed to find, successfully recruit, train and integrate a solicitor in a small and niche firm. The Court was also of the view that the 12-month period reasonably reflects the “shelf life” of the confidential information and Ms Ali's ability to remember it.
Important reminder for employers
This case, Law By Design Ltd v Ali, emphasises the need for the careful drafting of restrictive covenants to ensure that they are no wider than is reasonably necessary to protect the employer’s legitimate business interests. What may appear to be a small difference in drafting could result in a covenant being unenforceable and leaving your business exposed to unfair competition from former employees.
The case is a useful reminder for employers to identify the business interests that they are seeking to protect and to tailor any restrictive covenants to go no further than is necessary to protect such interests. As in this case, where the scope of the covenant is considered reasonable, there may also be legitimate reasons to support a lengthy period of restriction (although, generally, the longer the duration of a non-compete clause, the less likely it is to be enforceable).
Kerry Garcia
Sarah Taylor