Restrictive covenants on sales: lessons for sellers and buyers

Restrictive covenants on sales: lessons for sellers and buyers

Two recent cases in the High Court concerning high profile names have looked at restrictive covenants given by sellers.  We look at the key points from those cases.

In Millen v Karen Millen Fashions Ltd & Anor [2016] EWHC 2104 (Ch) the fashion business was sold in 2004 and the agreement contained a number of restrictive covenants as to Karen Millen’s future conduct.  She agreed not to use or attempt to use in the course of any business any IP rights relating to the Karen Millen business.  She was also prevented from using the name “Karen Millen” or any name confusingly similar to it in connection with any business that was similar to or competed with the Karen Millen business anywhere in the world.

On planning a return to the industry, the claimant agreed not to use the trademarks “Karen” or “Karen Millen” in the UK or EU but sought to expand her business in China and the US and asked the court to agree that the proposed activity would not breach the restrictive covenants.  A key question was whether the goodwill and intellectual property rights being protected under the restrictive covenants were those in existence in 2004 or as they had developed in the future.  The court held that goodwill in the Karen Millen name was not “frozen in time” and had to be assessed as at the time of the conduct of the claimant.  It was held that the parties must have contemplated in 2004 that the business would develop and expand over time and the judge noted that this formed part of the factual matrix against which the agreement would be construed. In effect, Karen Millen was prevented from using her own name.

For entrepreneurs selling a business that features their own name, note that they may be restricted from use of that name or similar names if such use competes with the developed goodwill of the business in the future. 

In Rush Hair Limited v Gibson-Forbes [2016] EWHC 2589 (QB) Rush agreed to buy the business of a former franchisee, Ms Gibson-Forbes (GF), paying £25,000 on completion of the sale with deferred consideration of £15,000 payable six months later.  Rush refused to pay the deferred consideration when due, arguing that GF had breached restrictive covenants in the agreement (in each case given for a period of two years from completion):

  • not to employ named individuals who had been working at the salons; and
  • not to compete with the Rush business within a two mile radius around the salons.

GF argued that the two year time period for the non-solicitation covenant and the two mile radius for the non-compete covenant went further than reasonably necessary and that both covenants were therefore unenforceable.  GF also argued that the non-solicitation covenant applied to her personally but not to her activities through her limited company.

Unsurprisingly, the Court had little sympathy with GF’s argument that she could escape the restrictive covenants by acting through a limited company.  Duration of two years was not unreasonable in the context of an acquisition agreement where buyers are keen to protect goodwill.

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