Keeping secrets

One issue which regularly causes concern is advising clients on the effectiveness of non-compete covenants, whether in contract employment or a business sale agreement.

The difficulties of drafting non-compete clauses in employment contracts is clearly shown in the cases of Systems Reliability Holdings plc v Smith [1990] IRLR 377 CH D and Office Angels Ltd v Rainer Thomas and O'Connor [1991] IRLR 214.

In Systems Reliability a worldwide restriction on practising for 17 months was upheld. In Office Angels a clause preventing the ex-employees from working within 1.2 square miles was deemed void as it was not 'appropriate or necessary'. It was relevant the claimants' office was in the City of London itself '“ seemingly poles apart.

The apparent anomaly of these cases identifies the need to exercise care when drawing up these clauses and how the individual circumstances of each case must be considered every time. It is essential to 'drill down' with the client to establish the facts and what genuinely should and can be protected.

But the problems lie not only in clauses relating to the area of restriction, similarly the length of time that a restriction is in place has a bearing on whether the courts will uphold it as reasonable.

The onus is always on the party seeking to enforce non-compete covenants to satisfy a court that the terms should be enforced '“ not the other way around.

Making a restriction on not practising within an area is often allowed, but the area defined by the clause must be reasonable looking at the particular circumstances of the case. Making the area wider than necessary could place the willingness of the courts to uphold the clause in jeopardy (Nordenfelt v Maxim Nordenfelt Gas and Ammunition Co [1894] AC 535 HL A).

The keyword that recurs is reasonable. This makes the interpretation of the clause imposed again a specific set of circumstances in each case. The type of work involved, the area of restriction, the position of the parties at the time the contract was made, industry custom, length of restriction and the place in the company of the employee are taken into account by the courts.

While many employers will be reluctant to incur the cost or risks inherent in applying for injunctive relief, it is always worth having a non-compete clause in the employment contract, because, without an effective restraint of trade clause, an ex-employee may be able to approach known clients with no threat of legal redress; causing havoc to the employer and maybe even putting the whole future of the business at risk (Horcat and Garland [1983] IRLR 459).

Rational justification

A cover-all clause for all employees is not, however, the answer. Employers will face a real problem in court in trying to enforce non-compete clauses seeking to apply blanket restrictions on all employees without reference to the different jobs or positions that each has within the company. One size does not fit all; there must be a rational justification for taking covenant from a specific employee.

Ideally the clause should be redrafted, not only for each level of employee but also for each employee individually, and checked to make sure it is compatible with their specific work and the situation. What business data do they process, what access to customer contacts do they have and what level?

Drafting correctly is critical, because, although the courts may delete words to make sense of the clause, they will not make substantive alterations. The 'blue pencil test' only works against employers not for them.

On balance the courts tend to favour the side of the employer while the employee is working for the company, but, once he has left, the employee has on his side the right to work and the concept of fair competition.

Confidentiality agreements

But there are other options: confidentiality agreements, although different, look to the same end, namely the protection of the employer's business. These agreements go hand in hand with non-compete clauses in the arsenal of safeguards with which the employer seeks to surround himself.

In this instance it is (among other matters) the level of the employee's skill and knowledge which will be material to enforceability. Other requirements to prove confidentiality are: that the information must have the necessary quality of confidence and also be imparted in circumstances importing an obligation of confidence '“ in Faccenda Chicken v Fowler [1986] ICR 297, the fact the employees were never told the information was confidential pointed significantly to it not being a trade secret '“ and finally there must have been an unauthorised use of the information causing detriment to the party who communicated it.

These principles which were laid down in Megarry v Coco AN Clark (Engineers) Ltd [1969] RPC 41 Ch D were later approved by the House of Lords in Attorney General v Guardian Newspapers Lt No 2 [1988] 3 WLR 776.

Given the difficulties inherent in enforcing non-compete clauses and confidentiality agreements, in what other ways can the employer be advised to protect his business and business secrets? Although perhaps now more difficult to enforce than in the past, a clause entitling an employer to require for garden leave, where the employee remains on the payroll but does not work for a period of time after 'leaving', can be a valuable way to protect the business from a disgruntled or overambitious (soon to be) ex-employee.

Advise the client to guard the IT system so that it is clear who has logged on, especially important now considering the level of communication carried out soley by email, and also provide a right to check employees' email.

Inevitably every business will have to cope with staff turnover, but the key is to try and ensure that the business does not walk out of the door at the same time as a key employee.