12-month non-compete clause enforceable
In Merlin Financial Consultants Ltd v Cooper a 12-month non-compete clause in a “goodwill agreement” was held to be enforceable against a financial adviser, Mr Cooper.
Mr Cooper had joined Merlin Financial Consultants (“Merlin”) in April 2012. On joining, Merlin paid to Mr Cooper a capital payment for the goodwill arising from the transfer of his client funds. He entered into a goodwill agreement which contained a 12-month non-competition restrictive covenant, preventing him from being engaged in any other business which supplied goods/services which competed with the type supplied by Merlin.
At the same time, Mr Cooper entered into an employment contract which contained restrictive covenants preventing him from competing with Merlin for 6 months after employment.
Mr Cooper left Merlin in November 2012 to set up his own business, advising that he intended to continue working with some of Merlin’s clients. Merlin brought claims against Mr Cooper for breach of contract, seeking damages for loss of business. The main question before the Court was whether the restrictive covenant in the goodwill agreement was enforceable against Mr Cooper – it held that it was.
The Court treated the goodwill agreement as a business sale agreement which was entered into between parties of equal bargaining power.
By comparison in an employment contract, the employer arguably has greater bargaining power than an employee hence why restrictive covenants are scrutinised more in an employment contract. For this reason, the law distinguishes between such agreements and the courts are unlikely to intervene in a business agreement scenario.
In the present case, the Court held that Merlin had a legitimate business interest and the 12-month restriction imposed on Mr Cooper was reasonable to protect its interest. Whilst the covenant restricted Mr Cooper in any part of the United Kingdom, in Allied Dunbar v Weisinger (1988) it was held that the financial services industry was a single geographical market.
A further interesting point was one raised by Mr Cooper’s representative, who argued that the Company ought to have done more to mitigate its losses e.g. by applying for an injunction against him, placing him on garden leave etc. The Court concluded that Merlin had acted entirely reasonably in the circumstances – it did not think that an injunction/garden leave etc would have mitigated the Company’s losses in any event.
Comment
The case illustrates the key difference between restrictive covenants entered into in a freely negotiated business agreement and those entered into in an employment contract. It is extremely rare for an employer to have a legitimate business interest that warrants a restrictive covenant of this length, so as to be deemed enforceable against an employee under an employment contract. In most cases, a shorter time period will suffice.
When drafting restrictive covenants it is extremely important for businesses to consider the nature of the business interest they are seeking to protect and ensure that any covenant goes no further than necessary to protect that interest, or else it is likely to be deemed unenforceable.
It would be unusual for an employee to enter into a business sale agreement, or a “goodwill agreement”, save for circumstances like the present case where the employee is very senior and effectively has/had ownership of the company.
On a side note, it is interesting that the Court recognised that seeking an injunction against an employee may not always be the most beneficial/useful approach, particularly if there is not much that can be done to prevent a loyal customer-base following an ex-employee. It will be welcome news for employers to hear that they may not be penalised at the mitigation stage of their claim for not seeking injunctive relief against an ex-employee.