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Case law: courts reinterpretation of non-compete clauses helps employers - 06/06/2008
Non-compete clauses in an employee's contract, that stop them from working for a competitor after they leave, are unenforceable unless they:
- do no more than protect the employer's legitimate business interests; and
- are reasonable, in both extent and duration, ie they do not unfairly prevent the ex-employee from earning a living
An encouraging trend for employers is that the courts appear to be prepared to consider whether a non-compete clause that is, on the face of it, unreasonable can be construed in a way that makes it reasonable, and therefore enforceable.
Survey the scene
In a recent case, an employee was employed as a surveyor. He worked initially in his employer's valuation services team and then in its healthcare team. He had also occasionally helped colleagues working in other areas of the business, and worked on projects outside the healthcare sector for his employer.
The non-compete clause in his contract of employment said that, if he ceased to be employed, he could not work for any company that had, as part of its business, a "prohibited business". A prohibited business was defined as any business with which he had been "directly and materially" involved for his employer in the 18 months before his contract ended. Clauses like this are common, but have been difficult to enforce in the past.
The employee left and went to work for a competitor, which also operated in the healthcare sector.
Unreasonable!
When his former employer tried to enforce its non-compete clause against him, he argued that the clause would stop him from working for any company which had, as part of its business, a division or department that competed with a part of his former employer's business that he had been involved in, whether or not he worked in that division or department in the competing business.
Given the nature of the industry, and the range of "prohibited businesses" that he had worked in at his former employers, the non-compete clause effectively stopped him from earning a living in his profession. It was therefore unreasonable and unenforceable.
The court says no
The court decided that, if he was right in his construction of the clause, it was unenforceable. However, it decided that, if the non-compete clause could instead be construed as stopping him from working for a competing part of another company (but not a non-competing part) that was not, by itself, unreasonable. The court decided that the clause could be construed that way.
On the employee's argument that he had been involved in such a range of activities for his former employer that there were unlikely to be other businesses that did not carry out at least one of them, the court said that limiting the definition of "prohibited business" to businesses with which he had been "directly and materially" involved in the previous 18 months meant it only caught activities if they amounted to a significant part of his work. The occasional work he had done for colleagues in other parts of the company, or on projects outside the healthcare sector, was not enough. Nor was involvement in any work more than 18 months before he left.
Overall, therefore, the court construed the clause as preventing him from working for a competitor only if he worked in its healthcare business - which was exactly what he was, in fact, doing. Given the employee's knowledge of his former employer's clients and prospects, it ruled that the clause, as so construed, was reasonable and enforceable.
Recommendations
- In industries where competitors may carry out multiple competing activities, consider limiting non-compete clauses so they only prevent employees from working in those parts of a competitor's business that made up a significant part of the employee's work before he left.
- Always take advice on non-compete clauses in any event.
Related Resources
in the Muckle LLP Resource Centre
