12 month non-compete clause upheld by Court of Appeal

Thomas v Farr plc and Hanover Park Commercial Limited 2007

Mr Thomas was the managing director of a company called Farr plc. This is an insurance broker specialising in providing services to social housing companies. His contract contained a clause stating that he could not compete for a period of 12 months after he left. The contract also contained clause seeking to prevent solicitation of customer and against using confidential information. Mr Thomas resigned following a company restructuring saying that he had been demoted by being moved to a subsidiary company. He then sought to work for a competitor. He claimed breach of contract in the High Court. He also asked for a declaration that he had been constructively dismissed and a declaration that the non-competition clause was an unreasonable restraint of trade and therefore unenforceable.

The claim that the 12 month non-compete clause was unenforceable was dealt with as a preliminary issue by the High Court. It held that the clause was enforceable. Mr Thomas appealed and the Court of Appeal upheld the decision against him. The Court of Appeal took into account the fact that he was the managing director and that as such he had overall responsibility for running the business. It said that he was party to all major strategic and operational decisions and that as such he had knowledge of and access to confidential information.

When considering restrictions, the general rule is that they are void as they are in illegal restraint of trade and therefore against public policy. However, the courts recognise that some legitimate interests can be protected by reasonable clauses. This means that if a covenant is found to be necessary to protect an employer’s legitimate business interests and is no wider than necessary to protect that interest then it will be enforced.

Although the types of business interests capable of protection are not fixed the usual ones that are protected are customer connection and goodwill, trade secrets and confidential information and the maintenance of a stable workforce (no poaching). Preventing competition is not a legitimate interest but a non-compete clause may be upheld if it may be the employer’s only means of protecting the business. An example of where such a clause may be upheld is where the employee has highly confidential information.

Another general rule is that such clauses may not be upheld if there is a better way of enforcing the restrictive covenant. One of the things the Court took into account was the difficulty of actually policing such clauses. The High Court took into account the fact that Mr Thomas was the managing director, that he had had sensitive confidential information which would be strategically helpful to a competing new employer and that although solicitation of clients was unlikely to be carried out by Mr Thomas himself staff below him could. This meant that there were practical problems in policing the non-solicitation clause.

In Mr Thomas’s case the Court of Appeal decided that Farr had a legitimate business interest to protect. It decided that even though Mr Thomas’s contract also contained non-solicitation and confidentiality restrictions these wouldn’t adequately protect the ex-employer’s legitimate interests.

When considering a restriction, the courts will rule against the clause if it is wider than necessary to protect the legitimate interest. It is therefore crucial that restrictive covenants are drafted carefully so they are no wider than is reasonable to protect the legitimate interest. Although there is a limited ability for courts to ‘cross out’ parts of a restriction, the general rule is that if it is unreasonable the whole clause fails. This means that the courts will not redraft the unenforceable to make it enforceable.

In Mr Thomas’s case the Court of Appeal had to decide whether the clause was no wider than necessary to protect legitimate interests. The court decided it was not too wide as it was limited to social housing so didn’t prevent Mr Thomas working in any other insurance section. In addition, it didn’t prevent him working in social housing as long as he was not in competition with his ex-employer. Finally, it had to consider the length of the restriction. In drafting restrictions, one has to consider what interest the clause is seeking to protect and what the business cycle or activity relating to that interest is.

In deciding this point the Court of Appeal decided that the 12-month restriction was reasonable since most housing association insurance policies were for periods longer than 12 months. This was the length of time that the ex-employer would take to do business again with all of its customers. If the sales cycle was 3 months it is likely that the 12-month period would have been unenforceable. As it was the Court held that the 12-month period was reasonable as that was the length of time the confidential information would remain valuable. Thus, one of the reasons for deciding against Mr Thomas was that the non-compete clause was necessary in order to prevent him being able to exploit his knowledge.

Conclusions

Although this case doesn’t create any general principle or law it does illustrate judicial thinking on restrictions. The decision illustrates that the courts are prepared to enforce non-compete clauses if there is a legitimate business interest to protect, even if the employment contract also includes non-solicitation and confidentiality clauses and providing that the clause goes no further than is necessary to protect legitimate interests. A 12-month restriction has for many years been considered to be about the maximum acceptable for a restrictive covenant but this case serves as a reminder that in an appropriate case such a clause will be upheld.

[2020 update - we were aware for many years after originally putting this article up that we were the number 1 hit worldwide on Google for the words ‘Thomas v Farr’. That did make us question whether we were assigning too much importance to this case but since then other firms have caught up and widely publicised this case. It also means that we have lost our top slot but are still on the first page of Google. The case is still important by the way!]