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Is all fair in business and sales?
Friday, 10 August 2007 00:00

 Practical advice from David Greenhalgh, head of employment law at H2O Law LLP

Our Head of Sales, Simon, recently handed in his resignation giving one month’s notice. Since the end of his notice period, I have discovered that he has started work as head of sales at our fiercest competitor. 

Almost immediately following Simon’s departure a number of our important customers decided to move their business to this competing company. Having made enquiries I have discovered that Simon has been enticing our customers to move their business. I also have my suspicions that another employee in our sales department, John, is passing on confidential information to Simon concerning our customers, and that he has been approached by Simon to join him at his new company.

Is there anything I can do to protect my business and prevent both current and former employees from joining a competitor, using our confidential information, or trying to steal our business and poach other employees?

The key to protecting your business is to have an effective and up-to-date employment contract. In your employment contract it is acceptable to have provisions, often called restrictive covenants, which seek to prevent your former employees from:

•   Using your confidential information (e.g. client contact lists/databases);
•   Soliciting business from your customers or clients;
•   Providing services to your customers or clients, irrespective of whether the former employee initiated the approach;
•   Working for a competing business;
•   Recruiting former-colleagues.
Such provisions are valid provided that they are confined within reasonable limits (e.g. geographical and time); any provision which is too wide will be deemed an unreasonable restraint of trade and will not be upheld by the courts. 

It is also highly recommended to include an express confidentiality provision clearly setting out the employees’ obligations in relation to your confidential information and specifying what information you consider will amount to confidential information or trade secrets.

Another effective provision to include in your employment contract is a “garden leave” clause. The principal purpose of such a provision is to give you the right (during the employee’s notice period, and without breaching the employee’s contract): not to assign any work to that employee; to exclude the employee from your premises; to prevent the employee from contacting or dealing with your customers and employees; and to prevent the employee from working for a competitor during the notice period. During any garden leave period the employee should continue to receive his/her normal salary and other contractual benefits.

If you do not have express restrictive covenants or confidentiality provisions in your employment contract, then you are likely to have considerable difficultly in successfully preventing important employees like Simon and John from joining competitors and enticing away your customers and employees. Furthermore, you will be left having to rely on implied contractual obligations which will afford you less protection and are more difficult to apply.

If you do have effective provisions in your employment contract, you need to act fast. You must get together any evidence you have against Simon and John, backing up your suspicions that they have breached their contracts of employment. Once you have your evidence together there is a three step process you will need to follow:

1) Get your lawyers to apply for an interim (ex-parte) injunction restraining the employee from breaking the terms of his/her employment contract or misusing your confidential information. Your application is likely to include a claim for damages against the employee for breach of contract and also possibly against his new employer for inducing a breach of the employment contract (if the new employer knew of the employee’s contract terms with you). You do not necessarily need to give Simon and John notice of the hearing, but it is best practice to give some warning. If you have compelling evidence a judge should grant you an interim injunction for a short period only until a return date.  As part of your application you will have to give your binding agreement to cover any losses suffered by Simon and John as a result of you obtaining the interim injunction in the event that you eventually lose at trial.  If you have clear evidence of misconduct or breach of restrictions by the employees then it is common that following the issue of an interim injunction for the case to then settle, usually with employees undertaking to comply with the restrictions in their contracts and with the employees paying a substantial contribution towards your legal costs.

2) By the return date, which is usually approximately one week after you obtain the interim injunction, Simon and John will have had the chance to serve on you any evidence that they wish to rely on. If the judge finds that you have presented compelling evidence and rules in your favour he is likely to order that the interim injunction should continue until a future trial.

3) At trial both sides fully debate the matter and the judge will decide whether or not your claim has been successful. If you are successful, the judge may award you your costs to be paid by the employee/s and damages for any loss you have suffered as a result of Simon and John’s actions. Be aware that if you are not successful, you will find yourself covering not only your own costs, but also Simon and John’s.
If you have evidence that John is leaking confidential information to Simon then this is likely to amount to gross misconduct, which would allow you to dismiss John without notice. However, before reaching any decision you must first follow a fair and proper disciplinary procedure in accordance with current legislation. If you were to dismiss John or any other employee in breach of their employment contract or if an employee resigns in response to your breach of contract then you will not be entitled to enforce any restrictive covenants contained in the employment contract. It is therefore extremely important to follow all procedures correctly.

So, to protect your business it is important to use your employment contract to your advantage and to ensure where appropriate it includes confidentiality provisions, restrictive covenants and a garden leave provision.  Before you take any of legal action set out above it is essential that you seek legal advice.

If you have any queries about restrictive covenants and injunctions please contact David Greenhalgh at H2O Law LLP on 020 7405 4700.

Whilst H2O Law LLP makes every attempt to ensure the accuracy and reliability of the information contained in this article the information should not be relied upon as a substitute for formal legal advice.  H2O Law LLP, its employees and agents will not be responsible for any loss, howsoever arising, from the use of or reliance upon this information. © H2O Law LLP 2007

 
 

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