Non-competition clauses might stifle innovation?

A recent government press release from the Department for Business Innovation and Skills (DBIS) has pledged to act on non-competition and non-solicitation clauses (restrictive covenants) that could be stifling British innovation.  The press release is also a call for evidence from businesses and entrepreneurs in respect of such rules.  It is part of the stated drive to diminish red tape and make Britain the best place in Europe to start a new business.

The law relating to non-competition is at present complex and the cost of litigation is often a significant factor in whether an employee with an eye for a start-up, takes on his employer, who may wish to enforce post-termination restrictions.  The call for evidence is to look at whether non-competition and rules preventing employees approaching former clients (non-solicitation/non-dealing clauses) amount to red tape.  Not all contracts of employment have these particular provisions and when they do, they are often carefully thought through, having regard to the difficulty of enforcing them.  Let’s not forget the starting point that such clauses are actually void as being in restraint of trade.  They are only enforceable if they amount to a reasonable protection of a legitimate business interest.  If it comes to litigation the employee’s actions and proposed activities and the needs of the company looking to enforce the restriction are carefully picked over.  The clauses are often also found in settlement agreements where employees are leaving a business on agreed terms, in which case they may have a better chance of being enforceable.

Most employer/employee relationships are on an open basis with employees having reasonably free access to relevant confidential information. Employees are introduced to the company’s clients and customers with a view to developing relationships to promote the business.  On the face of it protecting the company’s interests with a sensible non-solicitation/non-dealing clause in relation to clients would not seem to be unduly onerous.  In my experience most companies see a specific non-competition clause (in addition to non-solicitation/non-dealing) as an added extra recognising that it is difficult to enforce such a provision.  There is a tendency to rely on the non-solicitation/non-dealing provisions to protect their interests in their customer relationships.  The parties in any litigation or potential litigation are usually pragmatic and a company rarely argues to keep a customer who will go with the employee come what may.  That customer may not be willing to remain with a company which has prevented it from dealing with its preferred individual.

If the government has concern over preparing for competition during the course of employment (rather than post-termination) then is this really justified?  An employee can prepare to compete within parameters which are not, in my view, unduly restrictive.  As long as you don’t take your employer’s confidential information and intellectual property and you operate in your own time in accordance with the duty of good faith and loyalty, there should not be an issue.

I suspect there could be an argument that non-competition/non-solicitation clauses may well help entrepreneurship in that they create a stable business environment with a level playing field.  You can develop and promote your idea in the knowledge that you can create some contractual legal protection if you take on employees and share your idea and confidential information.  It is difficult to see how non-competition provisions stifle a dragons’ den entrant.  They may stifle a professional services employee looking to move with a client base to another company looking to build turnover.

One of the issues may be around the cost of enforcing these provisions for an employer and the cost and uncertainty of contesting them by an employee.  There is often a two-stage process involving an injunction and final trial.  Legal fees easily run into tens of thousands of pounds.  It may be that we can develop a more streamlined system and there is currently talk of an Employment Court which would deal with these cases as well as unfair dismissal, discrimination etc claims.  That may well be the best way forward.

Iain Jenkins

Iain Jenkins

Iain Jenkins
Employment Director
Employment Team
0113 227 9308
IJenkins@LawBlacks.com

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