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Pensions Update

How To Stop Former Employees Competing Against You

Irwin Mitchell's John Hayes has recently successfully acted for one of the UK's largest employment businesses in an important restrictive covenant case in the High Court where vital interim remedies were obtained to protect his client's business. Here he shares his tips on what to do if you suspect that your employees are planning to compete against your business

The Facts

Our client (the Claimant) (a supplier of agency staff to the rail sector) faced a real threat to its business when its outgoing MD set up a rival business, in an orchestrated conspiracy with a number of senior employees (past and present). The Claimant had evidence that its confidential information had been used to compile business plans to obtain funding and that some of its clients were being actively solicited. Potentially, many millions of pounds worth of business was at stake. The Claimant instructed IM's London employment department, to take immediate and decisive steps to protect its business. It also wanted to send a message to its clients, and existing employees, that it was not prepared to allow its business to be ripped out in this way.

Proceedings were issued in the High Court and the Defendants voluntarily gave undertakings to the High Court to confirm that they were prepared to honour their contractual obligations. This meant that any further breaches of contract on their part could have resulted in a contempt of court application against them.

As is the case with so many injunctive relief applications, the claims then settled before trial because once the interim remedies (enforcement of the contractual obligations) had been obtained significant financial loss was prevented and there was little benefit to either side in pursuing costly litigation.

Key Principles:

  • The principles for consideration in applications for interim relief are determined by the case of American Cyanamid v Ethicon as follows:

    a) Is there a serious issue to be tried?

    b) Are damages an adequate remedy?

    c) Where does the balance of convenience/hardship lie?
  • A client will need enforceable contractual provisions. One "myth" in the business community is that restrictive covenants are not enforceable - they are, as long as the contractual provisions are well drafted.
  • A client will need good evidence of the defendant/s wrongdoing to put before the court at the application hearing to convince the Judge to grant the relief (or to convince the Defendants to give undertakings). This will consist of detailed witness statement/s to support the application dealing with principles a) – c) above in detail. Documentary evidence should be appended as an exhibit to the statement. In our case, the evidence was painstakingly assembled by a director of the business with the support of his IT department. In most cases it will be useful to instruct forensic IT consultants.
  • Most applications for injunctive relief turn on "the balance of convenience" - will more damage be caused granting or not granting the relief, for a short period (typically 2-3 months) pending a trial of the full action?

Therefore, first impressions count: all of the applications for injunctive relief I have been involved with over the past two years have been successful because we managed to persuade the Judge that we were acting for "the good guys" and that the balance of convenience was firmly in our favour.

Commercial Considerations:

  • A business needs to act decisively and be clear that its strategic commercial interests will be best served by issuing proceedings in the High Court. This is a genuine partnership between client and solicitor and involves very intensive work, usually over a period of 2-3 months. Applications for injunctive relief are not for the faint-hearted and the commercial client has to be up for the fight.
  • Thought must be applied to the claims being made and the remedies available. In this case we argued there had been a conspiracy between the Defendants. Conspiracy cases are complex to prove but if you are successful they can result in a "total remedy" being obtained which can stop the rival business in its tracks and persuade other employees not to join it. Careful thought has to be given as to which Defendants to include in the High Court claim and why.
  • There must be sufficient money or significant commercial interest at stake and the commercial client must be well funded - because it will have to give a cross-undertaking in damages (a guarantee to "make good" any damage suffered by the Defendants) to be paid if the interim remedy obtained is found, at trial, to have been wrongly granted by the High Court. Injunctive relief applications are expensive and even a small case is likely to cost a minimum of £50,000 - £100,000.
  • Commercial clients have to be realistic about whether they can expect to recover any damages (or legal fees) against the Defendants. In our case, the action taken by our client was so successful that the new business never really took off and therefore the damage suffered (the volume of lost clients) was very small. It was very much a case of "job done" by the Claimant. They had to bear some of their own legal fees but this was a measure of success for our client.

John Hayes

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