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Restrictive covenants, Brexit and the war for talent – why protecting your confidential information has never been more important

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Rachel Reeves



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31 January 2018

In an age of artificial intelligence and robotics and where electric cars are now a reality, restrictive covenants in employment contracts are essential armour for any employer.  Certainly for Dyson Technology Limited (DTL), where the engineer involved in developing an electric car resigned to join a competitor, Tesla, these contractual provisions were essential for its protection. A successful application for an injunction by DTL enabled it to safeguard business critical information. This case serves as a reminder that fit for purpose drafting of restrictions is key to protecting the legitimate commercial interests of a business: Dyson Technology Ltd v Pellerey [2015] EWHC 3000 (Ch)

Factors affecting enforceability

Of course, not all restrictive covenants will be easily enforced. It is well established in case law, as set out in TFS Derivatives Ltd v Morgan [2004] EWHC 3181 (QB) and applied in this case, that when deciding the issue of enforceability, it is important to look at four key elements.  These are:

  • Interpretation of the contract itself.  Is the meaning of the clauses apparent and the scope easily understood? 
  • The breadth of the restraint. Is it wider than reasonably necessary for the protection of the company’s legitimate business interests?  It is worth noting here that the fact the contract might contain a separate clause restricting the disclosure of confidential information did not prevent a non-compete clause from being regarded as reasonable.
  • Will the proposed actions of the employee infringe the covenants?
  • Should the court exercise its discretion to grant an injunction? This required consideration of all the facts.  Unfortunately for Mr Pellerey, the court considered that he had “acted unwisely” and breached his contractual duties to DTL when failing to inform them at the time he was asked to work on their electric car project that he had already accepted a conditional job offer from Tesla.

The court was therefore satisfied in this case that the grant of an injunction was appropriate.

Immediate steps prior to enforcement action
Before an employer need get to the stage of enforcement action via the courts, there are practical steps which can assist in protecting its confidential information.  For example, if an employer has suspicions that one of its employees is about to resign to join a competitor, it should consider how reasonably to restrict their internal access to confidential information.  This might be done by simply removing the employee from internal email distribution lists or meeting invitations. In doing so, care should be taken not to alert the employee to the fact they are suspected of wrongdoing. 
In such circumstances, an employee’s recourse could be a constructive dismissal claim against the employer if the employer materially restricts their ability to perform their role or inadvertently reduces their responsibility.  This is a tactic often deployed by employees who are planning to leave and wish to deflect attention from their own actions or misconduct onto allegations against their employers.  It is important to avoid arguments that there has been a fundamental breach of the employee’s contract because this could render void any restrictive covenants the employer should subsequently wish to rely on.
A more subtle approach might be to review the employer’s policies on the right to monitor the employee’s activity such as email usage (including sent items to Gmail, Yahoo or iCloud accounts), security passes, downloads, printing, CCTV or photocopying patterns.  This more covert action will enable the employer to balance the probative value of the evidence it might uncover against any likely prejudice to the employee.
It is also permissible to seek written assurances from the employee and potentially their new employer about information or company property they may have in their possession.  Given most employers are taking a flexible approach to remote and home working, it is legitimate to ask for confirmation from an employee that any information belonging to the employer has been returned and not copied.  It may also be appropriate to check the employee’s electronic devices to review the data held on them. 
Potential consequences for employees
Besides the risk of enforcement action and being kept out of the job market for a period of time, concerns about an employee might also be referred to the Data Protection Information Commissioner (ICO).  This might occur where, for instance, the employer believes that the employee is misusing or planning to misuse confidential data.  The ICO can take action to change the behaviour of both organisations and individuals that collect, use and keep personal information. Such action includes criminal prosecution under s55 of the Data Protection Act 1998 which can attract an unlimited fine. This power to impose a fine on those who misuse personal data, together with the prospect of a criminal record, constitutes a real threat to employees.
In addition, where the employer is a bank, accountancy firm, law firm or other organisation which is regulated by a professional body, the employer may be able to raise the issue of misuse of confidential information with those professional bodies such as the FCA, PRA or SRA. In banking, misuse of confidential information gives rise to concerns about a regulatory employee’s fitness and propriety as well as their integrity.  This will not only impact their ability to perform their current role but also their regulatory reference to prospective employers.
There are therefore considerable personal and professional risks to some employees if they misuse their employer’s information. It is worth drawing out these risks in any exit interviews before the employee leaves.
How employers can manage the risks

With the imminence of Brexit in the next 12 months, the competition amongst employers to attract and retain the most talented of employees will continue to gain momentum.  The savviest employers should therefore be auditing their contracts and reviewing their restrictive covenants as well as their systems and controls to ensure they afford the right protection to those in business critical and revenue generating roles.  This will be an issue particularly in sectors such as financial services, pharmaceuticals, start-ups, the motoring industry (as highlighted here) and digital specialists.

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  If you wish to receive this publication, please contact Amy Edwards,