Protecting your business with restrictive covenants

It is vital to get the balance right when trying to protect your business by subjecting employees to restrictive covenants.

If the conditions are not strict enough, they may not prevent the employee setting up a rival enterprise or helping a rival firm; if they are too strict, they may not be enforceable, as in a recent case before the High Court.

The case involved an online bicycle retailer. It employed a merchandiser who was subject to a non-competition covenant stipulating that once his employment terminated, he would not engage in “any business or activity carried out by the company” for a period of 12 months.

There was a second covenant stating that the merchandiser would not make use of or communicate the company’s trade secrets or confidential information at any time.

The merchandiser then moved to another bike company as head of buying. His former employer tried to invoke the covenants.

The High Court, however, refused to enforce them. It held that the merchandiser’s role with his former company had been to analyse financial information with a view to making business decisions. It did not involve contact with customers and was different to his role with his new firm.

The stipulation that he could not engage in “any business or activity carried out by the company” was too wide and could not be upheld.

The court held that the second clause was also unenforceable. The confidential material was so voluminous that it defied the imagination to suggest that it could be carried away in a person’s head. It was also unreasonable in its scope and length.

It was unrealistic to imagine that the merchandiser could have accurate recall of all that information for 12 months, and in any event, it would be out of date within that period.

Please contact Mark Pelopida if you would like more information about the issues raised in this article or any other issue relating to protecting your business interests.