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August 2018

All life sciences businesses have information they consider vital to their functioning and success. As employers, therefore, these businesses are often keen to restrict access to and use of this information by their staff members. This is much more easily managed whilst staff remain in employment, but once they leave the business, becomes much more difficult.

Restrictive covenants are one form of protection employers can use to protect access to customers, suppliers and funding relationships, and against poaching of other employees post-employment. Such covenants can act as a deterrent both during and after employment, courtesy of both their existence and the threat of enforcement.

Without express protection in the contract, only confidential information which amounts to a trade secret remains protected after termination of employment, so the basic starting point is to have express confidentiality provisions alongside covenants in the contract of employment. Customer and supplier lists and information are usually capable of being protected.

Who can be restrained?

Primarily, employees – and this is the focus of this article. That said, it may also be appropriate to impose similar restraints on other groups of individuals who provide work or services for the company.

• In most cases, it will not be appropriate to include or enforce restrictive covenants for workers, particularly casual or temporary workers. The same applies for agency workers. A court is likely to take the approach that the "employer" is trying to have it both ways in terms of these groups – denying them full employment rights, but seeking to treat them as employees when seeking to restrict their activities. Tread carefully with restrictive covenants for these individuals, as you may also be opening up wider issues around their employment status.
• You may consider it appropriate to seek restrictive covenants in connection with consultants and independent contractors. Whilst the court will apply the same general principles as set out above, it may be harder to establish that it would be reasonable to seek restrictions for a self-employed consultant who works for other companies. The bargaining position for consultants is usually different to that of employees, which may be reflected in the terms of the agreement and may assist with the enforcement of any restrictions. This falls outside the scope of the note below.
• Likewise, it would be sensible to consider any partners who are not employees, and consider including restrictive covenants or similar in any partnership documentation. Again, this falls outside the scope of the note below.

Employees: enforceability of restrictions

The starting point is that restrictive covenants are void as restraints of trade (for public policy reasons), unless employers can show that the restrictions:

• have a legitimate business interest that it is appropriate to protect, and
• go no further than is reasonable having regard to the interests of the parties and the public.

Given this, restrictive covenants should be very carefully tailored to the circumstances involved, otherwise they run the risk of being unenforceable (and therefore lose their deterrent and practical effect).

Legitimate interests: what can be protected?

Broadly, the courts will allow employers to protect the following groups of interests:

• trade connections (with customers, clients or suppliers) and, more generally, goodwill;
• trade secrets and other confidential information; and/or
• the stability of the workforce.

That said, this is not a finite list, and it is open to employers to justify a legitimate interest that has not previously been upheld.

Reasonable protection: what is reasonable?

The employer will need to balance the interests of and risks to the employer's business as against the impact on the individual and their rights. As part of this consideration, employers will need to consider:

• any definition of the employer's business, area of business and any interests that the restriction is intended to protect;
• the length of any restricted period;
• the impact of the covenant on the employee;
• the role and seniority of the employee;
• the impact and risks to the company if the employee were to leave the company; and           
• what information it really wants to protect.

The burden will be on the employer to prove the restriction is reasonable, not on the employee to show it is unreasonable. The usual contractual obligations (consideration, execution, clarity and so on) will apply. It is unlikely that a restrictive covenant seeking to protect associated companies (that is, other companies in the employer's corporate group) will be enforceable.

The enforceability of covenants is assessed at the date the employee agreed to them, so employers should regularly review and update restrictive covenant provisions of employees, particularly in circumstances of internal promotion. In PatSystems Holdings v Neilly the court held that a 12-month restriction may have been enforceable for the employee's final role, but was unenforceable because he entered the covenant when in a much more junior role, as affirmed in Egon Zehnder v Tillman.

Types and ambit of restrictions

Definitions are key. The employer's business / relevant part of the business should be carefully defined. Narrower and more limited definitions are more likely to be enforceable, whereas wide definitions and definitions that effectively would shut an employee out of an industry are not. Similarly, covenants that purportedly applied to an employee acting in any capacity (including as a shareholder, consultant and/or agent) have consistently been held to be unenforceable.

There are various types of restrictions, which cover different activities. Common types include non-competition, non-solicitation, non-poaching and non-dealing restrictions. As the protection sought must be no wider than reasonably necessary to protect the legitimate interest, the type of restriction is important.

For example, it may be appropriate to consider a non-poaching or non-employment restriction where you want to protect the stability of the workforce, but a non-compete or non-dealing restriction is unlikely to be deemed appropriate to protect this business interest. Similarly, concerns about poaching clients may justify a non-solicitation or non-dealing covenant, but may not justify a non-compete covenant. The courts have tended to view non-competes as the harshest of the restrictions, given that it has potentially the widest implications for departing employees.

With the exception of restraints on using or disclosing confidential information, restrictive covenants must be for a limited time. Employers will need to consider how long it will be before competitive activities by the employee represent less than a material threat to the employer's legitimate interest. This could include consideration of the frequency of contact with customer, the "shelf life" of the confidential information in question, the turnover of staff, any industry standards (although be wary of relying heavily on this factor).

Employers should also be looking at the level, type and length of restrictions in relation to an employee's seniority. The courts will look at the seniority of an employee in relation to any restricted periods and are unlikely to uphold restrictive covenants for junior employees, unless their role means that protection is needed. The lack of comparable restrictions for more senior employees was a factor in the court's rejection of a non-competition provision in a junior employee's contract in CEF Holdings v Mundey.

Restrictive covenants & garden leave

For longer restricted periods, any garden period should be off-set; the courts have refused to allow a combination of garden leave and restrictive covenants for a period of longer than 12 months, instead treating the two elements as off-set against each other. The courts are showing a willingness to enforce longer restrictions where industry evidence suggests this would be reasonable (holding that 12 month restrictions were standard in certain industries). The courts have indicated that 12 months could be standard in certain circumstances in the life sciences sphere, so think about your company's activities and any perceived vulnerabilities as well as the employee's seniority).

Defective covenants

Employers should also remember that, whilst courts have the power to delete words from covenants (but not to insert, the so-called "blue pencil test"), as a rule they are unwilling to re-write covenants where they are incorrectly drafted or imply limitations where restrictions are too broad. Very rarely, where a restrictive covenant does not work due to a drafting error, the court will hear evidence as to what was intended by the parties although despite this, in Prophet plc v Huggett, a 12-month restriction as drafted was found on appeal to offer no protection.

Technology and devices

The growth of so-called "bring your own devices" (BYOD) policies, integrated and home working programs and arrangements, and similar developments have left employers more vulnerable than ever to information and control threats. Employers do not have the same physical control of their employees' hardware as previously. Moreover, the advent of smart devices means that employees now have more methods that ever before to record sensitive meetings, transmit data, and act outside employer supervision. The difficulty for employers is twofold:

• preventing the employee's action, and
• proving it occurred should they wish to pursue the employee and/or enforce any restrictive covenants.

Routinely, employees who are intending to take confidential or sensitive information will often do so by attaching relevant documents to emails rather than taking information in hard copy form. Employers should have monitoring software in place to alert them to record and monitor email traffic, and to alert them to this, so that they have evidence of this should they wish to pursue the departing employee and enforce restrictive covenants.

Employers have to constantly balance their need to monitor and track employees with those employees' rights to privacy, data protection and general employment rights. The advent of wearable technology will only exacerbate this tension. Products such as Google Glass present huge potential threats to employers, as well as advantages – imagine the implications of an individual filming or live streaming a sensitive disciplinary meeting, highly confidential board meeting, or incident of workplace bullying. Employers should regularly review employment contracts, particularly confidentiality provisions, and social media, IT and email and disciplinary policies, as well as considering home working and BYOD policies. Employers should also regularly remind employees of these policies, their confidentiality obligations and any covenants.

Team moves and colleagues

The starting point is that employers cannot stop colleagues and former colleagues remaining in contact. However, they can try to restrict the implications this may have for their business. Team moves and soliciting of colleagues can devastate companies, and the courts have demonstrated that they are willing to protect employers in these circumstances, within limits. Employers should remind departing employees of their non-solicitation obligations on termination of employment, and again make sure that they have email monitoring and recording software, because evidence of wrongdoing will be vital to any action.

Evidence of wrongdoing by employees is also key. In Thomson Ecology v APEM Ltd, the court found that that the employee breached his implied duty of fidelity where the employer was able to show he had not informed his employer of a planned team poach, arranged discussions with colleagues at his home, and discussed salaries and conspired with a competitor to identify and recruit colleagues.

What if you have no express protections?

Employees are under an implied duty of good faith and fidelity, which applies even where there are no written employment terms, conditions or express protections. This broad implied duty covers three aspects: a duty not to compete (including not to entice away employees), a possible duty to disclose wrongdoing, and a duty of confidentiality. This offers limited protection and is often problematic for employers to rely on, as illustrated by the Thomson case. Separately, directors commonly owe fiduciary duties to their companies, which carry a higher level of restriction and therefore greater protection for the company.

Life Sciences: a unique sphere

The life sciences sphere has seen a number of decisions in this area in recent years. Below are two key decisions showing the important role of restrictions and protections in a life sciences context.

Norbrook Laboratories (GB) Ltd v (1) Adair, (2) Pfizer Ltd

The High Court considered the enforceability of restrictive covenants against a departing sales manager of a pharmaceutical company, whose contract included non-compete and non-solicitation restrictions of 12 months and who had accepted a job at Pfizer. As the sales manager, the employee had access to important confidential information, including information relating to customers, products and sales strategy.

The court did not uphold the non-compete restriction, but concluded that the relevant confidential information, which included knowledge of pricing and discounts, did not have a limited shelf life (contrary to the employee's assertions) and could have been useful to a competitor beyond the 6 months suggested by the employee; the 12-month duration was, in the court's opinion, reasonable. It also held that 12 months was not unreasonable, because Norbrook's customers entered 1-year contracts, so would be vulnerable around contract renewals.

The court looked at notes taken by Pfizer during the employee's interview, which showed that the employee had told Pfizer about Norbrook's work with another company, and the level of sales of one of its products. The court found that it was reasonable to restrict the employee from working for a competitor in the same capacity (sales), and took the interview notes as evidence of a real risk that confidential information could be revealed irrespective of the employee's role at the competitor. It confirmed that salary level was not significant when assessing the reasonableness of any restriction.

Thomson Ecology v APEM Ltd

A senior employee, who was employed by Thomson Unicomarine Ltd (Unicomarine), did not have a formal contract but did have a basic statement of terms requiring him not to disclose any matter relating to the company to any third party without consent.

The employee resigned and announced his move to APEM, a competitor. Shortly afterwards, 17 senior colleagues left Unicomarine, most of whom then started work with APEM. It became clear that for several months prior to his resignation, the employee had planned with APEM to transplant Unicomarine's business. This included incorporating a new company called Unicomarine Ltd, registering domain names very similar to those owned and used by Unicomarine and the transfer of numerous staff. The employee had arranged discussions with colleagues at his home, discussed salaries and conspired with a competitor to identify and recruit colleagues. He had not informed his employer of the planned team poach. As a result of the details that came to light, Unicomarine put the employee on garden leave, therefore he technically remained an employee during his notice period without having access to the office.

The court found that the employee had clearly breached his duty of fidelity to Unicomarine, one of the implied duties owed by employers to employees. The decision and facts of this case illustrate the importance of implied duties, especially where employees are engaged in activity during their employment (which includes garden leave); protecting a business from business activity after termination is much more difficult without express protections.

If you have any questions on this article or would like to propose a subject to be addressed by Synapse please contact us.

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