A restraint of trade clause is a term contained within a contract that seeks to limit a party’s ability to be employed by an alternative business. The most common type of restraint clause is contained within a contract of employment and is one which simply seeks to restrict an employee’s ability to work for another business during the term of their employment.
The next level of restraint of trade clause seeks to limit an ex-employee from working for a competitor for a specified period of time. Clauses such as this are prima facie void, they will only be uphold by the court if the employer can show it has a ‘legitimate proprietary interest to protect’ (LPI).
An LPI may be a trade secret, a list of existing clients, a manufacturing process or other important confidential information.
One of the leading cases on restraint of trade clauses is Faccenda Chicken Ltd v Fowler [1986] I.C.R. In this case Mr Fowler had previously worked for Faccenda Chicken Ltd, when he finished his employment he set up his own business. Faccenda Chicken Ltd sued Mr Fowler and argued he had information about the names and address of its clients. The court held that whilst there is a clear obligation not to disclose information that may cover a secret process or other information which is a sufficiently high degree of confidentiality to amount to a trade secret it does not extend to all information acquired by an employee during the time of their employment.
The question of whether a restraint of trade clause will be deemed enforceable or not is by no means a simple question. The court will look at a number of factors.
The first is whether the clause is an express or implied term (i.e. written into the contract of employment or not). If it is an implied term the court is not likely to enforce the contract but if it is an express term, the court will then look to see if there is a LPI (e.g. trade secret).
The next stage is to consider the extent of the clause. The court will want to see that the clause goes no further than offering the minimum protection necessary to protect the employer. If the clause is too restrictive it is not likely to be enforced. The characteristics of the clause that will be considered are the time restriction, geographical restriction and scope of the clause.
The above characteristics are taken on a case by case basis. I have previously dealt with a restraint of trade dispute in the aerospace industry. My client wanted to employee Mr A from its rival (Party B) however, Mr A had a 12 month restraint of trade clause. At first, it was argued this clause would not be enforced because whilst Mr A was aware of some trade secrets / client lists, these were largely historic. Party B protested and investigated it’s employee further, it transpired that Mr A was aware of a technical specification for a new product and had emailed this to himself the night before his resignation. Unfortunately this was not helpful. In any event, I was able to argue for a reduction in the restrain to trade clause to 5 months because it was clear this was all that was necessary to protect Party B’s interests.
Historically, restraining someone for a period of over 5 years had been enforceable (Forster & Sons Ltd v Suggett (1918) 35 T.L.R 87), indeed in more high value cases a clause restraining someone’s ability to work for 25 years in a particular industry has been held to be enforceable (Nordenfelt v Maxim Nordenfelt Guns Co Ltd [1984] A.C. 535).
Owing to the complexities of restraint of trade clauses, due consideration must be given when drafting the same. It may be that each department in a given business will need a different level of protection and the more senior the employee the more extensive the restriction.