Non-competition clauses - do they work?
Traditionally the Courts have been reluctant to enforce these types of clauses giving more preferential treatment to non-solicitation and non-dealing clauses. However the case of Merlin Financial Consultants Ltd V Cooper seems to show the Courts changing their stance particularly in circumstances where the covenants are contained in a business sale agreement and/or there is a close connection between the leaving employee and the clients he or she assisted.
Mr Cooper is an IFA who worked for Merlin for just over 4 years before leaving in November 2012. He signed a “goodwill agreement” with Merlin under which Merlin bought the goodwill in, and right to receive future income from, Mr Cooper’s clients. This agreement contained a clause stopping Mr Cooper from competing against Merlin for a period of 12 months after his departure in any part of the United Kingdom.
Although he worked out his notice Mr Cooper made it clear that he would continue to work for “his” clients moving forward and challenged the validity of the covenant in the goodwill agreement.
The High Court found that the non-compete covenant was enforceable. In its judgement the Court highlighted the following points:
- The goodwill agreement could be considered a business sale agreement rather than an employment contract. As such the parties could be considered to have more equality of bargaining power;
- In previous cases involving IFAs it was noted that the industry was one where advisers had particularly strong relationships with their clients and 12 month restrictions appeared to represent an industry standard
- The geographical restriction covering the whole of the United Kingdom was NOT too wide as; again, previous cases had noted that the financial services industry had been seen to be a single geographical market. Given the increasing use of electronic communication that was now even more true.
Importance of the Decision
It would seem that the following key points emerge from this decision:-
- If an organisation wishes to rely on a non-compete provision as opposed to a non-dealing or non-solicitation provision it should consider entering into a goodwill purchase agreement with the individual concerned or perhaps giving the individual shares in the organisation (with a view to entering into a shareholders’ agreement with the individual). Covenants in such documents stand a far higher chance of being enforced than in an employment agreement;
- Even then the party applying to enforce the restriction will need to show a particularly close relationship between the individual and his clients;
- A UK wide restriction is capable of enforcement if the industry is such that the individual can realistically expect to receive instruction from clients both near and far.
- A non-competition clause in an employment contract will require great care in its drafting to ensure it is enforceable. Expert advice should be taken.
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