Case of the week: Employment
25 June 2012
Law at Work — February 2014: reasonableness and extent of restrictive covenants did not apply to actions as a minority shareholder
28 February 2014
21 January 2014
30 July 2013
25 October 2013
10 June 2013
CEF Holdings Ltd v Mundey (2012) EWHC 1524 (QB). Silber J. 1 June 2012
The court determined a number of issues in relation to a company’s attempts to prevent its former employees starting up a rival company. It set out important lessons in relation to without-notice injunction applications.
The court had to determine issues regarding a claim by the claimant company (C) that the defendants had conspired to harm its business.
C employed 3,000 people worldwide. The first to 19th defendants were its former employees; the 20th and 21st defendants were companies (Y) planning to compete with C in the UK. It was C’s case that the first and second defendants had sought to entice its staff to join Y. It also alleged that the third to 19th defendants had breached their contractual duties by failing to report the approaches made to induce them. C had successfully applied, without proper notice, for injunctions preventing the defendants from acting in competition.
The court had to determine whether: (i) employee recruitment restriction clauses and non-competition clauses in the third to 19th defendants’ contracts of employment with C were enforceable; (ii) C could claim springboard relief; (iii) the court had jurisdiction to deal with claims against those defendants not domiciled in England; (iv) the injunctions should be set aside on the basis that C had failed to comply with its duty of full and frank disclosure and that there had been no adequate reason for the without-notice injunction application.
Issues determined: (i) (a) The employee recruitment restriction clause, which prevented the defendants from inducing, soliciting or endeavouring to entice away any employee of the company, irrespective of where that employee worked or whether the person enjoined was even aware of their existence, was invalid. The defendants would not have known who they could solicit because so many of C’s employees would not have been known to them. (b) It was difficult to see why the non-competition clause was needed as the defendants were bound by a customer connection restriction clause. Further, its width was so great that it prevented any employees from having “any interest” in another company and the injunction sought had no geographical limitation.
(ii) C had not established sufficient evidence to support a conspiracy or other wrongful conduct needed for springboard relief.
(iii) Under the Civil Jurisdiction and Judgments Act 1982 Sch.4 r.10(3), claims could only be brought against defendants in the place where they were domiciled.
Accordingly, there was no jurisdiction to grant relief against the non-English defendants.
(iv) The purpose of giving “not less than three days’ notice” when applying for an injunction was to allow respondents adequate time in which to consider the applicant’s case on both factual and legal issues. If a shorter period was given, the obligation of full and frank disclosure continued.
The nature and extent of the non-disclosure in the instant case meant that the injunctions should be discharged, save in respect of orders made for delivery up. Without-notice applications should only be granted in very limited circumstances. An application for an injunction sought without any or proper notice had to include a statement supported by facts explaining fully and honestly why proper notice could not have been given. Witness statements on a without-notice application should contain a statement setting out the duty to give full and frank disclosure and indicating how that duty had been complied with. Any application for an injunction had to be based on facts; mere suspicion was not enough.
For the claimants
- David Reade QC and Charlotte Davies, Littleton Chambers
- Thomas Kibling, Matrix Chambers
- Neal Gibson, Nabarro
For the first, third, fourth, seventh, eighth, ninth, 11th, 13th, 14th, 15th, 16th, 17th, 18th and 19th defendants
- Simon Devonshire QC, 11 King’s Bench Walk
- Sarah Fitzgibbons, Gateley (Scotland)
For the second, fifth, sixth, tenth and 12th defendants
- Gerard Clarke, Blackstone Chambers
- Amelia Walker, Hardwicke
- Dan Fawcett, Bond Pearce
For the 20th and 21st defendants
- Robert Howe QC and Nicholas De Marco, Blackstone Chambers
- Anthony Fincham, CMS Cameron McKenna
Commentary: Samantha Mangwana
’Team moves’ litigation is a growth industry, with ever-more elaborate contractual restrictions about poaching staff, competing for business and dealing with customers after employment.
When a team walks, employers react by applying for an injunction to stop them in their tracks. Restrictive covenants, springboard injunctions and arguments about fiduciary duties get more complex. Yet both parties are often gambling in confusion. The costs risks are enormous and uncertain.
This decision thankfully puts common sense first. For employers with an itchy litigation trigger-finger, it is also a 44-page caution to stop and think first, or risk feeling very foolish and out-of-pocket. Suspicion is not enough. If employers have short notice periods and restrictive covenants that are more onerous for junior than senior employees, they will need to explain the rationale or they risk making a mockery of the protection they are asking the court to give. If other restrictions offer sufficient protection of the customer connection, additional, broader non-compete restrictions may not be upheld at all.
Employers should not reach for a boilerplate precedent, but assess each contract carefully and update restrictions to reflect increasing seniority. If someone is genuinely crucial, and their departure poses a significant business risk, their notice period should also reflect this. Otherwise, don’t expect the High Court to be impressed by injunction applications.
Perhaps the moral of the tale is this: before leaping for the springboard, suss out your strategy and how much it might hurt if you fall flat on your face.
Samantha Mangwana, partner, Russell Jones & Walker, part of Slater & Gordon