Keep your restrictive covenants under review

Restrictions are often re-inforced or placed into settlement agreements at the end of the employment relationship.
 

In the case of Patsystems Holding Ltd v Neilly [2012] EWHC 2609 (QB), Mr Neilly began employment with Patsystems, which sells financial trading software, in 2000. He began as an Account Manager on a salary of £35,000. His contract of employment contained a one month notice period and a 12 month post-termination non-compete covenant.

Five years later in 2005 Mr Neilly was promoted to Director of Global Accounts. His pay increased to £80,000 and his notice period was extended to three months. Mr Neilly signed a letter agreeing to these changes and acknowledging that there were no other changes made to his contractual terms.

When Mr Neilly left Patsystems in April 2012 to go to work for a company which Patsystems regarded as a competitor, Patsystems sought an injunction to enforce the non-compete clause.

Mr Neilly argued that the non-compete clause was unenforceable as it was not reasonable at the time the contract was entered in to in 2000. Patsystems argued that Mr Neilly entered into the covenant again in 2005 when he accepted the other changes to his terms on promotion.

The Court rejected Patsystems’ argument and held that the covenant was unenforceable as an unreasonable restraint of trade. The relevant test was whether the terms of the covenant were reasonable at the time the agreement was entered into in 2000. By reference to Mr Neilly's status at the this time the covenant would not have been deemed reasonable and could not subsequently be resurrected by a change in circumstances that might render it reasonable at the time when it was relied upon.

Implications:
 

  • While the principle set out in this case is not new, the facts are a good example of a very common situation and demonstrate that restrictive covenants will not be enforceable unless they are:

    • reasonable at the time they are entered into; and

    • relevant at the time the employee leaves.

  • Employers must draft and review the terms of restrictive covenants with reference to the changing circumstances of the business and the employee throughout their employment if they want to rely upon them.

Employees need to consider if they want to sign a settlement agreement that contains new restrictions if any earlier ones are likely to be unenforceable.

A story from earlier this year.

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