Court of Appeal refuses injunction to enforce 12 month non-compete covenant

At first instance the Judge (Edwin Johnson J) had refused to grant an injunction only two months into the period of the 12-month covenant.  The Court of Appeal held that the Judge had erred in approaching the enforceability of the covenant primarily (or perhaps exclusively) by reference to the Judge’s view that, if the covenant were enforced, the employee would be unable to work during the period of the covenant.  That could be a relevant factor in determining whether the Court should exercise its discretion to grant an injunction.  However, there is “no authority which supports” the approach of determining enforceability primarily by reference to whether or not the employee can work, without proper consideration of whether the covenant goes no further than reasonably necessary to protect the employer’s legitimate business interests.

Notwithstanding the Judge’s error, without considering whether or not the covenant was prima facie enforceable the Court of Appeal upheld the Judge’s decision not to grant an interim injunction.  There are three points of particular note from the Court of Appeal’s judgment.

Damages as an adequate remedy for the employee

Employers frequently argue that damages would be an adequate remedy for the employee, because the employer is in a position to compensate loss of remuneration under the cross-undertaking in damages.  The Court of Appeal gave that argument relatively short shrift on the facts.  Elisabeth Laing LJ said:

[The employer’s Counsel] referred us to two first instance authorities about restrictive covenants in which the judge held that damages would be an adequate remedy for the employee. Those cases do not establish a rule of law to that effect. I consider, in principle, that restraining an employee from taking up a new employment opportunity for many months may well cause him damage that cannot be compensated in money alone, if it turns out that at trial that the covenant is not enforceable.  

Bean LJ was more forthright:

…it is quite unrealistic to argue that (since the Claimants have the resources to honour the cross-undertaking) damages would be an adequate remedy for the Defendant if an injunction against competition was granted at the interlocutory stage, but was proved at trial to have been an unenforceable restraint of trade. Except in cases of very wealthy defendants, or where the claimant employer is offering paid garden leave for the whole period of the restraint, this argument has no traction. Mr Gilligan’s evidence is that he has a wife and child, a mortgage and other family commitments. It is by no means clear that his current employers would be able and willing to transfer him to work which had no connection with facilities management software; indeed it would be risky for them to do so in the face of a non-competition injunction breach of which would be a contempt of court. The likely effect of such an injunction would be to deprive him of his income until and unless he can find a new job.

No doubt these comments will regularly be cited by employees (and new employers) going forwards in seeking to rebut the argument that damages would be an adequate remedy. 

However:

1.      There should be an evidential basis for the submission that damages would not be an adequate remedy (certainly from the employee in terms of his or her commitments and the likely consequences if out of work, and perhaps also from the new employer in terms of whether they would continue to employ the individual);

2.     Not infrequently, the new employer is willing to pay the employee until the expiry of the covenant in any event, so well advised claimants will explore that issue in correspondence (and may well wish to agree to the individual being paid by the new employer, in return for appropriate undertakings);

3.     The fact that the individual could be compensated for any losses under the cross-undertaking in damages is likely still to be relevant when the Court considers the balance of convenience, even if ‘damages would be an adequate remedy’ is not a complete answer for employers.

At the interim stage, enforceability of the covenant is not a trump card

It is common (and perhaps more common since the Court of Appeal’s decision in Dyson v Pellery [2016] IRLR 335) for employers to rely on the following statement of the House of Lords in Doherty v Allman (1878) 3 App Cas 709 at the interim stage:

'If parties, for valuable consideration, with their eyes open, contract that a particular thing shall not be done, all that a Court of Equity has to do is to say, by way of injunction, that which the parties have already said by way of covenant, that the thing shall not be done; and in such case the injunction does nothing more than give the sanction of the process of the Court to that which already is the contract between the parties. It is not then a question of the balance of convenience or inconvenience, or of the amount of damage or of injury – it is the specific performance, by the Court, of that negative bargain which the parties have made, with their eyes open, between themselves.'

In Planon the Court of Appeal put firmly to bed the idea that this dicta applied (at least in its full force) at the interim stage.  Even where the Court at the interim stage takes into account the likelihood of the employer showing at trial that the covenant is enforceable (i.e. applies the Lansing Linde v Kerr [1991] 1 WLR 251 test, rather than the lower ‘serious issue to be tried’ American Cyanamid test), at the interim stage the Court’s view is still a provisional one “not a definitive ruling, and it is only one of the factors that goes into the exercise of the discretion whether to grant an interlocutory injunction or not. If therefore the employer wishes to establish the reasonableness and validity of a covenant, the only way to do so is to take the matter forward to trial”.  Bean LJ referred to a very speedy trial in respect of a restrictive covenant taking place “within weeks not months”. 

However, the Doherty principle (that an injunction should normally be granted to enforce a negative covenant freely entered into by the parties):

“applies where it has been established  [at trial] that a covenant is valid; in such a case the normal reaction of the Court is to enforce by injunction the covenant that it has found to be valid and enforceable. But, precisely because at the interlocutory stage the Court is not determining whether the covenant is valid or not, but assessing where in its discretion the balance of convenience lies, the principle in Doherty v Allman has no application.”

These words provide powerful ammunition for those representing departing employees and new employers in resisting references to the principle in Doherty at interim relief hearings. 

Delay

The Court in Planon was unanimous that, by the time of the hearing before the Court of Appeal, with only about four months left to run on the 12-month non-compete covenant  and the defendant having been in-post for 7 months, the claimant would already have suffered much (if not all) of the damage to its legitimate business interests occasioned by the defendant taking employment with his new employer.  The status quo therefore favoured refusing an injunction at that stage. The judgment does not explain why the claimant in Planon failed to obtain a speedier hearing before the Court of Appeal.

There was, however, an interesting disagreement between Elisabeth Laing LJ and Bean LJ about the effect of delay to the hearing of the original interim relief application (Nugee LJ declined to express a view on the issue).  The defendant started employment on 1 September 2021; the claimant discovered that the next day.  The claimant issued its application for interim relief on 22 October 2021, and the hearing took place on 5 November 2021.  Before the Court of Appeal, the defendant argued (by way of Respondent’s Notice) that the Judge should in any event have refused injunctive relief because of this delay.

Elisabeth Laing LJ held that it would not have been reasonable for the claimant to take action until it knew that the defendant had commenced work (the defendant was evasive about that), and that it was also reasonable for the claimant to try to reach agreement through correspondence before issuing proceedings, such that “on balance” it was “open” to the first instance Judge to decide that delay was not a reason for refusing injunctive relief, such that she would “not have interfered” with his decision on that ground.  I note that this is hardly a ringing endorsement of the initial decision.

Bean LJ, however, said that:

I would be the last person to encourage the approach of those litigators who fire off several aggressive letters per day, whether seeking to demonstrate their machismo, run up costs or simply batter the opposition into a state of exhaustion. But the Claimants’ approach in this case seems to me to have gone too far in the opposite direction. Mr Gilligan joined [his new employer] on 1 September 2021. The very next day this came to Planon’s attention. The letter before action was not sent until 20 September, and proceedings were not issued until 21 October. By the time of the hearing before the judge on 5 November Mr Gilligan had been working for [his new employer] for over two months…

The significance of this is not that the Claimants deserve censure for proceeding at such a stately pace. Rather, it is that if Mr Gilligan’s new job posed as severe a threat to Planon’s protectable trade secrets or customer connection as the Claimants sought to argue, the damage would surely have been done in the first few days, and certainly well before the lapse of two months. It is important, too, to bear in mind the observation of Lord Diplock in Cyanamid ([1975] AC 396 at 408F) that “where other factors appear to be evenly balanced it is a counsel of prudence to take such measures as are calculated to preserve the status quo”.

This is a salutary reminder to those representing employers seeking to enforce non-compete covenants of the importance of acting very swiftly when it is discovered that a departing employee has joined a competitor.  Whilst it takes time to marshal the evidence and prepare the witness statement and procedural documents for an application, a delay of even a few days after the employee starts employment may well lead to arguments that the damage is done, and the status quo favours permitting the employee to continue in his new employment.  There is a real risk that a first instance judge may be receptive to such an argument.  An employer in this situation needs to pull out all the stops to get the application on as swiftly as possible.