Guidance from the Court of Appeal on employee competition injunctions

The case itself

In Derma, there was strong prima facie evidence that Dr Ally (the seller of the business, who had continued as an employee and director of the company post-sale) had breached his obligations and acted dishonestly. Constable J granted preservation, imaging, non-use or disclosure of “Confidential Information” and non-compete injunctions at a without notice hearing. At the Return Date, Bourne J discharged all of the injunctions (save for the imaging order) because he decided that the Claimant had failed to comply with its obligation of full and frank disclosure. The decision to discharge the injunction was overturned by the CA in a judgment that emphasised, in respect of an alleged failure to comply with the duty of full and frank disclosure, considering the interests of justice, and the need to maintain a due sense of proportion in complex cases. The CA also held that a fresh injunction should have been granted (and was in fact granted by the CA). With that background, I turn to the three points of particular interest.

1. Staged injunctive relief if applying without notice?

In finding that the Claimant had not complied with its obligation of full and frank disclosure, Bourne J at first instance referred to a passage from Bloch & Brearley (14th Edn) which mentioned the possibility of applying for only some injunctive without notice and other relief (e.g. to enforce covenants) on notice at the Return Date, and stated that “Making only certain elements of an application on a without notice basis is often a more proportionate and reasonable way to proceed.”

The CA gave that relatively short-shrift, holding that:

“Some judges might have taken the view that notice of the application for the non-compete order ought to have been given, so that the application had to be made in two stages. Other judges could reasonably have considered that the delay inherent in requiring notice to be given when a without notice application was clearly justified in relation to the devices and electronic accounts, and when there would be a return date within a relatively short period in any event, would cause injustice to the claimants which could not be compensated by an award of damages – i.e. that this was the situation contemplated by Mr Justice Hoffmann in Re First Express Ltd in which an application without notice would be justified.”

It is always important to give very careful consideration to whether to apply without notice at all (not least because of the difficulties for applicants in complying with their obligation of full and frank disclosure, and the dangers that: (i) the Court decides at the Return Date that there has been a failure of full and frank disclosure and discharges injunctions that could have been obtained on notice; or (ii) the Court refuses to grant the relief on a without notice basis, meaning that the first that the defendant hears of the case is that relief has been refused, together with a note of the hearing and a copy of the applicant’s skeleton argument setting out - in full and frank disclosure - all the reasons why relief should not be granted).

However, in Derma there were powerful reasons for going without notice in relation to the preservation and imaging orders (e.g. deletion of information from a particular account which suggested that the Defendant may seek to destroy evidence if tipped off) – as the CA held, going without notice was “clearly justified”. The CA’s reasoning set out above may be thought by many to give those who have the evidence to justify a without notice application on a narrow basis a ‘free shot’ at wider relief without notice. An applicant seeking to go beyond preservation and imaging orders, and to enforce restrictive covenants until the Return Date, could include the relevant passages from Derma in the full and frank disclosure part of its submissions and roll the dice as to whether the particular judge is prepared to grant the wider relief (if not, the application for wider relief would be renewed at the Return Date).

However, if wider relief is refused, the defendant will still have the benefit of arguments set out by the applicant in full and frank disclosure as to why the relief should not be granted (e.g. any points relating to the (un)enforceability of the covenants). That, combined with a ‘loss’ by the applicant on the wider relief, may strengthen the resolve of a defendant (perhaps particularly one who is not immediately minded to pay for solicitors). So the decision as to what relief to seek without notice will continue to be a highly strategic one, to be taken in consultation with the client.

The definition of “Confidential Information”

On a without notice basis, the applicant in Derma obtained a confidential injunction prohibiting use or disclosure of “Confidential Information”, which was defined (inter alia) as “including but not limited to any information that would reasonably be regarded as confidential”.

Bourne J had found this definition “hopelessly wide”. The CA agreed: “the words 'including but not limited to' are indeed too wide as they do not enable the defendant to understand the full scope of the information which he is restrained from using or divulging, while the words 'that would reasonably be regarded as confidential' require an exercise of judgment on which views may well differ, leaving the defendant at risk of contempt proceedings if he gets the judgment wrong.”.

In my experience, lawyers not infrequently (and on occasion some judges) give insufficient thought and attention to the definition of Confidential Information used in (draft) Orders. Given the very serious consequences for defendants of breach of an injunction, in my view it is essential to ensure that “Confidential Information” is tightly, and clearly, defined. Applicants equally have an interest in ensuring that they have a properly drafted Order which is – if required - capable of enforcement by way of contempt proceedings, and in avoiding appeals. I would expect these words from Derma to be cited frequently going forwards. They are a useful reminder not only for those involved in applications for injunctive relief, but also for those drafting contractual confidentiality clauses which might (in due course) need to be enforced by way of an injunction.

An injunction as the default remedy at the interim stage

In Planon v Gilligan [2022] EWCA Civ 642, the CA appeared to put firmly to bed the idea that the principle that that an injunction should normally be granted to enforce a negative covenant freely entered into by the parties should apply at the interim stage, stating that “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 … has no application” (see my article here).

However, in Derma the Court of Appeal referred to the principle, and found that the first instance Court should have granted a fresh injunction (to enforce a non-compete covenant) because:

an injunction will generally be the appropriate remedy to enforce a lawful negative covenant on the straightforward basis that this is what the parties have bargained for… Although [another CA case referring to the principle set out above] was a case of a final injunction after a trial, and the adequacy of damages is a relevant consideration at the interim pre-trial stage when a court is considering the balance of convenience, it nevertheless remains the case that what an employer, or in the present case the purchaser of a business, has bargained for is not an uncertain and evidentially difficult remedy in damages, but the opportunity to develop its business free of competition from the defendant during the currency of the non-compete obligation. That factor has all the greater weight when a significant element of the value of the business is attributable to the reputation of the vendor himself, here Dr Ally.”

The CA in Derma did not refer to Planon, and it is not clear whether Planon was cited, but it was argued by the Defendant in Derma that the non-compete covenant was unenforceable as a result of a repudiatory breach of contract (in failing to pay consideration under the SPA), so the issue considered in Planon appears clearly to have been in play.

The result is that there appear now to be two conflicting CA decisions on the weight to be given at the interim stage to the principle that employees who have entered into a restrictive covenant should be held to their bargain. That is, no doubt, fruit for further argument in future cases. Watch this space….