Of Minnows and Whales: E G Solutions Ltd v Hughes and Nice Systems UK Ltd

The facts

The Claimant, EG Solutions Ltd, was a business software company providing back office workforce optimisation (‘BOWFO’) services. Whilst still a comparatively small company, it had developed ‘a unique service of software’ in a ‘niche area of management consultancy’ over the course of nearly three decades [3]. Mr Hughes, the First Defendant, had been employed by EG Solutions as a sales executive for just under two years when he gave notice in March 2016. Once his contractual 1-month notice period, spent on gardening leave, expired, Mr Hughes took up employment with Nice Systems UK Ltd, a ‘much larger’ business who had only recently entered the BOWFO market in order to compete with ‘minnow’ EG Solutions [6].

The covenants

The First Defendant’s contract of employment contained a series of non-compete, customer non-solicitation and staff non-poaching covenants, as well as provisions in relation to confidential information. The particular focus of the case was the non-compete covenant, which provided that Mr Hughes would 

The restricted period under the clause was 12 months [25], and the defined area encompassed the UK, South Africa, the Nordics, Netherlands, India, and the United States [30]. In resisting EG Solutions’ claim, the Defendants argued that the covenant was an unenforceable restraint of trade due to the unreasonable breadth of the protection it afforded to EG Solutions.

The legal issues

The claim was determined using the well-established American Cyanamid principles: Was there a serious issue to be tried? Would damages be an adequate remedy? And where did the balance of convenience lie?

(1) A serious issue to be tried

HH Judge Platts first set out Chadwick LJ’s test in Arbuthnot Fund Managers Ltd v Rawlings [2003] EWCA Civ 518: was it ‘plain and obvious that [the clauses could not] be enforced having regard to the wellknown limitations on restrictions in restraint of trade’? If not, ‘the clauses must at this stage be regarded as having a reasonable prospect of being upheld’ [11].

In applying this test to the facts, the Judge found that EG Solutions was seeking to protect a clearly identified commercial interest, both in its software and the associated delivery, sales, and trading techniques [17]. Furthermore, whilst details remained to be determined at trial, the First Defendant’s role in the business had not been ‘so lowly or insignificant’ as to deny him access to confidential commercial information [19].

Discussion then turned to the prohibited activity, which according to the Defendants was drafted to include even ‘passive involvement’, such as a shareholding in another undertaking. On a proper construction of the covenant, however, its language necessarily implied ‘some active participation’ in a competitor [24]. Given the Claimant’s ‘unique operation and business’, the prohibited activity was thus not plainly too wide on the Arbuthnot test [27, 29]. Similarly, neither temporal nor geographical restrictions were plainly unenforceable [26, 31]; there was thus a serious issue to be tried.

(2) Damages as an adequate remedy

Given that the Claimant’s business was based on a unique methodology in a niche industry, HH Judge Platts held that damages arising from a breach of D1’s covenants ‘would be very difficult to quantify’ once commercially sensitive information had become available to a competitor. On the other hand, damages would be an adequate remedy for both Defendants [33].

(3) The balance of convenience

In determining the balance of convenience, finally, the Judge emphasised that in maintaining the status quo, the court should look to the circumstances prevailing ‘before any alleged breach took place’, as any protection the Claimant was entitled to would otherwise become meaningless [37]. Relief was thus granted on an interim basis. The First Defendant was furthermore ordered to delete the remaining message of a series of emails which he had sent from a work account to his personal address shortly before leaving the Claimant’s employment [7].

Comment

The decision in EG Solutions v Hughes might surprise some as the covenants in issue are unusually broad for a sales executive. They cover a wide range of potential activities, in a number of significant global markets, and there is ‘no doubt that the 12 month period … is a long time’ [25]. Upon closer inspection, however, the case serves as an important reminder that applications for interim relief will ‘depend acutely upon [their] factual context’ [12]. It is not difficult to imagine, for example, that small technology start-ups in positions similar to the (well-established) Claimant here might want to rely on similarly drafted covenants for senior staff – helping minnows to keep the whales at bay, at least until a speedy trial takes place.

By Jeremias Prassl

Blackstone Chambers Academic Panel