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Help! One can’t breathe for the non-compete clause…

Carol Davis comments on the BIS plans to call for evidence on
potentially stifling employment rules and considers a world without non-compete
clauses

At the end of
last month, the Department for Business, Innovation and Skills (“BIS”)
announced plans to look into employment rules that could be stifling British
entrepreneurship by preventing employees from starting up their own business
after leaving a job. The announcement is part of the Government’s drive to
develop an ‘Innovation Plan’ which will, according to BIS, set out how the
Government can help make the UK a better place to turn ideas into new products
and technologies. It is all part of the Government’s pledge to make Britain the
best place in Europe to innovate and start up a new business.

According to BIS
the call for evidence is “a move designed
to back even more small businesses and entrepreneurs across the country”
.
The specific question under investigation will be whether post-employment
non-compete clauses limit innovation and entrepreneurship by hampering the
efforts of start-ups and small businesses to hire the most talented people. The
BIS announcement quotes Emma Jones, founder of Enterprise Nation:

“The UK continues to record
over half a million start-ups being formed each year, with many people starting
a business by holding onto the day job and building the business at nights and weekends.
Entrepreneurial individuals need to be able to ease out of employment and into
self-employment so a move to look into how employment contracts reflect this
and the modern economy is warmly welcomed.”

Well, um, yes.
Up to a point. There is certainly an argument for saying that the hard-working
budding entrepreneur who burns the midnight candle, working every evening and
weekend to come up with innovative high tech business ideas instead of
succumbing to the wine-based and boxed set pleasures of the indolent, should
not be unduly hampered in his/her efforts by unnecessary red tape or unduly
onerous and unfair contractual restrictions. However, I am struggling to buy
the argument that non-compete clauses really do have a stifling effect on
innovation.

At present,
non-compete clauses are not upheld by the Courts lightly or just for the sheer
heck of it. Such clauses are only enforceable if they go no further than is
reasonably necessary to protect an employer’s legitimate business interest
(such as confidential information, the stability of the workforce or client
base). If there is no legitimate business interest capable of identification or
the clause is too broad, it will be regarded as being in restraint of trade and
it will not be upheld. So, for example, a clause which simply seeks to prevent
competition as an end in itself will be given short shrift by the Court.
Similarly, where an employer’s legitimate business interest is adequately
protected by the means of a non-solicitation and/or non-dealing clause, any
additional non-compete clause will almost certainly be unenforceable.

So to suggest
that post-termination non-compete clauses prevent the brightest and best of
Britain’s talent either from creating their own businesses or finding gainful
employment with a vibrant and thrusting start-up fails to have regard to the
fact that the Courts are well-used to, and more than capable of, balancing the
competing interests of employer and employee – the interest of the employer on
the one hand in preventing unfair competition and the interest of the employee on
the other in moving on and away from the employer in his /her career.

There is also an
argument for saying that by and large it is not the honest and faithful
hard-working budding entrepreneur who finds non-compete clauses problematic,
but only the budding entrepreneur who unlawfully and unfairly decides to get
ahead of the game by misusing his/her employer’s confidential information or
pinching colleagues or customers.

As with most
things in life, balance is all. An employer must have the right to protect its
business and to rob an employer of that right to protection must surely be far
more damaging to innovation than a properly drafted enforceable non-compete
clause could ever be. One has to ask who in their right mind would start a
business and employ anyone remotely capable if there was no means of preventing
those individuals leaving their employment and setting up in unfair competition
by exploiting the fruits of their former employer’s labour and hard-won business.

Although the
‘call for ideas’ in relation to the Innovation Plan itself is live now and open
until 30 May 2016,
the date on which the specific call for evidence in relation to non-compete
clauses has not yet been announced. It is also unclear whether it is only
non-compete clauses that are to be looked at in isolation, or whether evidence
is to be sought into other types of restrictive covenants which restrict an
employee’s ability to carry out business post termination. No doubt all will be
made clear in time but the prudent employer might decide not to adopt a wait
and see position but instead review all contracts of employment and actively
consider the extent to which its business interests really are protected from a
departing employee with a mind to compete unlawfully. It would be wise to look
at other means of protection, such as non-solicitation, non-dealing covenants
and sensible and business legitimate periods of garden leave.

For now, the
answer in relation to non-compete clauses lies in making sure that they are
thoughtfully and tightly drafted, they relate to a clearly identifiable and
genuine legitimate interest and go no further than is reasonably necessary to
protect that interest. For anything else, the answer perhaps lies in a glass of
Malbec and a box set.

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