Murky and unchartered waters”: the enforceability of variable and cascading covenants.
Last year an unusual non-compete covenant came before the High Court in the form of an application for interim injunctive relief in the case of Jump Trading International Ltd v Couture [2023] EWHC 1305 (KB), and later the Court of Appeal (considering an application to appeal a case management decision of the High Court) in Verition Advisors (UK Partners) LLP v Jump Trading International Ltd [2023] EWCA Civ 701.
The covenant in question appeared in the employment contract of Damien Couture, a quantitative researcher in algorithmic trading, and former employee of Jump (an algorithmic trading firm). It stated that Mr Couture could not engage in competitive activity for a period of between 0 and 12 months, with the actual length of the restriction to be determined by Jump within 20 days of the notice of termination. Questions arose in relation to the enforceability of this restriction.
In this article Sophia Berry and Alex Francis consider where the law on variable or “cascading” covenants stands in light of the Jump litigation, which recently settled during trial.
Legal framework
A covenant that seeks to restrict an employee’s activities after the termination of employment will be void under the restraint of trade doctrine, unless it protects a legitimate proprietary interest of the employer, and the restriction is no more than is reasonably necessary to protect that interest.
A covenant may also be struck down if it is too uncertain to be enforceable. As the Court observed in Patsystems v Neilly [2012] EWHC 2609 (QB) at [37] “an employee needs to know where he stands”.
However, and perhaps reflecting the fact that such covenants are unusual, there have been no reported decisions in England and Wales in which a variable or “cascading” covenant in restraint of trade has been considered. In the words of the High Court, these are “murky and unchartered waters”.
The Jump litigation
The non-compete covenant in Jump provided that Mr Couture was to “refrain at all times from directly or indirectly engaging in Competitive Activity … during any notice period, Garden Leave and the Non-Compete period.”
The non-compete period was defined as “the zero (0) to twelve (12) month period after the Termination Date as elected by the Company within twenty (20) business days following the notice of termination.”
Following his resignation from Jump, Mr Couture indicated that he intended to join Verition, a competitor, which led, after a period of delay, to an application by Jump for an interim injunction to enforce the terms of the non-compete.
Jump’s application for interim relief was dismissed by the High Court on grounds of “stark” delay. However, on the question of the covenant’s enforceability the Court held that there was at least a serious issue to be tried.
In the Court of Appeal, the question was whether the Court below had erred in ordering a speedy trial, in particular given that the interim injunction application had failed. However, in advancing its grounds for appeal the appellant (Verition) made an argument that such a clause was so uncertain and/or offensive that there was no serious issue to be tried in respect of it.
Dismissing the application for permission to appeal, the Court of Appeal held, amongst other things, that it was not open to the appellant to challenge the order for a speedy trial on the basis that there was no serious issue to be tried, which was irrelevant to that (case management) decision. The matter therefore proceeded to a speedy trial in November 2023.
Discussion
The Jump litigation was set to cast light on the enforceability of variable and cascading covenants in this jurisdiction, in the absence of express authority, however the settlement reached during trial means that the question remains to be determined.
In the meantime, the following points can be drawn out from the decisions of the High Court and the Court of Appeal:
- In the absence of domestic authority on the point, the Courts are likely to have regard to the decisions of comparable overseas jurisdictions. For instance, uncertainty as to the scope of a restriction was considered by the High Court of Singapore in the case of Lek Gwee Noi v Humming Flowers & Gifts Pte Ltd [2014] 3 SLR (a case which was referred to as “magisterial” by the UK Supreme Court in Tillman v Egon Zehnder Ltd [2019] UKSC 32 at [79]).
- The court in Humming Flowers found that the presence of ‘cascading’ restrictions (in which the employer had a variety of options in respect of a restraint) left the “vulnerable employee uncertain as to which cascading restriction binds him in law until the issue is actually determined by a court. To that extent, it appears to me that the non-solicitation covenant would have an in terrorem [i.e. intimidatory] effect on a reasonable employee in the plaintiff’s position” (at [197]).
- Whilst the High Court in Jump accepted that there was considerable force in the argument the non-compete clause before it did not fit with the need to assess reasonableness at the time a covenant is entered into, and also that they might have an in terrorem (i.e. intimidatory) effect [27], the High Court considered it “at least arguable that, although the clause’s temporal extent was not known at the time the contract was entered into, the fact it had a maximum duration of twelve months and a mechanism by which the employee would know its extent once an election was made does not necessarily make it unreasonable for the purpose of the restraint of trade doctrine” [27] (emphasis added). It was further noted that in contrast to Humming Flowers, the uncertain temporal extension of the clause is not unknown until it is actually determined by a court, because its length will be known once the employer states what is to be the period of non-competition [28-29].
- According to Simler LJ, in the Court of Appeal’s permission decision, it may be said that there is:
“no meaningful distinction between the non-compete clause which is for a period of zero to up to twelve months, and a covenant which imposes a restriction for a fixed period of twelve months, but expressly gives the employer a discretion unilaterally to reduce the length (particularly given that, in practice, an employer always maintains a discretion unilaterally to reduce the length of a fixed restriction by any amount or to waive it entirely…” (at [47]).
- However, it is to be emphasised that Simler LJ’s comment was made in the context of an application for permission to appeal only and in the absence of hearing full argument on this issue. Paragraphs 6.1 and 6.2 of the Practice Direction (Citation of Authorities) [2001] 1 W.L.R. 1001, CA prohibit the citation of judgments on applications for permission to appeal unless they contain an express statement that they “purport to establish a new principle or to extend the present law” (which this decision did not as it was expressed to amount to comments “at this preliminary stage”). This prohibition applies even when those judgments on applications for permission to appeal have been reported (as the Court of Appeal’s judgment had been in the IRLRs).
- One might reasonably question the Court of Appeal’s reasoning in connection with the point above. With respect, it seems inapposite to compare the non-compete covenant in Jump with a hypothetical covenant for a fixed period, with an express discretion for the employer to reduce the period. In reality, such an express discretion would never be needed given that in every covenant contained in every contract of employment, an employer can simply decide not to enforce the entirety of the length of the covenant (as was recognised by Simler LJ). If Jump’s discretion under the non-compete covenant was simply read as akin to a discretion to reduce the period of restraint, it would beg the question of why it was included at all, given that a discretion to reduce exists anyway.
- Further in respect of the non-compete covenant (and unlike any normal covenant), at the time of entering the contract the employee would have had no idea:
- If he or she would be restrained from working at all, given that the non-compete period may be anywhere between zero and 12 months and thus might be set at zero; and
- If he or she was to be restrained, what the period of restraint will be, given that it could be anywhere between 1 day and 12 months. By contrast, under a more commonplace covenant, the employee knows the period of restraint, and knows that it will apply unless and until the employer chooses not to enforce it either in whole or in part.
- The non-compete clause in Jump could be said to be even more objectionable than a “cascading” covenant, in respect of which the employee at least knows the various possible periods of restraint. In other cascading covenants these are usually limited to a handful of options (e.g. 12 months, 9 months or 6 months), whereas in this case, there was no such limitation; the clause even left open whether there would be any period of restriction at all for Mr Couture. Prior to the employer making its unilateral election after notice of termination had been served, the employee would be in the position of not knowing what period of restriction, if any, he or she was bound by. In practical terms, this uncertainty may well reduce the employee’s chance of securing future employment before deciding to hand in their resignation. Prospective employers may be deterred by a variable covenant from making an offer of employment that means they cannot tell for certain when the employee will be free to join them.
Conclusion
In the absence of express guidance in relation to covenants of this sort, and in light of the issues identified in this article, it seems clear that employers and their advisors must be mindful of the potential for a successful challenge to variable or cascading covenants, and in particular covenants of the sort found in Jump.
Littleton barristers Adam Solomon KC, Niran de Silva KC, Charlotte Davis, Sophia Berry, Stuart Sanders and Asfandyar Qureshi were instructed in the Jump Litigation.
