The government recently launched a call for evidence asking for companies' views on whether the use of non-compete clauses in employment contracts stifles growth, particularly in the science and tech sectors.
It’s undoubtedly frustrating for businesses to find that a prospective hire’s activities are restricted for a period of six (or even up to 12) months after they left their old job.
And there is some evidence that innovation flourishes in places where non-compete clauses are less likely to be enforceable. A study by Berkeley and MIT last year suggested that successful inventors left Michigan in droves after the law there changed to allow non-compete agreements to be enforced, while California, home to Silicon Valley, refuses to enforce such agreements.
But does English law in this area really stifle competition, or does it provide necessary protection for businesses that invest in innovation?
The government’s call for evidence is looking not only at what lawyers call non-compete clauses (clauses which restrict an individual’s ability to work for a business which competes with their former employer) but at other post-termination restrictions on approaching, or having dealings with, the previous employer's customers or clients ('non-deal' clauses) and on poaching staff from their former employer ('non-poach' clauses).
These restrictions apply for a fixed period of time after the individual leaves their old job, usually between six and 12 months, and are often offset against any time the individual spends on gardening leave (i.e. being paid during their notice period without carrying out any work).
The law in this area undeniably favours businesses with greater resources. Such clauses are unenforceable unless the employer seeking to rely on the clause can demonstrate that it goes no further than reasonably necessary to protect a legitimate business interest, such as confidential information, client relationships or workforce stability.
In order to be confident that the clauses included in its employment contracts are enforceable, a business must usually take specialist legal advice, as the wording needs to be carefully tailored to the business and take account of the substantial case law in this area.
This immediately disadvantages startups, which may not have the resources to invest in this.
The way that the clauses are enforced compounds this David and Goliath situation. If a business discovers that a former employee has breached such a clause, unless the matter can be resolved by negotiation, the business must start a claim against the ex-employee and/or their new employer in the High Court, and apply for an interim injunction to prevent the ex-employee breaching their obligations until a full trial can take place (which usually takes a couple of months).
Although the test for enforcing a non-compete obligation is strict in theory, the threshold for an interim injunction is much lower. The business seeking the injunction need only show that it has an arguable case that the relevant clause is enforceable.
This means that a business which can afford the (very substantial) legal costs involved can often buy itself a few months’ grace and stifle a competitor, even if the court decides at the full trial that the clause is unenforceable.
A startup business, faced with the threat of an interim injunction application from a larger competitor, may well decide that it simply cannot afford to haemorrhage cash on litigation and will instead agree not to permit a new hire to breach the clauses.
However, there is a flipside to all this. Protecting ideas is critical for technology businesses that have business models built on innovation.
Including confidentiality and intellectual property clauses in staff employment contracts is essential but may not be enough on its own to protect the business. Intellectual property law is often of limited use when an employee leaves and starts competing. Source code may constitute intellectual property, but it is much harder to protect the functionality of a product under the IP regime.
Confidentiality clauses, which aim to prevent the employee using confidential business information after they leave, also have drawbacks.
Although some product specifications may be genuinely confidential, it is often difficult to draw a line between what is genuinely confidential information and what represents the employee's skill and knowledge.
Proving a breach of confidentiality can be tricky unless there is clear evidence of wrongdoing (classic examples are printing the customer database or emailing key information to a personal email address just before resigning).
As a result, post-termination restrictions may be the best way for technology businesses to protect themselves. This is particularly important for employees involved in product development as without a non-compete, there is little to prevent them leaving and immediately developing a very similar product for a competitor.
Making it more difficult to enforce non-compete clauses could therefore make the UK a less attractive base for businesses wishing to invest resources in developing innovative products, and less appealing to investors.
The current law is far from perfect and a fairer balance can and should be struck, but the government must resist the urge to throw the baby out with the bathwater and deprive businesses that invest in product development of much-needed protection.
Alexandra Mizzi is a senior associate in the employment team at law firm Howard Kennedy.
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