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THE IMPORTANCE OF PRE-ACTION DECISIONS IN EMPLOYEE COMPETITION LITIGATION

Employee competition litigation typically starts with the discovery of some perceived threat to a business: perhaps the theft or removal of confidential documentation or information; the co-ordinated departure of key employees; or evidence of breaches of post termination covenants. Decisions have to be taken, often under time pressure, about how best to respond to that threat: is a without notice application justified? Is pre-action correspondence appropriate, and if so in what terms? What if any undertakings should be sought? These critical early decisions can have a significant impact on the future conduct of any litigation, including issues of costs and interim relief. 

A recent illustration of  this is provided by the decision of Snowden J in Affinity Workforce Solutions Ltd v McCann [2019] EWHC 2829 (Ch).

The Claimant was a recruitment agency operating in the education sector. The Defendants were five ex-employees of the Claimant (“the Individual Defendants”) and their new employer, Tradewind Recruitment Limited (“Tradewind”) a competitor recruitment agency.

The Claimant alleged that each of the departed employees was subject to enforceable non-competition covenants which precluded them from working for Tradewind. It sought an interim injunction preventing them from continuing to do so.  The Individual Defendants offered undertakings not to solicit or deal with relevant candidates or clients, but resisted the imposition of a non-competition injunction preventing them from continuing to work for Tradewind altogether.

The evidence regarding the terms and conditions that governed each of the Individual Defendants’ employment with the Claimant was complex and contested: there had been a number of alleged TUPE transfers; a number of contracts relied upon by the Claimant had not been signed by the relevant Individual Defendants; and one of the Individual Defendants alleged that she had been wrongfully dismissed, such that she was free from any post termination restrictions. The judge acknowledged that there were “… a number of legal and factual hurdles which [the Claimant] would have to surmount” at trial but concluded that there was nevertheless a serious issue to be tried for the purposes of the American Cyanamid test.

Having found that damages would not be an adequate remedy for either side, the judge considered the balance of convenience. He decided that it militated against the grant of an interim order enforcing the non-competition covenant: and it is clear that that decision was principally based on the way the dispute had been litigated prior to the application.

One of the Individual Defendants had started working for Tradewind on 20 June 2019. Eight other former employees of the Claimant – including the other four Individual Defendants – had started working for them between 29 July and 5 August 2019. In pre-action correspondence the Claimant had sought contractual undertakings from the departed employees concerning the non-use of confidential information and non-solicitation of candidates and clients but did not seek to prevent them from working for Tradewind. This stance had continued until 26 September 2019 (i.e. a day before the application for the injunction had been issued) and had resulted in an agreement not to issue proceedings against three of the ex-employees (who as a consequence were not defendants to the subsequent proceedings). This pre-action history proved determinative of the injunction application as is clear from paragraphs 52-55 of the judgment:

In the instant case, for a significant period after it was known that the Employees were working for Tradewind, the remedy which [the Claimant] pursued in correspondence was to obtain undertakings to prevent the Employees soliciting or dealing with particular customers and candidates with whom they had established relationships whilst at the Claimant. The Claimant did not assert that it was necessary to enforce the broader non-compete covenants alleged to exist in the Employee's contracts until some time after the Employees had started to work for Tradewind.

Moreover, until 26 September 2019, the Claimant was prepared to agree for each of its ex-employees a list of the customer schools and candidates that the employees should undertake not to solicit or deal with for an initial period whilst at Tradewind. In agreeing those lists, the Claimant must have accepted that it was possible to identify, with sufficient precision, the contacts and relationships which it contended amounted to its property for the purposes of protecting its legitimate business interests.

Further, in accepting that it was sufficient to protect its interests that some of the employees could give agreed undertakings not to solicit or deal with the specified customers and candidates, the Claimant must have accepted that those ex-employees could be relied upon to honour the contractual commitments that they were prepared to give.

In my judgment, that agreed regime addressed the underlying purpose of protecting the confidential information or relationships forming part of the Claimant’s business and property; and it would seem that the parties agreed that it would not to give rise to any uncertainty of definition, or inability effectively to police the regime, which the authorities indicate might justify a wider non-compete covenant.

Snowden J added (at para. 64) that if there were any doubt about his conclusion it was put beyond doubt by consideration of the relevant status quo: the current status quo involved the Individual Defendants having established new business relationships at Tradewind and he “… would be reluctant to disturb that new situation except on clear evidence that it was necessary to do so to provide sufficient protection to [the Claimant] for its legitimate interests. There is no such evidence”. The application was dismissed with a costs order made in favour of the Defendants.

Conclusion

The case illustrates the potentially decisive importance of decisions taken at the outset of the dispute. Delay, or adopting a stance that is at odds with a subsequent stance, can undermine a later application. Equally, an overly aggressive initial response can be damaging: asking for a lot and getting a little may leave you vulnerable on costs. The need for a nuanced and carefully analysed response applies equally to potential defendants: in this case the Defendants had offered undertakings which provided highly relevant to the court’s assessment of the balance of convenience, and the judge’s decision to dismiss the application.

Daniel Tatton Brown Q.C. was instructed on behalf of the Defendants by Ed Cotton and Julien Luke of TLT LLP.

Posted: 21.11.2019 at 13:59
Tags:  Comments  Employment Law
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