Non-Compete Clauses in Employment Contracts – What’s the law and how are they enforced?

If enforceable, a non-compete clause would provide an effective mechanism for an employer to protect its business interests however it would also mean the ex-employees right to earn a livelihood enshrined in our constitution has been restricted.  The employer’s business interests may be safeguarded for some time but the ex-employee might be without income for several months.

Below is a brief summary of the current law in this area and how the Courts have balanced above-competing rights.

The Law

In general the law acknowledges that competition is good and that restraint of trade is bad.  A non-compete clause will be enforceable if it a) protects a deserving legitimate proprietary interest of the employer and b) is considered reasonable in the interests of the parties and in the interests of the public.  More specifically a non-compete clause will be upheld if it satisfies the following strict criteria:-

i.          there is a legitimate interest to be upheld ; and
ii.         the restriction is reasonable between the parties in respect of
a.         duration;
b.         geographical location; and
c.         subject matter.

What is considered a legitimate proprietary interest of an employer?

The following are considered proprietary interests that an employer may legitimately seek to protect in a non-compete clause in an employment contract:-

1. Continuity of its employees;
2. Its Goodwill ; and
3. Its confidential information.

An employer is entitled to protect itself against the spectre of valuable employees being poached by a former employee who establishes business in competition with it.  Goodwill is considered to comprise the employer’s customer base, customer lists and reputation.  What is confidential information is always difficult to define and is outside the scope of this article.  Knowledge and skill acquired during the course of employment is not considered confidential information.

An employer is not permitted to prohibit all competition by a former employee but is entitled to prevent that employee from using his knowledge of the employer’s trade secrets or customer base to the detriment of the employer’s legitimate proprietary interests as referred to above.

What is considered reasonable?

The easiest question is not always the easiest to answer. The reasonableness of the restricted period, location and subject matter would depend on the circumstances of each particular case and would be determined in light of the particular legitimate interest to be protected. For example, a non-compete clause preventing a former employee stockbroker from taking up employment with a competitor might be considered unreasonable if for a period of in excess of 3 months. However, a non-compete clause preventing a former software developer employee in a niche area of say, alarm systems programming for example, from taking up employment with a competitor might be considered reasonable if the restricted period was for in excess of 6 or even 12 months.

Where a non-solicitation or a confidentiality clause would adequately protect the employer’s legitimate interest, a non-compete clause is likely to be considered to go further than is reasonably necessary and could be deemed unenforceable and void by a Court.

How are non-compete clauses enforced against former employees?

If a former employee and/or his “new” employer refuse to be bound by the terms of a non-compete clause voluntarily, the former employer must apply to the court to obtain an injunction seeking an order preventing the former employee taking up employment with the “new” employer.  Such applications for obvious reasons have to be made as a matter of urgency and as a rule therefore they are very costly.

In order to succeed in an injunction application, a court must be satisfied that:-
i.          There is a serious issue to be tried;
ii.         Damages would not be an adequate remedy; and
iii.         The balance of convenience lies in favour of granting an injunction.

A court does not decide the substantive issue between the parties i.e. whether the non-compete clause is valid and enforceable at an injunctive application stage.  It only decides the issue based on the above three criteria.

In general injunction applications in relation to non-compete clauses in employment contracts fall to be considered under the second and third criterion: whether damages would be an adequate remedy and whether the balance of convenience lies in favour of granting an injunction. If damages are an adequate remedy and/or the balance of convenience lies in favour of granting an injunction the applicant will not be entitled to the injunction.

In the recent case of Hernandez v. Vodafone Ireland Limited (February 2013) the court held that damages would not be an adequate remedy even though the loss to the former employee would be no more than €20,000 because he was able to demonstrate to the court that he needed an income of that amount or thereabouts to support his family. In that case, the employee agreed to be bound by a 6-month non-solicitation clause and a confidentiality clause but refused to be prevented from taking up employment with O2, his former employer’s competitor for 3 months from the date of termination of his employment which was in December 2013.  The employee successfully argued that it was crucial that he had a continuous stream of income to fund his liabilities.

It is important to note that this case was unique in that it was the employee who applied for the injunction. Usually, it is an employer who seeks to enforce a non-compete clause.

Summary 

In summary, there is a growing trend of judicial caution towards enforcing non-compete clauses. It is often very difficult to determine whether or not a court will uphold a non-compete clause and it is therefore imperative for an employer to include non-solicitation and confidentiality clauses in its employment contracts in order to protect its legitimate interests.  An employee should appreciate the significance of a non-compete clause and should not agree to its inclusion if he does not intend to be bound by its terms.  Whilst a non-compete clause might be unenforceable or unreasonable it is ultimately for a court to decide on the issue which, if the circumstances transpire, involve expensive litigation.  It is therefore important that such non-compete clauses are clear and precise and outline exactly the legitimate interest they seek to protect.

Prevention is better than cure.  Expert legal advice before contracts are signed can save both employer and employee considerable expense not to mention the stress and inconvenience involved in an expensive injunction application.