I was out at a business today preparing to deliver a presentation on 'Getting your recruitment right'. I was chatting to their CFO, who is a good friend of mine, when the topic turned to the other end of the employment relationship - termination.
More specifically, we began discussing an issue that the CFO was currently dealing with. A senior executive had resigned a day after returning from a company funded conference overseas.This in itself was no real issue and something that both the CFO and I agreed was just the cost of running a business.
The real issue was that this particular senior executive had immediately joined a competitor and had taken a substantial amount of company property (intellectual and otherwise) with him. He had then used this inside knowledge of the company to put in a competing tender for a lucrative supply contract. Illegal? Possibly. Immoral? Most likely. Very difficult for the former employer to deal with effectively (from a cost and time point of view)? Definitely!
Unfortunately for the ex-employee the former employer has sought substantial legal advice and their position is quite strong with respect to enforcing their restraint of trade/no-competition clause and seeking damages should they occur.
For the business this now creates the catch 22 situation that we were discussing today. Although in a seemingly, and logically, very strong position the company is going to have to spend a substantial amount of money to defend their position, or potentially lose a substantial revenue source if they lose the contract in question.
As technology makes it easier for us to access information, it in turn makes it harder for us to control what people do with that information. This particular employee had a very intimate knowledge of the company's position and operations in practically every way. So when this employee resigned he took a significant amount of inside knowledge with him. This is likely to occur every time an employee leaves a business. And whilst you can try to minimise how much information an employee takes with them, short of erasing their memory there is very little that can be done to guarantee an employee won't use their knowledge in their next role.
Obviously this particular employee had chosen to use his knowledge for less than honourable endeavours, seemingly more for a significant personal gain. His former employer is very reasonable and they understand completely they cannot expect that employee's won't leave - and an element of this will be employee's taking a knowledge of sensitive information with them. They are also very much aware that they need to defend their hard earned market share.
Restraint of trade clauses are commonly used in the contracts of senior employees and in industries that are at risk of their employees taking their clients with them (finance, sales and law are the most common).
Even when these clauses are included in such contracts they can be costly to enforce and in many circumstances they can be found by a relevant Court or Tribual to be unenforceable if it found they are unreasonable or too restrictive.
Clauses can be found to be unreasonable or restrictive generally because a Court or Tribunal will find that an employee has a right to earn a living and a business cannot unreasonably restrict this right. Typically taken into account is the nature of the business/industry, the risk to the business and the employee from a financial point of view and the employee's career prospects (this will look at the jobs available, including geographical factors).
I won't go on too much about the solutions I offered the CFO - that sort of information is confidential. However, I will say I still advocate the use of restraint/no-competition clauses, provided you are realistic/aware of their pro's and con's.
I definitely recommend that should you have cascading restraint clauses - from very restrictive to less restrictive. This allows a Court or Tribunal to find that one element of the clause is unreasonable and others reasonable (and therefore still enforceable). If cascading provisions are not included and a Court or Tribunal finds one element unreasonable, the whole clause will be deemed inoperable and ineffective.
For more information on anything discussed in this blog please get in contact.
Regards,
Chris Turner
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