Webinar series: Confidentiality and Restrictive Covenants Around the Globe UK 24 January 2013 Paul Oxnard Morna Mackenzie 37 Offices in 18 Countries
Today ’ s presenters Jane Bullen Partner and today’s Moderator UK jane.bullen@squiresanders.com Paul Oxnard Partner UK paul.oxnard@squiresanders.com Morna Mackenzie Associate UK morna.mackenzie@squiresanders.com 2
Overview • What are the risks when an employee leaves? • What are “restrictive covenants”? • What are the established categories of covenant in the UK? • Why does your business need them? • What practical steps should you take when you discover potential unfair competition? • How do you go about taking Court action? • What steps should you be taking now to protect your business? 3
Importance and scope What restrictions are there on an employee's ability to compete? During employment Implied contractual terms – Duty of fidelity Express contractual terms – Restrictions on competitive activity during employment. – Confidential Information / IP – Garden Leave Fiduciary duties After employment Post-termination restrictions (“restrictive covenants”) 4
Importance and scope • The established position in the UK is that post-termination restrictions are only enforceable to the extent that they protect a legitimate business interest of the employer and go no further than is reasonably necessary to protect that interest . • Established categories of legitimate business interests: Trade connections (with customers or suppliers), and more generally, goodwill. Trade secrets and other confidential information. Maintaining the stability of the workforce. • The legitimacy of the business interest is judged at the time the covenant is entered into. 5
Restrictive covenants Types of covenant • Non-compete • Non-solicit • Non-deal • Non-poach • Confidentiality 6
Confidentiality Duties - During employment – express / implied / fiduciary - After employment ends – much more limited Three types of confidential information 1 – Trivial or public information which cannot be protected – anything widely known / available to the public or custom and practice in the trade. 2 – Information which an employee must treat as confidential - this will include the employee’s ordinary skills and experience 3 - Trade secrets – for example chemical formulae / recipes 7
Importance and scope Why are post-termination restrictive covenants important? • Protecting against unfair competition • Implied restrictions are of a limited nature and do not generally extend to periods after termination • Harder to control individuals once they are no longer an employee • Deterrent effect - put off potential employers • Basis for a negotiation with employee 8
Specific points to consider • Duration • Effective date • Geographical scope • Prohibited activity • Competitive activity • Business interests • Definition of customer • Definition of employees/key personnel • PILON clause • Limiting the scope of restrictions as far as possible will maximise chances of enforceability 9
Case Study • You are the HR Director of ABC. • The Ex-Sales Director (Mr Smith), (who left ABC last month) has gone to work for a major competitor, XYZ. • Mr Smith has apparently approached one of ABC’s major customers and told them that his new employer, XYZ, would be able to offer more competitive rates than ABC. The MD suspects that he may have contacted other customers. • The MD has also discovered that 2 of the most senior members of the sales force have handed in their notice and plan to go and work for XYZ too. He suspects they have been approached by Mr Smith and is concerned that other employees may have been approached. • Mr Smith’s Service Agreement contains a 12-month non-solicitation of customers clause, a 12-month non-poaching clause and an express confidentiality clause. He spent the last 4 months of his notice period on garden leave. • ABC sells its products to customers all over Europe and in the US. XYZ does not operate in the UK. It only competes with ABC in the US and German markets. 10
Practical points Practical points where competitive activity is suspected / discovered • Act swiftly and take steps to find out what has happened • Check any relevant employment contract(s), employee handbooks and/or company policies • Gather information and evidence promptly, including details of: • What has occurred? • What is the employee doing? • Who else is involved? • Are other employees involved or likely to be? • Are customers involved or will they be? • Where is or will the employee be operating from? • Are the employer’s customers/suppliers being targeted or are they likely to be? 11
Practical points • Consider whether any obligations have been breached • Have any competitive activities been carried out during company time? • Has any confidential information been misused and/or removed? • Have other employees been enticed to participate in the competitive activities? • Have customers/suppliers been notified by the employee or has the employee sought to interfere with dealings between them and the company? • Has there been a failure by the employee to disclose information to the company? (particularly relevant to fiduciaries) • Consider what threat the activity poses to the business • Consolidate relationships with customers/employees to minimise scope for damage 12
Evidence gathering • Speak to employee’s colleagues, including secretary and personal assistant • Check the computer system, including electronic diaries, emails, internet usage – especially around notice period/termination as well as telephone call logs and photocopying records • Unusual requests for information/documentation e.g. client lists • Unusual or unexplained behaviour – working weekends, taking home documents, forwarding documents to personal email accounts • Correspondence with clients and lavish entertainment of clients • Social networking sites – Facebook and Twitter • Preservation of hard drives / forensic imaging 13
Practical tips for evidence gathering • Sophisticated employees will seek to cover their tracks but it is rare for an employee to leave no evidence - a thorough search will usually find something. • Be cautious of details of any investigations being fed back to the employee. • Beware of overstepping the mark – Data Protection Act 1998, Part 3 of the Employment Practices Data Protection Code, Human Rights Act 1998. 14
Starting proceedings • Strategy is key • Issuing a claim • Injunctive relief • Order for speedy trial 15
Remedies / settlement • What can be achieved? • Can the Company demonstrate it has suffered financial loss or other harm? • Compensation/contribution to costs • Return of salary ? • Undertakings (extended period)/sworn affidavit • Delivery up • Apology / public statement 16
Social Media Why is social media important in the context of restrictive covenants? • 200 million+ registered LinkedIn users. • Social media sites are designed to enable the type of activity which you are trying to restrict. • New sources of evidence – approach to evidence gathering. 17
Social Media Specific issues • Is information stored on a social media site “confidential”? • What happens to information/ property stored on social media sites after employment ends? • Who owns LinkedIn contacts? • What constitutes “solicitation” when using social media? 18
Action Plan 1. Consider the risks. 2. Review contracts – do you have the protection you need? 3. Review handbook – do your policies and procedures give you the protection you need? 4. Review your termination procedures. 5. Put in place a Social Media policy. 6. Diarise to check again (and again!) 19
Contact details Paul Oxnard Partner Squire Sanders (UK) LLP E: paul.oxnard@squiresanders.com Morna Mackenzie Associate Squire Sanders (UK) LLP E: morna.mackenzie@squiresanders.com London office 7 Devonshire Square, London, EC2M 4YH T: +44 (0)20 7655 1000 F: +44 (0)20 7655 1001 20
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