UK: short notice period undermines enforceability of covenants

The High Court judgment in Quilter Private Client Advisers Limited v Falconer highlights the risk that a short notice period, including during a probationary period, can undermine an employer's argument that restrictive covenants should be held enforceable on the basis they are necessary to protect confidential information or customer connections.  The judgment also provides some more general guidance on the enforceability of covenants, of particular interest to employers in the financial planning and advice sector.

Ms Falconer's employment contract with Quilter included a 9 month non-compete covenant, 12 month non-dealing and non-solicitation covenants and a 6 month probationary period during which either side could terminate on 2 weeks' notice.  She had been given a book of 181 clients from a retiring employee but only 120 had been transferred to her and she had only contacted 40 before deciding to leave to work for a competitor just before her probationary period ended.

Quilter was aware that she was working for the competitor but seemingly unconcerned by this as long as she did not provide advice to any of their clients. It waited over 4 months before seeking injunctive relief, only doing so when it became apparent she was advising Quilter clients.  In December 2019 an expedited trial was ordered to be set down on the first open date from 30 March 2020. Presumably because of the pandemic, the trial wasn't heard until November 2020, four months after the covenants had expired, but still on an expedited basis.  The value of the claimant's monetary claim was a mere £39,000, with the real dispute now focussed on liability for the costs of the action, as the claimant's costs alone were close to £500,000; Ms Falconer was representing herself due to lack of funds.

The court held that the 9 month non-compete was not reasonably necessary to protect legitimate business interests because:

• Quilter had accepted that it takes 12 months or more to build a personal relationship with and become a trusted adviser of a client, and having access to the client book did not of itself build that relationship.  The 6 month probationary period subject to 2 weeks' notice made it foreseeable that her employment might end after only a short period of time during which she would have had little opportunity to build client relationships.  The brevity of the 2 week notice requirement indicated a low perceived need for protection  - the shorter the notice period, the less important to the company the employee's services would appear to be and the more junior her position.
• It was also relevant that more senior employees had the same or shorter covenants despite having greater access to confidential information, indicating that Ms Falconer had been given an old "one size fits all" contract used for more senior employees without any consideration as to its suitability.
• The court considered that Quilter's legitimate business interests could have been adequately protected by a less onerous non-dealing covenant, given there was no problem identifying with which clients Ms Falconer had dealt during her employment with Quilter.  It also noted that the evidence suggested that non-competes were not standard in the industry, supporting the contention that they were not reasonably necessary.
• Quilter had given evidence that it was relaxed about Ms Falconer moving to a competitor provided she did not deal with Quilter clients.  Together with the delay in seeking injunctive relief after learning who she was working for, this suggested that Quilter itself did not consider the non-compete to be necessary on top of the other covenants in order to protect its business interests.
• The scope of the non-compete was too wide in preventing Ms Falconer from competing with Quilter on a UK-wide basis, given its legitimate interest was confined to clients in the region which Ms Falconer had covered whilst employed by Quilter.
• To be enforceable covenants must also be reasonable in the interests of the public.  The judge thought there was some force in the argument that non-compete or non-dealing covenants could never be appropriate in the regulated financial advice sector, given that they restrict a client's ability to instruct the adviser of their choice and therefore imposing such covenants would be a breach of the regulatory obligation to act in the best interests of the client.  He was not entirely persuaded by this argument and felt that, if a covenant is reasonable between the parties, this is likely to outweigh the public interest concern, but he decided to leave the point open.

The non-dealing and non-solicitation clauses were also held to be unreasonable because they covered individuals with whom Quilter had terms and conditions of business at any point during the 18 months prior to termination, provided Ms Falconer had had personal contact with them on at least one occasion or they were included in the book of clients allocated to her (which the judge held met the requirement that she be "materially concerned" with them, notwithstanding that she had had no contact at all with some of them). The court considered that the 18 month backstop went much further than necessary: given that Quilter's clients benefited from six-monthly reviews, a backstop of 6 or possibly 12 months might be reasonable. A backstop of 18 months, coupled with a lengthy restraint of 12 months, was excessive for a junior employee, and would capture those who may long since have transferred their business elsewhere.  It was accepted that Ms Falconer had dealt with clients within the scope of the covenants and the court also found that she had solicited two clients by making disparaging remarks about Quilter's business when informing them of her resignation;  however, this was immaterial given the covenants were unenforceable.

Ms Falconer was held to have breached her employment contract by covertly scanning confidential client documents, failing to show the new employer her employment contract containing the restrictive covenants (in breach of an express clause), attending an induction course with the new employer during her working hours for Quilter, and contacting Quilter clients during her garden leave without permission. However, the new employer had not induced these breaches. Providing a portal for its advisers to upload documents facilitated, but did not amount to an inducement of, Ms Falconer's breach of contract in uploading Quilter's confidential documents without the new employer's knowledge. Further, the new employer honestly believed that her attendance at its induction course was not a breach of contract. Quilter's inducement claim was weakened by the fact that the new employer had sought a regulatory reference from Quilter's HR department;  when providing this Quilter had failed to take the opportunity to bring her restrictive covenants to its attention.

The case highlights some practical points for employers to consider when drafting covenants to maximise their chances of enforceability:

• in relation to a new recruit, consider providing that covenants do not apply until after an initial period of employment has been completed, particularly if there is a probationary period subject to short notice and/or it would take some time for the employee to build any protectable client connections
• ensure that covenants are tailored to the individual employee's role and are proportionate relative to those imposed on employees in more junior or senior roles with differing levels of access to customers or confidential information
• tailor non-deal and non-solicit covenants to reflect the actual frequency of client contact
• give a consistent message in dealings with the departing employee as to the importance of complying with the covenants
• ensure any new employer is made aware of the restrictive covenants at the same time as or before any reference is provided
• apply for injunctive relief promptly.