Dealing with departing employees, the potential pitfalls with restrictive covenants – Lessons learnt from Capita Plc v Darch [2017]

Posted by Heather Welham on
A key issue for businesses is what happens when senior employees or managers leave and set up a new company in competition or join an established competitor.

An employer needs to know to what extent it will be able to prevent use of the company's business information. The common approach is to include restrictive covenants in the contract of employment restricting solicitation of the company's clients, poaching of the company's employees, and use of confidential information gained during the course of employment. However, a cautious approach needs to be taken when drafting and enforcing restrictive covenants as there is extensive case law on such matters. The recent decision in Capita Plc and another v Darch and others [2017] illustrates some of the issues with applying for interim relief on the basis of restrictive covenants.

Legal background

The starting point is that a restraint of trade is unlawful, however, a business is able to protect its legitimate interests.  In examining whether a particular restriction is enforceable a court will examine whether: it is reasonable; that the restriction relates to a legitimate proprietary interest of the business; that the sole aim of the restriction is to prevent competition; and that the restriction is no wider than necessary.

The advantage of having restrictive covenants is that an aggrieved business can apply for an interim injunction if the employee breaches the restriction after leaving employment. However, for the court to award an interim injunction it must assess whether there is a serious issue to be tried, whether damages would be an adequate remedy as an award at trial, and the balance of convenience (in other words, which party would be most prejudiced if the court decided either to grant, or not to grant, the injunction).

Facts of the case

Capita made an application for a variety of interim and springboard injunctions to restrict a group of former employees who had set up a competitor company.

Capita, among other business areas, is a provider of business process management and integrated professional support service solutions. One of the areas in which Capita offers their services is the health sector with a customer base made up of NHS trusts and similar bodies. The defendants in the case were nine former employees of Capita and a company, Archus, which was run by many of the other former employee defendants, and of whom it was alleged was in direct competition with Capita.

As you might expect, Capita was concerned by this development and alleged, among other things, that:

  • the defendants had conspired and/or entered into a common design to set up Archus to compete with Captia;
  • that the defendants had accessed and/or misused confidential and proprietary information for the purposes of their future employment with Archus; and
  • that some of the defendants had acted in breach of restrictive covenants in their contracts of employment.

Capita pursued a claim for breach of contract and immediately launched an application for interim injunctions against its former employees.

Decision in case

Capita's application for an interim injunction was refused by the Court on three grounds:

First, while the Court examined the case against the defendants and deemed it to be sufficiently serious, it was held that there were difficulties with Capita's position due to the terms of its contracts of employment. In particular, the restrictions imposed by the contract on employees were deemed too wide by the Judge who considered that the clauses would not be upheld at trial.

Second, the Judge considered that the relief sought by Capita was too wide. In particular, the Judge concluded that relief requiring the defendants to forward to Capita's Solicitors "copies of all emails that they have received into any non-Capita email account from any email account at Capita (including their own)" and that the defendants should not "take any steps to delete remaining copies of such emails unless [they are] directed to do so" was not acceptable on the basis that:

  • the relief goes wider than the obligations required by standard disclosure in a litigation matter;
  • the contents of these emails were not the property of Capita; and that
  • the relief would infringe the right to respect for private and family life that is guaranteed by Article 8 of the European Convention on Human Rights.

Finally, the Judge held that the "clouds of suspicion" demonstrated by Capita were not akin to clear evidence of wrongdoing and were therefore insufficient evidence to allow the granting of an interim injunction, this was despite the possibility that these "clouds" may be shown to be substantive at trial.

Points to note

The case reported above dealt with an interim application for an injunction but the full trial is yet to take place. However, often an injunction is a first step for businesses seeking to enforce restrictive covenants so this case does provide a useful overview of relevant case law. Three key points should be taken from this decision:

  • Ensure that restrictive covenant clauses in employment contracts are specific on what they are restricting, particularly in relation to confidential items. Capita's argument in the case fell down because the clauses had been drafted in a manner that would likely be found to be too wide at trial and as a result the interim injunction remedy was not available.
  • Use of emails or information in a 'suspicious manner' will not always be sufficient to demonstrate the necessary level of wrongdoing required for an interim injunction to be granted (despite the fact that they might be shown to have substance at trial).
  • A request for all copies of emails sent from an email account linked to the original company to a third party on the basis that they are the original company's property is not likely to be successful. Firstly because such a request is likely to be wider than the obligations imposed on parties to provide for standard disclosure at trial, and second, the request is likely to include personal and private emails, a request for which would be in breach of Article 8 of the European Convention on Human Rights.

About the Authors

Heather is an Associate in the Commercial Litigation team specialising in contractual disputes.

Heather Welham
Email Heather
023 8085 7493

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Oliver heads up the London Employment, Pensions & Benefits and Immigration Team.

Oliver Weiss
Email Oliver
020 7814 5494

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