Former director prevented from poaching clients through interim injunction
The High Court has temporarily enforced restrictive covenants in a former director's contract, in a case which has some interesting implications when considering how long restrictive covenants in an employment contract should last.
Restrictive covenants are a vital tool for the protection of client relationships and databases, and most staffing companies require their recruitment consultants and managers to enter into such covenants as a condition of employment. However there always has been and probably always will be considerable uncertainty over the enforceability of such covenants on a case by case basis, because the questions of how long a covenant should last and how broad in scope it can be will always provide fertile ground for litigation, and will vary depending on a multitude of factors.
In the case of Le Puy Limited v Potter the High Court was recently asked to rule on a dispute involving a staffing company seeking to enforce restrictive covenants against a senior employee. The case serves as a useful reminder of the issues that recruiters need to be aware of when faced with unfair competitive activity by former employees.
The staffing company, which traded as Harpur Recruitment, was in the business of supplying temporary workers to the warehousing, logistics and constructions sectors. Mr Potter had been a director and shareholder and had most of the client relationships. He was subject to twelve month non-solicitation and non-dealing covenants.
Mr Potter resigned citing poor health and personal reasons, but shortly after his resignation Harpur Recruitment learned that Mr Potter had set up a competing business and was dealing with and attempting to supply temporary workers to clients of Harpur Recruitment.
Harpur Recruitment sought an injunction from the Court to prevent Mr Potter continuing these activities by making him comply with the restrictions in his employment contract. Mr Potter challenged the imposition of an injunction by denying that he had ever signed the employment contract containing the covenants and arguing that the covenants were too wide in any event because they prevented him from dealing with clients in their entirety, rather than merely the specific branch offices that he had personally dealt with.
Despite these arguments the Court decided to grant Harpur Recruitment an interim injunction. Applying the established tests the Court determined that there was at least a serious arguable case to be tried as to the application and enforceability of the covenants. The Court also ruled that it would be difficult to establish a causal link between the breach of covenant by Mr Potter and any loss of business suffered by Harpur Recruitment and therefore damages would not be an adequate remedy for Harpur Recruitment if it were to ultimately succeed in enforcing the covenant later on in proceedings. Accordingly, although the Court could not decide on the enforceability of the covenant at this interim stage, it was prepared to grant an interim injunction to preserve the position pending trial.
The case is a very useful reminder about the sort of issues that a Court will consider when asked by a staffing company to grant an injunction. One particularly interesting aspect of the case was the Court's indication that because the covenants were for twelve months it was content to grant the interim injunction without any great scrutiny of the covenants because there was time for a full trial before the expiry of the covenant period, it being a matter for the judge at the full trial to determine the question of enforceability.
The implication seemed to be that if the covenants had been for a shorter period (e.g. six months), such that the restrictive period would in any event have expired by the time the full trial could have been heard, then the Court would have had to have looked more closely at the question of enforceability of the covenants at the interim stage. If that were to be the case it could achieve a rather bizarre result whereby shorter covenants, which on the face of it should be more readily enforced than longer ones, are more liable to being struck out at interim stage, simply because they are likely to be subjected to a more rigorous scrutiny. Whilst it would be unwise to read too much into this, because it was not central to the Court's decision and was more in the nature of a passing observation, it does nonetheless serve to highlight the complexity of employment covenants and suggests that there is likely to be plenty more litigation to come in the future.
This article was first produced for APSCo, the Association of Professional Staffing Companies.