Anstalt & Ors v Hayek & Ors

A covenant restraining competition is enforceable only where it is reasonable between the parties and consistent with the public interest. Investors in patent rights are not necessarily entitled to restrain the inventor from competing in businesses exploiting those rights, beyond the protection supplied by the patent monopoly. Contractual restraints exceeding Parliament’s chosen patent protection require exceptional justification, particularly where they restrict a pioneer’s inventive work in medical science. An estoppel by silence requires a firm foundation in pleaded and established facts. If the underlying covenant is unenforceable, a claim for inducing its breach cannot succeed.

The claimants included companies exploiting the Hayek Oscillator and investors who had acquired interests under an investment agreement. A collateral side letter required Dr Hayek not to compete, directly or indirectly, with the relevant companies in connection with present and future applications of the Oscillator.

At trial, Mr Justice Evans-Lombe held that the side letter was enforceable by the investors, that Dr Hayek had breached it, and that Medivent Limited had procured the breach. He rejected an injunction and awarded damages instead. The defendants appealed on restraint of trade, estoppel and procurement of breach. Related appeals by the companies and investors concerned costs and an interim payment.

1. Disposition. The appeal by Dr Hayek and Medivent was allowed. The cross-appeal and costs appeal, 2002/0253 and 2002/0647, had already been dismissed after the court refused an adjournment. The claim against Medivent for inducing breach could not survive once the side-letter restraint was held unenforceable.

2. A covenant restraining competition operates in restraint of trade and is enforceable only if reasonable having regard to the interests of the parties and the public interest. The principle applies not only to employment covenants but also to restraints given on the sale of a business or in connection with an investment.

3. The trial judge had failed to relate the protection sought to the nature of the investment. The investors acquired a small interest in a company holding patent rights in the Oscillator. They did not acquire, or invest directly in, the businesses conducted by Flexco and Breasy. Their legitimate protection extended to the patent rights, including the statutory protection under Patents Act 1977, sections 60 and 61, but it was not self-evident that they could restrain competition which did not infringe those patents.

4. The covenant was also excessive in scope. It extended beyond the Oscillator, applied to competition with several corporate bodies, lacked limits of time and area, and restricted Dr Hayek’s ability to work in ventilation or respiration. The public interest in allowing an inventor to apply his skills, especially in medical science, carried substantial weight. It would be wholly exceptional to justify contractual restraints going beyond the balance struck by the patent legislation. This was not such a case.

5. The estoppel finding concerning Kilroy and Dorley was, if necessary, unsustainable. A finding of estoppel by silence required a firm foundation of pleaded and established facts, and a party said to have been under a duty to speak must have a proper opportunity to investigate and challenge the relevant facts.

• High Court, Chancery Division: Mr Justice Evans-Lombe held that the side letter was enforceable, that Dr Hayek breached it, and that Medivent procured the breach. The companies’ other claims failed.
• Court of Appeal (Civil Division): The appeal on the side letter was allowed. Appeals 2002/0253 and 2002/0647 were dismissed.