Thomas v Farr Plc & Anor

An employer may enforce a post-termination non-competition covenant only to protect a legitimate business interest, rather than to prevent competition itself. Confidential information may justify the restraint where the employment is liable to expose the employee to trade secrets or information of equivalent confidentiality.

The employer must particularise that information sufficiently to establish the legitimate interest. The required detail depends on the circumstances. Difficulty in separating protected information from the employee’s general knowledge may support a non-competition covenant where its duration, geographical reach and business scope are reasonable.

Reasonableness is assessed when the covenant is agreed. Evidence of information later received may illuminate what exposure was reasonably foreseeable. Non-solicitation and confidentiality covenants are not necessarily adequate substitutes where enforcement would be impracticable or the protected information is not client-specific.

The appellant had been managing director of an insurance broker specialising in the social housing market. His employment contract prohibited him for 12 months after termination from competing with the employer within the relevant business and territory. After terminating his employment and proposing to join a new competitor, he sought a declaration that the covenant was an unreasonable restraint of trade.

Ramsey J determined the enforceability of the covenant as a preliminary issue. He found that the appellant had access to continuing confidential information concerning financial planning, pricing, insurer arrangements and business-development strategy. He also found that the confidentiality and non-solicitation covenants gave inadequate protection and that the non-competition covenant’s scope and duration were reasonable.

The appeal challenged the sufficiency and particularity of the confidential information, the need for a non-competition covenant, and the reasonableness of its geographical, business and temporal scope.

1. Appeal dismissed. Toulson LJ, with whom Scott Baker and Chadwick LJJ agreed, held that the covenant was enforceable. The judge had correctly identified and applied the law governing post-termination restraints.

2. An employer relying on confidential information must show that the proposed employment was liable to expose the employee to trade secrets or information of equivalent confidentiality. The information must be particularised sufficiently for the court to determine whether a legitimate interest exists, but no greater particularity is invariably required. The degree of detail depends on the facts.

   There was ample evidence that the managing director’s position foreseeably exposed him to protected information. This included budget and profit targets, facility-management fees, pricing strategy, insurer arrangements, acquisitions and the development of new markets. Such knowledge could assist a competitor in undercutting the employer or planning competing business.

3. Reasonableness was assessed when the managing-director agreement was made. Evidence about information actually received later was relevant to what exposure had then been reasonably foreseeable. Whether every later strategy had matured by termination was not decisive. If the employee ultimately retained no protected information, that might affect the grant of an injunction, but it would not make the covenant unreasonable when agreed.

4. The confidentiality and non-solicitation covenants did not provide adequate protection. It could be difficult to distinguish protected information from information that the former employee remained free to use. The non-solicitation covenant was also difficult to police because subordinate staff, rather than the former managing director, were likely to conduct client negotiations using strategies informed by his knowledge. Some protected information was strategic and not client-specific.

5. The substantive and territorial scope was reasonable. The covenant prevented competition in the social housing insurance sector where the protected information was relevant, but left the employee free to broker insurance in other sectors and to work for insurers without competing with the former employer.

6. The 12-month duration was also reasonable. Evidence established that information about insurer arrangements and planned business developments could remain confidential for more than a year. The judge was entitled to accept 12 months as a conservative estimate of its continuing currency.

• Court of Appeal (Civil Division): The appeal was dismissed by [2007] EWCA Civ 118. The court upheld the determination that the 12-month non-competition covenant was enforceable.
• High Court, Queen’s Bench Division: Ramsey J determined enforceability as a preliminary issue in a reserved judgment dated 12 October 2006. He held that the covenant was enforceable. No neutral or report citation is stated.