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  • Ireland
  • General

17-10-2013

Non-compete clauses are commonly included in employment contracts and can be an effective way of protecting an employer’s commercial interests.

However, the recent High Court decision in Hernandez v Vodafone casts some doubt on the extent to which an employer can rely on such clauses.

In this case, the High Court granted an injunction restraining Vodafone from enforcing a noncompete clause in a former employee’s contract when the employee was offered a position with O2. The Court accepted that the enforceability of Vodafone’s non-compete clause was open to challenge and that it should be prevented from enforcing it until the trial of the action as it would restrict the employee’s ability to provide for his family.

Background

The employee worked for Vodafone for seven years and subsequently left his employment after being offered a position with O2. Vodafone sought to enforce the non-compete clause in the employee’s contract so that he would be prevented from taking up employment with O2 (a direct competitor)
for six months after leaving Vodafone. Following some negotiation between lawyers for Vodafone and O2
regarding the employee’s notice period and proposed start date with O2, it was agreed that the restriction period in question was approximately three months.

The employee brought proceedings to challenge the enforceability of the non-compete clause and sought an injunction preventing Vodafone from enforcing it so that he could take up his employment with O2 immediately. The injunction was granted.

The decision is interesting for two reasons. First, it demonstrates the Court’s willingness to grant an injunction against an employer on the basis that damages are not an adequate remedy in circumstances where an employee is suffering only financial loss by being restricted from working. Secondly, the Court accepted that a noncompete clause of only three months duration is open to challenge in the Courts.

Injunction

In granting the injunction, the Court was satisfied that damages would not be an adequate remedy for the
employee on the basis that if the clause was enforced, it would result in a lack of cashflow for the employee for the duration of the restricted period. The Court took the view that this would cause hardship to the employee and his family and that, although this hardship would be purely financial, it could not subsequently be remedied by an award of damages.

The Court’s view appears to be that a lump sum reimbursement of income at some point in the future could never remedy the hardship that would actually be endured during three months with no income.

Interestingly, the Court came to this conclusion notwithstanding the fact that the employee left his employment with Vodafone voluntarily and was in no way prevented from working in any other capacity during those three months or from obtaining jobseeker’s benefits.

The Court also found that it was irrelevant that the employee was fully aware of the consequences of the noncompete clause when he entered into the contract with Vodafone and that the contract he entered into with O2 contained virtually the same non-compete restrictions.

This High Court decision differs from most employment injunction scenarios in that the injunction sought was merely to restrict the former employer enforcing a noncompete clause, rather than forcing a former employer to allow an employee to return to work or pay his salary.

However, this recent decision gives greater weight to the potential financial hardship not only to the employee but to his family in assessing adequacy of damages when granting employment injunctions.

Non-compete clauses

In granting the injunction, the Court was satisfied that there was a fair issue to be tried regarding the enforceability of the non-compete clause.

This decision indicates the Court’s readiness to cast aside non-compete clauses in favour of employees and, therefore, provides some key learnings for employers as follows.

  • Employers should review their non-compete clauses to ensure that they are as narrow in scope as possible in order to protect their commercial interests without causing undue hardship to employees.
  • One size does not fit all. Non-compete clauses should be drafted in light of the specific circumstances of an employee’s position – while a strict non-compete clause may be appropriate for some employees, such as those who handle sensitive commercial information or intellectual property, it may not be for others.
  • One way of ensuring that a non-compete clause is not overly restrictive is to allow any period of garden leave following an employee’s termination to be offset against the restricted period or even provide for continued payment to the employee during the period of proposed restriction.

In summary, employers should always tailor their noncompete clauses as an overly restrictive non-compete clause might only defeat its own purpose.

 

Disclaimer

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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