Restrictive Covenants - How to protect your business when key people leave
This article first appeared in the Sunday Business Post on Sunday 19 August 2018.
We all recognise the established indicators of a growing economy – buoyant consumer confidence and tax receipts running well ahead of target. A less obvious but just as convincing sign of confidence in the market is the recent trend of departures of key people to competitor businesses, sometimes taking an entire team, sometimes taking trade secrets - sometimes both.
Recently we have seen that employers are increasingly willing to take the expensive and public High Court injunction route to restrain the theft of confidential information. But it can be a gamble. These restrictions can be difficult to enforce because they are regarded as unfairly interfering with the open market and disrupting an individual's right to use their skills and experience to earn a livelihood.
So, what can employers do?
A suspicion of wrongdoing by a former employee is not enough to secure a High Court Order to stop the damage. You need proof.
- Move quickly to identify what has left the building with the ex employee. Check email, call and printing history on work devices in the weeks before departure. Examine attempts to permanently delete items.
- Engage experts to forensically interrogate activity on work issued devices. Departing employees are savvy and cover their tracks better nowadays. You may need to dig deeper and examine patterns of unusual conduct to piece together the jigsaw.
- Check CCTV for unusual activity.
- Remember - without the smoking gun, there definitely is no fire.
Who can forget GDPR?
Enforce rigorous data security practices. Do not tolerate employees routinely sending confidential information to personal email accounts or storage locations outside of your secure network. This potentially creates a serious GDPR risk and it is also unhelpful in trying to restrain wrong doing, when the time comes. If the only evidence is a few emails by an ex-employee to a gmail account, a long standing practice of this in the business devalues that evidence.
What does the contract say?
Without a written agreement signed by both parties, it is difficult to stop an employee from soliciting clients, staff and competing with the former business from day one in their new venture.
The one exception is the common law rule that an employee cannot steal or misuse highly confidential information or trade secrets. But beware – labelling a document as "confidential information" is not enough. The bar is high - a "trade secret" is information which, if disclosed to a competitor, could cause real or significant damage to the information owner – a famous example, the Coca Cola recipe. A customer list or marketing strategy is unlikely to be a "trade secret".
Ensure that you have a comprehensive and bespoke definition of "confidential information" in contracts of employment. Insert clear restrictions on its misuse and disclosure. The good news is that employers can restrict the misuse and disclosure of confidential information forever - or at least for so long as it is remains confidential and outside the public domain.
More good news – non solicitation and non dealing restrictions can be worth the paper they are printed on – provided they are bespoke, reasonable and go no further than necessary to protect a legitimate proprietary interest. Pay careful attention to the drafting of these clauses in particular in relation to their duration and scope. The restrictions must have a short duration, no more than three to six months typically. The geographic scope should be limited to, for example, Dublin or Munster or just Ireland). Define your business carefully and limit the restrictions to customers or assets that are truly vulnerable and in need of lawful protection. A court will not, as a general rule, re-draft the restrictions to help in their enforceability.
And some bad news. As a general principle, non-compete clauses are exceptionally difficult to enforce. In all but rare cases, the better battle to fight is to preserve the confidentiality of information and to restrict unlawful soliciting of customers and employees.
Be aware of the practical limitations of non-dealing clauses. If a client really wants to follow an ex-employee then, without proof of wrong doing, an employer might just have to let that one go and wait for its opportunity to work with that client again. The same goes for employees. No court will prevent an employee going to work for an ex-employee without evidence of wrong doing by either.
In short – secure your data, update your contracts and be prepared to fight the right battle when the time comes.