Ryanair case demonstrates difficulties in enforcing restrictive covenants
The High Court refused a recent application by Ryanair for an injunction to prevent its former Chief Operations Officer (COO) (Mr Bellew) from joining easyJet. It held the restriction in question was void and unenforceable as an unjustified restraint of trade.
Many employers insert post-termination restrictions in employment contracts with the aim of protecting their business from the damage the employee could do in moving to a competitor. The courts will heavily scrutinise whether such a restriction extends further than is necessary to protect the employer's business interests and if so, the restriction will be unenforceable.
Mr Bellew was recruited as COO of Ryanair in October 2017. He received share options in 2018 and in return entered into a separate post-termination restriction.
Mr Bellew agreed to a non-compete restriction that he would not, for a period of 12 months after the termination of his employment, work in any business in competition with Ryanair for air passenger services in any market.
In July 2019 Mr Bellew resigned in order to join easyJet as its COO, commencing 1 January 2020. Ryanair commenced proceedings relying on Mr Bellew's restrictive covenants.
In his defence, Mr Bellew raised the following:
- The covenant was not binding as the consideration (the value given in return for the covenant) was worthless. Mr Bellew pleaded that he was not bound by the covenant, as the 2018 grant of share options were "obsolete and worthless"
- That he was so badly treated by Ryanair that there should not be an injunction
- That the covenant was void and unenforceable because the restraint was excessive
What did the High Court decide?
In relation to Mr. Bellew's defence, the High Court held that:
- The time at which consideration is to be assessed is the time at which the covenant was given, i.e. the date on which the offer of share options was accepted. Allen J was quite satisfied that at the date of the grant the options were thought – on both sides – to be valuable. Mr Bellew's first line of defence failed.
- In relation to Mr Bellew's treatment by Ryanair, Allen J commented: "If Mr Bellew had made out his case that he was badly or unreasonably treated – short of constructive dismissal – an interesting legal issue might have arisen as to the extent to which the court might properly have regard to such conduct in the exercise of its discretion to enforce a post-termination restraint to which the employee had agreed but the ground has not been laid in fact, so the legal issue does not arise".
- In relation to the enforceability of the restraint several noteworthy findings were made:
- A confidentiality clause is no substitute for a non-compete clause. The court found that confidential information obtained in the course of employment may be deployed by a former employee, without necessarily disclosing it. The resulting damage would not be covered by a confidentiality clause.
- The court found no difficulty with the time constraint. A period of 12 months was abundantly justified by the likely useful life of the confidential commercial information that would have come to Mr Bellew's knowledge.
- Difficulty arose for Ryanair however, as the covenant applied to any business wholly or partly in competition with Ryanair for air services. It applied not only to low cost airlines, but also to "legacy or flag or high cost" airlines. It was clear that there are two "spaces" in the market: the low cost space and the legacy or flag space, in which the fares are considerably higher. It was acknowledged in evidence that if Mr. Bellew had wanted to join a high-cost airline a different view would have been taken by Ryanair. Allen J. therefore found: "It seems to me to follow that the commercial information that Mr. Bellew has is not sufficient justification for preventing him from taking up employment with a legacy airline and that the restraint is too wide".
- The other provision of the restraint in this case that troubled Allen J was the prohibition on employment "in any capacity". It appeared to him that literally construed this would restrain Mr. Bellew from taking up employment with another airline as a pilot or air steward. He found the restraint on employment "in any capacity" went beyond the interest Ryanair sought to protect and was not shown to be justifiable.
What does this mean for employers?
Employers need to exercise particular caution in using standard restrictive covenants. Covenants need to be tightly tailored to reflect the particular damage the employee could do post-termination of employment.
Employers should carefully consider restrictive covenants with senior employees, particularly those who are in possession of valuable confidential information and pay particular attention to the express terms of restrictive covenants which address the type of role and business the employee is prohibited from entering into.
For more information in relation to this topic, please contact Triona Sugrue or any member of the A&L Goodbody Employment team.
Date published: 20 January 2020