Veitch Penny LLP - Exeter | Crediton, Devon

Case

LTE Scientific Ltd v David Anthony Thomas (1) Barbara Anne Thomas (2)
High Court - (20 December 2004)

Issues

(1) Restraint of Trade
(2) Competition
(3) Reasonableness of Restraint

Facts

On 6th December 2001 the Defendants sold their business, known as ACE, to the Claimants for £600,000.00. Mr Thomas then continued in salaried employment with the Claimants. When he left employment, the Claimant company then sought to enforce a restrictive covenant contained in Mr Thomas’ Service Agreement. The Service Agreement prevented Mr Thomas from working elsewhere in any of the defined restrictive activities for 12 months after he left employment. He also undertook not to carry on or be engaged in any of the restricted activities within a business which competed in a material way with such part or parts of the company as he had been concerned with in the last 12 months of his employment.

A preliminary hearing was held to determine whether the covenant was enforceable.

Decision

The Court held that the Claimant was entitled to enforce the clause because it had been incorporated to protect its legitimate business interest (which in this case was its confidential information). The question the Court had to consider was whether that clause was reasonable, necessary and afforded no more protection than was adequate to protect the Claimants. As Mr Thomas had been the Technical Director of the company he had access to all the confidential information it owned. Therefore, it was necessary to protect the leakage of confidential information worldwide in all the restricted activities the clause covered. Furthermore, a restriction with a duration of one year was reasonable and necessary to protect the company’s confidential information because of the time scale in which it took to develop new products.

Comments

This case highlights the distinction between restraint of trade clauses in Employment Contracts and in Business Sale Agreements. Such clauses will be construed less strictly in Business Sale Agreements because there is a greater equality of bargaining power between the parties. However, in employment cases a different principal applies. A clause which attempts to prevent competition by an informer employee will be struck down on grounds of public policy. An employer can only enforce a restraint clause if he can show that:-

1. He has an interest which is he entitled to protect such as trade secrets or confidential information.

2. The clause strikes a balance between the restriction on the former employee and on the protection of those interests.

When considering such a clause thought must be given at the drafting stage to:-

1. The seniority of the employee and whether he has access to confidential information.

2. The scale of the activities of the business.

3. The width of the restraint in terms of geographical area duration and activities.