Recent developments in the US, as well as potential changes mooted in the UK, may fundamentally alter the way that organisations can impose contractual restrictions on those who hold valuable confidential information and influence.
Certain US states have limited the use of non-compete restrictions on workers on the basis that they stifle innovation. However, the US Federal Trade Commission (FTC) has recently announced a proposed rule to ban non-compete clauses between employers and workers at a federal level.
The proposed rule would make it illegal across the US for an employer to:
• enter into or attempt to enter into a non-compete clause with a worker;
• maintain an existing non-compete clause with a worker; or
• represent to a worker, under certain circumstances, that the worker is subject to a non-compete clause.
There are some limited exceptions: non-compete clauses between a buyer and seller of a business, where the restricted person holds a minimum 25% shareholding in the business, would not be prohibited.
In justifying the policy change, the FTC commented that less onerous alternatives to non-compete clauses, in particular non-disclosure agreements, provide adequate protection to businesses.
It is notable that the position in the US is being driven by the FTC as its anti-trust regulator, indicating that this matter is seen as a broader unfair trading issue, rather than just a matter of what is fair or reasonable to impose on an individual. Similar commentary is now being seen from the UK’s Competition and Markets Authority, as well as its European counterparts, on unfair competition practices when recruiting and retaining talent. Employers should keep a close eye on these regulatory developments.
Will it happen here?
In the past few years, there has been talk of change to the current UK legal regime on non-compete restrictions imposed on individuals. The government launched a consultation in December 2020 on measures to reform post-termination non-compete clauses in employment contracts.
The consultation, which closed in February 2021, sought views on two main options for reform:
1. making post-termination non-compete clauses enforceable only when an employer provides compensation during the term of the clause, and
2. introducing an outright ban on non-compete clauses (akin to the FTC’s approach).
A number of interested parties, including the Employment Lawyers Association, responded to the consultation, flagging the lack of clear evidence that such changes would achieve the stated policy aims and also that legislative reform in this area would cause enormous upheaval to the current common law legal regime.
The outcome of the consultation is awaited, although a minister confirmed on behalf of BEIS that the government was in the process of analysing responses to the consultation and that a response would be published “in due course”.
For now, employers can continue to include post-termination non-compete covenants in their employment contracts. These remain a useful and legitimate business protection measure.
We consider that the most likely route for reform is that an employer must compensate the employee during the restricted period. This would align with the approach in other European jurisdictions where the payment of compensation is a prerequisite for enforceability.
There is, however, little point in UK employers taking formal steps to adopt such an approach within their businesses at this stage because any changes will be a long way off.
In addition, the payment of compensation is not a factor that the UK courts currently take into account in determining the enforceability of restrictive covenants under the existing common law regime. Payment mechanisms are being used in some sectors in the UK but can be unwieldy and add another arena for dispute. Garden leave is a more straightforward alternative.
What should businesses be considering at this point?
Despite the above, it remains the case under the current legal regime in the UK that many businesses either do not consider that the contractual restrictions often imposed on key stakeholders are effective or find that it can often be disproportionately time-consuming and costly to seek to enforce them. But the risks for businesses have perhaps never been greater, especially in today’s hybrid working world.
Where enforcement via litigation is not the preferred (or, perhaps, realistic) route, there are other measures that businesses can rely on to protect their legitimate interests.
• implementing enhanced information security arrangements such as employee monitoring (subject to compliance with data privacy obligations), access restrictions, prohibiting the use of personal email addresses, and system alerts in respect of unusual copying, printing or downloading activities;
• extending notice periods and making use of garden leave clauses instead of payments in lieu of notice;
• refreshing restrictions and other retention mechanisms as a matter of course on promotion or role change or location change.
There may be other causes of action available where a former employee sets up—or prepares to set up—in competition. For example, during the course of their employment, employees are subject to a duty of fidelity which includes an obligation not to compete with their employer.
Businesses should not forget the statutory protection afforded to their trade secrets under the Trade Secrets (Enforcement, etc) Regulations 2018, where an employer has taken “reasonable steps” to protect the information and can establish that that information is secret and has commercial value.
Business protection via litigation against (ex)employees and other stakeholders is sometimes unavoidable. However, with the legal landscape changing in the US and potentially also in the UK, the direction of travel in this area is becoming less favourable to employers. Businesses should consider what they can do to both mitigate the impact of these legal developments and shore up their internal business protection practices to prevent issues from arising in the first place.
Hannah Netherton and Catherine Taylor are partners in law firm CMS’s employment team and Aisleen Pugh is a professional support lawyer in the team.