I am hiring a senior manager and I have a concern about our commercial secrets. I would therefore like to include a restrictive covenant in the contract of employment, but I have heard that they are very difficult to enforce. How do I ensure that any restrictions are enforceable post termination of employment? How do I handle it?

Michelle Ryan writes:

One of the main means through which commercial secrets fall into the hands of competitors is through disclosure by former employees, as a result many employment contracts contain restrictive covenants/non compete clauses to protect commercial secrets and interests. But employers must be able to enforce such covenants against former employees. The following are the legal considerations when drafting an appropriate clause.


Q. What is the reason for having restrictive covenants?

A restrictive covenant is a term or condition in a contract of employment which places restrictions on the right of an employee to compete with their employer after they leave employment.


Q. How do I ensure a clause is enforceable?

A. In general, post termination restrictive covenants are prima facie void under Irish law as an unlawful restraint of trade. This is unless the covenant protects the employer’s legitimate business interests and the restrictions go no further than is necessary to provide that protection. A restriction must be reasonable in relation to duration, geographical scope, and the activities which are restricted.

In the 2005 High Court decision of Brightwater v Gemma Allen and Robert Walters Limited, Ms Justice Laffoy held that a reasonable period for the application of a restrictive covenant was six months from the date of termination of employment of the employee. The Brightwater case is considered to be a benchmark case in relation to restrictive covenants in Ireland.

For example, a restrictive covenant is unlikely to be upheld if an employer seeks to operate the clause for an unduly long period of time post termination of employment. The key test to be applied is that a balancing act needs to be achieved between the legitimate interests of an employer in protecting its business and an individual’s rights as an employee to work and earn a livelihood. A restrictive covenant which seeks to restrict an individual from earning a livelihood for a period which is longer than necessary to allow the company to take steps to limit the damage done by an employee's departure will not be allowed. What is actually too long will clearly depend on the facts of each case, but a restraint of trade for longer than six months to a year is unlikely to be upheld.

The extent of the territory covered by the clause must at all times be reasonable. In other words, the restrictive covenant cannot purport to stop you from working in an area of Ireland or in another country where the company has no business interests. A restrictive covenant cannot apply to an unfairly wide territorial area. The definition of territorial area in each case will depend upon the specialised nature of the business being carried out. As highlighted in the Brightwater example, the relevant territory in that case was deemed to be a four mile radius within Merrion Square in Dublin.

The restrictive covenant must protect a legitimate interest. A restrictive covenant must be carefully drafted to cover the particular trade secret in question and to clearly delineate the restrictions that apply in relation to the restrictive covenant covering the trade secret. In circumstances where such clarity is absent from a restrictive covenant and where the restrictive covenant is generic and seeks to cover “a catch all” situation, the clause would on the balance of probabilities be deemed by the Courts to be unreasonable and unenforceable.


Q. Presuming I have a valid clause, how do I enforce it and what is the likelihood of it being upheld?

A. Where a contract has legal effect the Court would consider the issue of the relevance of the non-compete clause in great detail where an employer seeks to enforce it. An employer may seek to injunct their former employee or in the alternative sue for breach of their contractual terms.

Recent case law illustrates increasing judicial caution towards injunctive relief being granted in employment cases. A high threshold is required to be met before they are granted. The principle test to be applied is whether the restrictive covenant goes further than is necessary to protect the legitimate interests of the company.

The recent decision in Net Affinity Ltd v Conaghan and Revmac Limited t/a Avvio [2011] IEHC 160 illustrates the position.


Q. What are other matters that an Employer should consider?

A. It is worth bearing in mind that if an employer breached or breaches the employment contract to any extent such that it repudiates the contract or engages in a fundamental breach of the contract, the Court will normally hold that the company is unable to rely on the restrictive covenant. We would advise employers to assess whether they have honoured all commitments set out in the contract of employment. A breach would include for example a failure to pay salary under the contract of employment, dismissal without notice and of course, constructive dismissal.


Conclusion

An indication of how narrowly a Court examines restrictive covenants is clear from our own experience in advising employers. We are always very careful to target the legitimate business needs of the client in the clause, ensuring that the restrictive covenant is reasonable from both parties’ point of view. When drafting such contracts, we err on the side of restricting only just what the client requires rather than slightly more than required. This is because if a Court finds that the clause is too wide, the entire clause will fall and the employer will be left with no protection. If a covenant is less ambitious in what it tries to protect, it is more likely that on balance a Court will be likely to view it as reasonable

The real potency in a restrictive covenant is in its deterrent effect. While it is possible to seek to enforce such covenants, if breached, it can be difficult to do so. That said, however, there is no doubt a benefit in having them in place.