Are variable non-competes enforceable if the length is confirmed at the point of termination?

Restrictive covenants are fairly commonplace in senior executives’ contracts. Among other things, they can prevent departing executives from using confidential information or working in competition with their old employer, or from soliciting or dealing with clients for a period of time post the termination of their employment. Non-competes can be particularly burdensome for the departing executive as non-compete restrictions present a barrier to moving into another position. In particularly fast-moving sectors, significant time out of the office may lead to a severe diminution of knowledge and skill, and so individuals may want to challenge the validity of those restrictions.

By way of brief reminder, in examining the validity of a restrictive covenant a court will look at whether the covenant:

1. Protects a legitimate business interest of the employer, and
2. Is no wider than reasonably necessary. In examining this the court may look at (at the time the contract was entered into) the seniority of the employee, the “industry standard” for a particular sector, the legitimate business interest the employer is seeking to protect, the geographical reach, and the duration of the covenant.

There is no general rule about the precise duration and scope of the covenants. Generally, it will be shorter and narrower for junior employees and longer and wider for more senior employees. It is worth noting that the question of duration is one that is currently being considered by the UK Government, who have put forward proposals to legislate to limit the length of a non-compete restriction to just three months. For a wider discussion on the Government’s proposals see Anna Birtwistle and Amy Wren’s blog here.

While the scope and duration of restrictive covenants between different sectors and seniorities varies, generally covenants are for a fixed duration which is set at the point of the parties entering into a contract, and they are usually offset against any time spent on garden leave. This was not the case however, in Jump Trading International Limited v Damien Couture and Verition Advisors LLP. The court in that case has given its judgment on the interim relief application, but we are still waiting for the full judgment on the substantive question of enforceability, the trial for which we understand will take place imminently.

The reason this case and its outcome will be of interest to employment lawyers and employers is that the non-compete was unusual: it was not ‘fixed’ at the point the parties entered into the contract, rather the employer retained a discretion to impose a non-compete (of up to 12 months) at the point of termination. Further, this was not offset by any time spent on garden leave. If this type of covenant is held by the courts to be enforceable it may lead to more employers seeking to retain this element of discretion in the drafting of covenants.

Jump Trading International Limited -v- Damien Couture and Verition Advisors LLP [2023] EWHC 1305 (KB)

Facts

Mr Couture worked for Jump as a quantitative researcher in algorithmic trading. His contract contained a non-compete restriction to begin after termination of his employment and was not offset by any period spent on garden leave. Unusually, however, the contract did not specify the non-compete period. Instead, the employer had discretion to determine the period within twenty days of the employee handing in their notice, up to a maximum of 12 months.

Mr Couture was looking to leave Jump and signed a new contract of employment with Verition. After Mr Couture had handed in his notice, Jump notified him that he would be placed on garden leave for his notice period (one year) and imposed a one-year non-compete period. In practice, this meant he would not be able to work for Verition until 30 March 2024. Mr Couture argued that the non-compete was not valid. Mr Couture informed Jump on 17 November 2022 that he would be commencing with Verition on 3 April 2023 but received no response from Jump until 6 March 2023.

Mr Couture started work with Verition and Jump served proceedings against Mr Couture for breach of his non-compete and Verition for inducing Mr Couture’s breach. This case concerned Jump’s application for interim relief to enforce the covenants.  

Held

The High Court refused to grant interim relief to Jump. It held that Jump’s delay in applying for interim relief was unreasonable meaning it was unjust to grant the relief. Jump had known about Mr Couture’s plans since 17 November 2022 and took nearly five months to reply to this letter. Had it acted more promptly, an expedited trial could have determined the validity of the covenants before Mr Couture started employment without the need for interim relief.

What then of the (as counsel for Mr Couture described it) “highly unusual” non-compete clause? As this was only an application for interim relief, the High Court (and subsequently the Court of Appeal)[1] did not expressly comment on the validity of the covenant itself. However, the Court did make some interesting comments when considering the question of whether there was a serious issue to be tried (a requirement for interim relief to be granted).

• Mr Couture argued that as an employee he did not know the duration of the non-compete at the time the contract was entered into which makes it legally uncertain and therefore unenforceable.
  
  The High Court rejected this argument and found that there was a serious issue to be tried that was at least arguable. While the clause detracted from legal certainty and may intimidate departing employees due to the uncertainty, it cannot be said there is not a serious issue to be tried. Further, the clause was not necessarily unreasonable as an employee would know its extent and knew its maximum duration.
• Mr Couture argued that the one-year period imposed was too long in the context of a one-year garden leave period and was unusual for the sector. Jump contended that the confidential information it was seeking to protect had a “two-year shelf life”, hence the need for a duration of this length.
  
  While acknowledging that the period “seemed long”, the High Court noted this was a fact-specific question based on the interests to be protected and as such should be examined at final trial. As such there was a serious issue to be tried.
  
  

Finding there is a serious issue to be tried is not a high bar and is by no means a guarantee that the covenants will be found to be valid at the final trial. Equally, although the High Court appeared to prefer Mr Couture’s arguments, the Court of Appeal was more forceful in its rejection of Mr Couture’s argument regarding the uncertainty of the covenant. The Court of Appeal noted they could find “no meaningful distinction” between this (as counsel for Mr Couture put) “highly unusual” clause and the far more commonplace clause specifying a twelve-month period with a discretion for the employer to reduce it. In both cases, the employer must justify the restriction at the time the contract was entered into.

We understand the trial on the substantive issues is due to take place over the summer so we can hopefully expect the judgment in this case later this year. Watch this space for our follow up blog!

Practical takeaways

In the meantime, there are some important lessons to be learnt from the interim judgment, for employers and departing senior executives alike.

For employers:

1. Consider the drafting of your covenants: as indicated above, the drafting of the covenants in Jump entered “murky and unchartered waters”. The best way to protect the interests of your business is to have clear covenants that have been drafted with the benefit of advice in the most sensitive cases. For some tips on drafting, please see our previous blog here.
2. Update your employees’ contracts: the reasonableness of a restriction is assessed at the point the contract is entered into. This may lead to a situation where a junior employee is promoted and their restrictive covenants are no longer appropriate. Remember to enter into fresh contracts.
3. If considering enforcing covenants, act quickly! The key factor in refusing interim relief in Jump was the unreasonable delay by Jump in seeking to enforce the covenant. As soon as there is a suggestion of non-compliance or impropriety you should engage your legal advisors to determine the best course of action.
   
   

For employees:

1. Seek advice early: if you believe your covenants are too wide, you may be able to reduce their scope or duration through settlement negotiations. Arguing that they are void and starting competitive work with an employer is a fairly nuclear option and should only be done on sound legal advice with a clear and comprehensive litigating strategy. For the new employer, seeking advice on the validity of covenants is advisable.
2. Be careful in your communications: if there is evidence of solicitation or a team move, an employer may seek, either at pre-action or before the Court, an image of your personal devices. As we explain here, in sensitive situations you need to be very careful about your communications on your personal devices as these may become disclosable.

With special thanks to Alex Evans, a former Legal Assistant, for his help in preparing this blog.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, August 2023

Footnotes:

[1] See Jump Trading International v Verition Advisors LLP [2023] EWCA Civ 701, this concerned Mr Couture’s unsuccessful appeal against the order for an expedited trial.