When can a business prevent its former employees from approaching or dealing with its clients, and how far can an individual go before their actions amount to a breach of their obligations?
In the second part of our new series on restrictive covenants and other forms of business protection, Partner David Fisher looks at the enforceability and scope of non-solicitation and non-dealing restrictions.
During their employment, an employee will be bound by the implied duty of good faith and fidelity to their employer, as well as any express contractual provisions which have a similar aim. In broad terms, this precludes the employee from acting in a way which damages the employer’s business while the employment is ongoing. However that implied duty comes to an end when the employment terminates, so the employer will need to have express provisions in place to give it the protection it requires after the termination date.
In the first part of this series we saw how post-termination restrictions have to protect one or more of the employer’s “legitimate business interests” if they are to be enforceable, which normally means its trade secrets and other confidential information, its customer or supplier connections, or the stability of its workforce – merely trying to prevent competition is not permissible. In addition, a covenant must go no further than is reasonably necessary between the parties to protect those interests, so a restriction which is too broad in its scope or which lasts for too long is unlikely to be upheld by the courts.
Non solicitation restrictions
If an employee’s contract contains restrictive covenants, it is likely to include one which prohibits the employee from soliciting the employer’s clients or customers for a limited period after the employment has ended. Such “non-solicitation” restrictions can be a reasonable way for the employer to protect its customer base and confidential information, and they are normally seen as having a greater chance of being upheld than a more onerous “non-compete” restriction, which would prevent the employee from working for a competing business altogether for the restricted period, and which might not be necessary in the particular case.
A non-solicitation restriction will still have to be justified if it is to be upheld by the courts. Possible reasons for the restriction being found to be unenforceable include:
- The duration of the restriction is too long. The restriction should last for no longer than the employer reasonably requires to protect its legitimate interests, and relevant factors might include the time the employer needs to consolidate its client relationships following the employee’s departure, the frequency of contact with clients, the shelf life of the employer’s confidential information that it is seeking to protect and the industry standard for such restrictions. For example, if client contracts are renewed every 12 months or if there is an annual review of confidential pricing structures then a 12 month non-solicitation restriction might be justifiable.
- The range of clients covered by the restriction is too broad. Ideally the covenant should be restricted to clients with whom the employee dealt during a specified reasonable period before the end of the employment, or about whom the employee had confidential information, rather than the whole of the employer’s client base, although a wider restriction might be justifiable in some circumstances.
- The restriction is not limited to solicitation which would affect the employer’s business. Ideally it should be clear that it only prohibits solicitation which is in competition with the business in which the employee was involved during a specified reasonable period before the end of the employment.
There is no automatic exemption for any clients who were originally the employee’s own contacts and who followed the employee to the employer’s business, and the employee can be restrained from soliciting them in the same way as any other client with whom the employee dealt during the employment. The employee should try to negotiate an appropriate carve out from the restrictions when agreeing their employment terms, if they want to be free to take these clients when they eventually leave the business.
Potential or prospective clients are often included in the scope of non-solicitation covenants. It should be possible for the employer to protect such connections, provided the category is adequately defined and it only extends to prospects in which the employer has invested significant time and money.
What is solicitation?
Solicitation usually involves an approach to a client by the former employee with some form of request, persuasion or encouragement to do business. However there can still be solicitation where the client is the one who initiates the contact, and whether solicitation occurs depends on the substance of what passes between the parties once they are in contact with each other. If the employee conveys the message that they are willing to deal with the client and, by whatever means, encourages the client to do so, that will be solicitation.
A simple announcement by the employee that they are leaving the employer is unlikely to amount to solicitation, but providing clients with their new contact details could be going too far, especially if it appears from the communication that the clients are being invited to continue their business relationship with the employee and the employee intended this to be its purpose.
There is a well-established distinction between a general appeal for custom and a specific and direct appeal to clients to transfer their custom, with the latter being solicitation when the former is not. The High Court considered this in X-R Touring LLP v Javor [2024] EWHC 562, in relation to a press release announcing Mr Javor’s move to a new employer, which he had helped to produce. X-R Touring claimed this breached his non-solicitation covenant and sought an injunction against him. Mr Javor argued that the restriction was unenforceable and there was nothing to suggest he had breached it. Taking a number of factors into account, the Court decided that the press statement did cross the line separating a general appeal for custom from a specific appeal to customers. It said that there was no requirement for a solicitation request to be addressed to an individual customer in every case, and there was room for solicitation by an appeal to the customers collectively. The Court said that if the request is powerful enough, it could amount to an act of solicitation even if it is not expressed as such in so many words. The question should be one of substance, not form.
Solicitation through social media
It is now very easy for employees to tell all of their contacts about their move to a new employer through the use of social media, and whether this is solicitation will depend on the particular circumstances, just as with any other form of communication with clients. While simply updating their profile on sites such as LinkedIn to reflect their new employment might be permissible on its own, and might not draw any serious response from their former employer, any indication that the employee is encouraging clients to contact them and to do business with them is likely to be viewed as solicitation.
Non-dealing restrictions
Given the challenges an employer might face in showing that the employee has solicited a client in breach of their restrictions (whether due to a lack of evidence of the contact between them, or because it is questionable whether the employee’s actions strictly amount to solicitation), it might choose to include a non-dealing covenant as well as a non-solicitation one in the employee’s contract. This will prevent the employee from doing business with the relevant clients, regardless of how the transaction came about.
The courts have held that the practical difficulty of defining and policing solicitation and proving that solicitation has occurred can justify the use of a non-dealing covenant in combination with a non-solicitation covenant in this way.
As with a non-solicitation clause, a non-dealing restriction should be limited as to its duration, the range of clients it covers, and to business that competes with the employer, so as to go no further than is reasonably necessary between the parties to protect the employer’s legitimate interests.
A non-dealing restriction may be valid notwithstanding the potential interference with the client’s choice and the fact that it might no longer want to do business with the employer. As the Court of Appeal put it in Beckett Investment Group Limited v Hall [2007] ICR 1539, during the period of restriction “the client is not compelled to remain with the [employer]. If he cannot await the expiration of the period of restriction he can in the meantime seek the advice of any service provider with which the [former employee] is unconnected.”
If you have any questions arising from this article, or would like to discuss restrictive covenants in more detail, please contact Partner David Fisher who specialises in employment and partnership law.
