Partner Article

Restraint of trade and deliberately misleading employer

With Watson Burton LLP Law Firm

Restrictive covenants amount to a form of restraint of trade, and therefore they will only be upheld as enforceable by courts if they protect a legitimate business interest. However it is theoretically possible for valid restrictive covenants in a shareholder agreement to be wider than those in a contract of employment.

In the case of Kynixa Limited v Hynes and Others ([2008] EWHC 1865), three employees are alleged to have misled their former employer about their intentions to work for a competing company.

The employees were Mr Hynes (Chief Operating Officer and Director), Ms Preston (Head of Business Development) and Ms Smith (Relationship Manager). Hynes and Preston were shareholders in Kynixa and agreed to abide by the terms of a shareholders agreement. The shareholders agreement included covenants restraining Preston and Hynes from competing with the Company, soliciting Kynixa’s customers and from poaching Kynixa’s employees, for 12 months from the date when they cease to “be connected” with the Company.

In November 2006, Hynes informed Kynixa that he was contemplating leaving the Company. Kynixa also held meetings with Preston, as it was concerned that Preston would also leave with Hynes. She also informed Kynixa that she had been approached to return to her former employer.

However, Hynes, Preston and also Smith had entered into discussions with a competitor, Parabis, about joining Scion Management Limited. In March 2007, Hynes resigned, and Preston and Smith left the business in April 2007. All 3 joined Scion either immediately or soon after leaving Kynixa.

Restrictive covenants in the shareholder agreement

Whilst the covenants were wide in ambit, the Court held them to be valid and enforceable:

• The covenants affected Hynes and Preston as shareholders, who could profit financially from their shareholdings.
• Both Hynes and Preston had access to and knowledge of very sensitive confidential information.
• Kynixa operated in a very competitive and niche market, and therefore disclosure of Kynixa’s confidential information could cause significant damage to the Company.
• Agreements between Kynixa and its clients were usually fixed for a period of up to two years meaning that a 12 month restricted period was reasonable.

The High Court considered the ambit of the restriction, which was triggered when Hynes and Preston ceased to be “connected with” Kynixa, The agreement defined that an individual was “connected with” the Company if s/he was a shareholder and either an employer, officer or consultant for the Company. This could include junior employees, who may not be privy to confidential information but are restricted due to also being a shareholder of Kynixa.

The Court concluded that it would be unjust not to uphold the restriction against a senior employee because of a theoretical concern about the enforceability of the restrictions in terms of a junior employee.

Duty of good faith and fidelity The High Court held that all three employees had breached their duty owed to Kynixa. Their breach arose as a consequence of their failure to disclose their discussions with a competitor with a view to joining them, whilst still employed by the Company. The Court stated that “a crucial aspect of the duty of fidelity is the concept of loyalty.”

If you have any comments or questions about this article or any employment related matters, please contact Padma Tadi of Watson Burton LLP at padma.tadi@wastonburton.com.

This was posted in Bdaily's Members' News section by Ruth Mitchell .