Will Burnham’s Bosman ruling mean employees go on a free?

Kevin McKenna, Partner

It was right here in Manchester at the Innovation Nation Summit held at Bruntwood SciTech that Prime Minister Andy Burnham delivered a keynote speech on national growth, R&D funding, and innovation reforms.

But for employment lawyers, chief people officers, HR professionals, and anyone who is a party to a contract to provide employment or services, either as an employer, employee, worker or consultant, your ears may have pricked up about half-way through the speech when the Prime Minister said, “I also know we need our innovators to be able to move freely between companies and start their own without constraint.  I believe some businesses have gone too far in their use of restrictive practices such as non-compete clauses.”

A commitment was given the government would legislate to make sure that non-compete clauses will no longer be a barrier to hiring for our most promising startups and scaling firms.  It was, as Mr Burnham called it, “the Bosman ruling for the innovation sector”.

The proposed reform of non-compete clauses

It’s not news that non-compete clauses are under fire.  In May 2016, there was a call for evidence under the conservative government to examine whether restrictive covenants stifled job mobility and innovation.

There followed a government consultation which launched in December 2020, exploring measures to reform or limit post-termination non-compete clauses in employment contracts, specifically considering making non-competes conditional on mandatory compensation during the restricted period or implementing an outright ban on non-compete clauses.

So, it is safe to say that non-compete clauses have been sweating for a while.

When are restrictive covenants enforceable in the UK?

The starting point for assessing the enforceability of any restrictive covenant in the courts of England and Wales (because a non-compete is not the only species) is that they are unenforceable because they act in restraint of trade and it is a long-established principle of public policy that competition is good.

Businesses can, however, protect their legitimate proprietary rights (in other words the things that genuinely belong to the business) so long as those protections go no further than is necessary to give that protection.  The court will not uphold unnecessarily lengthy or onerous restrictions.

The interpretation is slightly different if they apply in the circumstances someone is selling their business and the buyer wanted assurances that the seller would not immediately set up in competition.

Why are employee non-compete clauses so restrictive?

Of all of the various strains of covenant, the covenant which precludes a worker from going to work for a competitor – the “non-compete” – is usually the most onerous.  It has less impact on an individual than saying that you cannot deal with former customers or poach former colleagues.  It usually has the impact that the employee cannot earn a living for the period of restraint.  Judges recognise and regularly repeat that imposing an injunction that someone cannot earn a living in their area of expertise for any period of time is one of the most draconian tools available to them.  It is not taken lightly.

Confidential information and trade secrets

Equally business owners do not take lightly that a departing employee might be able to walk out of the door with valuable information which has taken substantial investment to obtain or develop.  On a practical level they say that a confidentiality clause in a contract has the protective qualities of the proverbial chocolate fireguard.  How is it policed?  But if non-compete protection goes or is reduced then businesses will need to give careful consideration to the other means of protecting what is theirs.

Confidential information and trade secrets are protectable interests in theory.  However, there is a distinction between what is termed “mere confidential information” and trade secrets.

• (Mere) Confidential information includes information that is proprietary to the employer but does not rise to the level of a trade secret. Employees are generally prohibited from using or disclosing such information during their employment. However, after termination, the protection of this information depends on the existence of an express confidentiality clause in the employment contract. Courts may enforce these clauses if they are reasonable and clearly define the information to be protected. Without an express clause, employers must demonstrate that the information is highly confidential and akin to a trade secret to seek protection. 

• Trade secrets represent the highest level of confidential information and are afforded the greatest protection under the law. These are defined as information that is used in the trade or business, whose dissemination is limited or discouraged by the owner, and which, if disclosed, would cause significant harm to the business. Trade secrets are protected both during and after employment, even in the absence of an express confidentiality clause. Courts have upheld restrictive covenants aimed at protecting trade secrets, provided they are reasonable in scope and duration. 

But there is a third category of information which is knowledge and experience.  These are considered the property of the employee. Courts have consistently held that an employee’s skill, knowledge, and experience, even if acquired during their employment, belong to the employee and can be freely used after leaving employment. This includes general know-how and expertise gained in the course of their work. Businesses cannot enforce restrictive covenants to prevent former employees from using this type of information, as it is not considered confidential or proprietary to the business.

Practical steps to protect confidential business information

The best that a business can do in terms of protecting its confidential information is to start with an understanding of the various information it generates and establish what is protectable and what is not.  Then take the protectable information and place real guards, controls and monitoring of who has access to it and how it can be preserved.  If all sorts of people can access large amounts of your information, it dilutes your argument that it is confidential. Ask yourself:

1. What confidential information do you have?
2. What are the protections for your databases?
3. Are there audit logs of who has accessed information and why?

These are not legal solutions but if you do not start with them, a judge will not help you out by filling in the gaps that you should have secured yourself.

For advice on restrictive covenants and protecting confidential business information, contact our employment team on 0161 832 3434, or at [email protected].