The High Court in Quilter Private Client Advisers Ltd v. Falconer and another [2020] EWHC 3294 (QB) has decided that the non-solicitation, non-compete and non-dealing clauses in a financial adviser's employment contract were unenforceable.

Background

Ms Falconer had recently started work as a financial adviser for Quilter. Her employment contract contained a nine-month non-compete clause and a 12-month non-solicitation and non-dealing clause. She was subject to a six-month probationary period, during which either party could terminate her contract on two weeks' notice.

Just before her probationary period ended, Ms Falconer decided to leave Quilter and join a competitor. Quilter brought a breach of contract claim against both Ms Falconer and her new employer.

High Court's decision

The High Court decided that the specific non-compete, non-solicitation and non-dealing clauses in Ms Falconer's contract were an unlawful restraint of trade and therefore void.

Non-compete clause

For nine months after the termination of her employment, the non-compete clause sought to prevent Ms Falconer from working for a competitive business.

The nine-month period applied from the outset of Ms Falconer's employment and did not take into account how long she had worked at the business. The court found it unreasonable that Ms Falconer could have been with the business for a very short period of time, only built up a small book of clients and then left, and yet still be bound by a nine-month restrictive covenant. The court also pointed out that the short, two-week notice period for the first six months of employment indicated that the employer considered Ms Falconer's services were not that important to the business until she had been with them for longer.

The court decided that it would have taken time for Ms Falconer to build relationships with clients. As such, it was unreasonable for her to be restrained for nine months after the end of her employment, when she had been employed for less than six months. The court commented that "the threat of a departing employee requires less protection if she has had less of an opportunity to build such a relationship with the clients. Having access to client-related documentation does not of itself build a strong client relationship".

The court also decided that the scope of the non-compete clause was unreasonable. It sought to prevent Ms Falconer from working in competition with Quilter for prospective clients. The court decided that this went beyond what was necessary to protect Quilter's legitimate business interests. The court noted that it was legitimate to protect their relationship with actual clients, but it was not legitimate to prevent competition. 

The court also noted that the head of Quilter only had a six-month non-compete clause in his employment contract, despite having access to much more confidential information.

Non-dealing and non-solicitation clauses

The non-dealing and non-solicitation clauses were for 12 months and prevented Ms Falconer from dealing or soliciting clients of Quilter: (i) with whom she had been materially concerned or had material personal contact in the 12 months before termination; and (ii) who had been clients of Quilter in the 18 months before termination.

This 18-month "backstop" was an issue for the court. The court held that the low standard of "material concern" combined with the length of the 18-month backstop made these restrictive covenants unenforceable. In particular, this was because, when given the opportunity, Quilter could not articulate why the legitimate interest being protected required such a long backstop.

Key takeaway

This case serves as a clear example of the difficulty employers face when striking the balance between an effective restrictive covenant and one that is not unnecessarily onerous. When drafting such clauses, employers should consider the legitimate interest they are trying to protect, and whether the covenant does any more than is really necessary to protect that interest.

Further, employers should not apply a "one-size-fits-all" approach to covenants without considering whether or not it is actually suitable for the employee in question. They should also try to achieve a degree of proportionality between the seniority of their employees and the restrictions applied to them.

Employers might also want to think about providing for shorter and more limited covenants for the initial period of a new recruit's employment, especially where the notice entitlement is reduced.