Drapers’ People Moves section is a must-read for fashionistas – who goes where, and why, helps lubricate fashion industry coffee machine chatter
It can also start people musing about restrictive covenants. So when Paul Masters moved from Missguided to In The Style, Adam Chesters left Deckers to join Craghoppers, and Céline Larose jumped ship from Richemont to join Kiki McDonough, thoughts on all sides were likely to have turned to their contracts and the hold that their former employers may have over their freedom to compete.
A recent Court of Appeal decision on restrictive covenants has created some consternation amongst fashion industry employers, and corresponding opportunities for their employees. The contract under consideration prevented the employee from being engaged, concerned or interested in a competing business. An injunction was granted, but was set aside by the court. So much so not very interesting – restrictive covenant judgments are two-a-penny. However, the court made two points that should be of concern to fashion industry employers, and are of potential benefit to employees seeking to escape from their covenants.
First, the court said that the fairly commonly-used language of the non-compete covenant (“You shall not…directly or indirectly engage or be concerned or interested in any business carried on in competition with [employer]…”) prohibited the employee from holding shares in a competing business. It was therefore impermissibly wide and in restraint of trade. It did not matter that the employee had no intention of holding shares in a competing business; the mere fact that the covenant precluded that was sufficient to mortally wound the employer’s case. It is usual for such covenants to include an exception allowing the holding of shares in listed companies of, say 3 or 5 per cent. Not in this case. If your covenants include similar language and do not contain such an exception, there is a risk that they will be considered to be impermissibly wide and unenforceable.
Is the traditional listed company shareholding exception mentioned above sufficient to confer protection for the employer, to render enforceable that which would otherwise be unenforceable? There is nothing in the judgment to indicate that shouldn’t be the case. However to further reduce the risk it is probably advisable for employers to have a more extensive exception, permitting limited shareholdings in private companies as well as in listed ones.
Second, the court said that severance, the traditional means by which a court can “save” an unenforceable covenant by removing (or “blue pencilling”) offending words, can only be applied to single, standalone covenants. It could not operate within a single covenant, which must stand or fall in its entirety. Right or wrong (and subject to a probable appeal to the Supreme Court), this shines a very bright light on the structure of the covenants in a contract. A series of sub-covenants within one clause may result in the entire suite of covenants being lost if one element of one sub-covenant is considered to be unreasonably wide and therefore unenforceable. A series of separate covenants each within its own clause would likely result in only the single unenforceable covenant being lost but the rest surviving. This may sound like a distinction without a difference (and maybe on appeal the Supreme Court will concur), but based on the Court of Appeal’s decision the structure of an employer’s covenants could have far-reaching consequences for their enforceability.
Of course, the safest solution to this potential problem is to ensure that your covenants are well-drafted and reasonable in scope in the first place, but this decision certainly provides employees with a couple more strings to their bows when defending a former employer’s attempts to enforce its restrictive covenants, and employers with food for thought.
Employers would be well-advised to review their restrictive covenants in the light of this important decision, to check that they include a provision permitting limited shareholdings in listed and possibly also private companies, always bearing in mind that aggregating the shareholdings of family members and other associates may be a wise additional step. And employees may also wish to review their contracts as part of their pre-move due diligence if they are considering moving to a competitor, to see if they might be able to make use of this decision should they subsequently come under attack from their former employer.