International Enforcement of Restrictive Covenants

September 23rd, 2014

This is the first in a series of articles on the international enforcement of restrictive covenants.  As and the world becomes flatter and marketplaces become global in scale, employers are faced with the daunting challenge of protecting their interests on an international level. Perhaps the most fundamental and crucial interest an employer must protect is the safety of their confidential information and trade secrets.  To prevent their disclosure by employees, employers often rely on employment agreements that contain restrictive covenants. These can consist of non-compete, non-poaching, and non-solicitation clauses among others.  Some of these restrictions protect an employer’s interests while inhibiting an employee’s  freedom to seek alternative employment with competitor of their former employor or to solicit work from the clients of their former employer

American companies are very familiar with the challenges involved in enforcing a non-compete clause nationwide. State law varies dramatically from state to state, ranging from extremely employee friendly states such as California, to more employer friendly states including New York. These challenges increase exponentially as a company turns from a national organization into an international one. For the purposes of this discussion, we will focus on an increasingly familiar scenario; a New York organization seeking to restrain an employee’s relocation to the United Kingdom.

Choosing the Forum

The first hurdle that an employer must overcome when attempting to enforce an international non-compete clause is determining which court is the appropriate forum to bring suit. A New York company would almost certainly prefer the friendlier laws and economic simplicity of a New York court, but European laws create crippling difficulties in attaining this goal.  Jurisdiction and the enforcement of judgments in civil and commercial matters in the UK is determined by Section 5 of Council Regulation (EC) 44/2001. Article 20(1) of this regulation mandates that “[a]n employer may bring proceedings only in the courts the Member State in which the employee is domiciled.” Unfortunately for employers, British courts have held that this Article will supersede choice of jurisdiction clauses in employment contracts. Samengo-Turner v. J & H Marsh & McLennan (Services) Ltd, [2007] EWCA (Civ.) 723 (Eng.). As such, a foreign corporation will be forced to litigate wherever the breaching party is domiciled, regardless of the provisions of their contract.

End Run

Companies have attempted to circumvent the Regulation by severing their restrictive covenants from the original employment contracts. By separating the two, companies claim that these contracts now fall outside of the employer/employee relationship that is required in order to apply the provisions of Article 20 of the Regulation. This argument was ultimately struck down by the High Court of Justice in Samengo-Turner v. J & H Marsh & McLennan (Services) Ltd, [2007] EWCA (Civ.) 723 (Eng.).

In SamengoTurner, employer Marsh & McLennan Services Limited and employee Julian Samengo-Turner entered into a restrictive covenant agreement in Maryland containing a New York choice-of-jurisdiction clause. The contract itself was not conditional on employment; instead, Samengo-Turner was to receive bonus stock awards in exchange for his signing of a non-solicitation, confidentiality, and non-disclosure agreement. The court held that though the contract was physically separate from a contract of employment, for the purposes of Section 5 analysis, the contract could not be viewed as severable. The court reasoned that though the two contracts are distinct, “[o]ne cannot ascertain the terms upon which they were employed without looking at both the original contracts and the [non-compete agreement].” Samengo-Turner­ sets the tone for how difficult it is to enforce a restrictive covenant internationally.

Which Law

Once the parties have established themselves in a court in the jurisdiction of the employee’s domicile, the next substantial challenge an employer faces is applying favorable law. Choice of law provisions in UK courts are governed by Regulation (EC) No 593/200 on the Law Applicable to Contractual Obligations (otherwise known as the Rome I Regulation). Article 21 states that “[t]he application of a provision of the law of any country specified by this Regulation may be refused only if such application is manifestly incompatible with the public policy (ordre public) of the forum.” British courts have held that the doctrine of restraint of trade is considered public policy in the UK, and as such, if a contract violates the UK laws on non-competes, a UK court will not enforce the contract. In other words, for a contract to be enforceable in the UK, it must be considered enforceable under both the governing laws of the contract as well as trade laws in the United Kingdom.

This issue was discussed at length in Duarte v The Black and Decker Corporation & Anor, [2007] EWHC (Civ.) 2720 (QB). Alexander Duarte was employed by the international Black and Decker Corporation. Duarte worked his way up the ranks at Black and Decker before leaving to work for Ryobi Technologies (UK), one of several competitors of Black and Decker included on a list of restricted employers in Mr. Duarte’s contract. Black and Decker quickly brought suit. Ultimately the court determined that Duarte’s employment contract with Black and Decker violated Maryland and UK laws on restraint of trade, and thus was declared unenforceable.

Duarte, applying the principles of Rome I (then known as the Rome Convention), makes clear that a New York employer attempting to enforce a restrictive covenant in the UK must be careful to tailor the agreement in such a way that it will be considered enforceable under both New York and UK law. A covenant in restraint of trade in England will only be upheld if the agreement is reasonable in the interests of the contracting parties as well as the interests of the public. Office Angels Ltd v. Rainer Thomas & O’Connor, [1991] IRLR 214 (Eng.).  Meaning, that these agreements will only be upheld when the employee “might obtain such personal knowledge of and influence of the customers of his employer, or such an acquaintance with his employer’s trade secrets as would enable him, if competition were allowed, to take advantage of his employer’s trade connection or utilize information confidentially obtained.” Office Angels, IRLR 214quoting Herbert Morris Ltd v. Saxelby,[1916] AC 688at 709.

Put differently, a covenant not to compete will only be enforced when the employer can show that the employee has control over the company’s trade secrets. It is not enough that an employee’s skills will aid a competitor; there must be a risk of or actual misappropriation. “The employer’s claim for protection must be based upon the identification of some advantage or asset inherent in the business which can properly be regarded as, in a general sense, his property, and which it would be unjust to allow the employee to appropriate for his own purposes, even though he, the employee, may have contributed to its creation.” Stenhouse Ltd v. Phillips, [1974]AC 391 at 400.

Moreover, as under New York law,  it is essential that the employer prove that the restrictions are no greater than reasonably necessary for the protection of their business. In Duarte, the court held that the restrictions placed on Duarte were too severe since several of the companies included on the restricted employers list were not considered a threat to Black and Decker’s confidential information. Like many jurisdictions in the U.S.,  Britain has a blue-pencil law that allows for unenforceable provisions to be removed without invalidating the entire agreement when: (1) the unenforceable provision is capable of being removed without the necessity of adding to or modifying the wording of what remains; (2) the remaining terms continue to be supported by adequate consideration and; (3) the removal of the unenforceable provision does not change the character of the contract that it becomes ‘not the sort of contract the parties entered into at all.’ Sadler v. Imperial Life Assurance of Canada Ltd., [1988] IRLR 388. From this, one might attempt to argue that any company on a restricted employer list should just be removed if found unenforceable.  In Duarte, however, the court held that removing any of the corporate groups included on the restricted employer list would have changed the character of the agreement and thus violated the court’s blue-lining provisions.

Careful Drafting, With an Eye Towards the International is Key.

It is clear that when drafting a non-compete agreement, an employer need be careful of many considerations. Though choice of jurisdiction clauses will often be disregarded, an employer must carefully choose their choice of law, noting that UK law will still take precedence. However, given that Britsh law and New York law is not dramatically different, employers should be able to draft restrictive covenants that withstand scrutiny on both continents.  There, like here,  employers must be cautious not to restrain trade outside of that which will protect their confidential information, and they must carefully balance their own legitimate interests with those of their employee. Should an employer wish to add an additional layer of protection, they must attempt to craft the agreement in such a way that any unenforceable provision could be found independent from other provisions while still maintaining adequate consideration, something, of course, we can help you with.  While the challenges have maintaining confidential information become more complex as the workforce becomes mobile and multi-continent, , maintaining a firm grasp on international law will help parties on both sides navigate these dangerous waters.