Non-Compete: What is Reasonable?

Much like London buses, the Supreme Court must be thinking that restraint of trade cases are coming along all at once. In what was their third restraint of trade case in three years, the Supreme Court has recently handed down its decision in Harcus Sinclair LLP v Your Lawyers Ltd* finding that a restraint of trade clause contained in a non-disclosure agreement between two law firms was not unreasonable in the circumstances and was, therefore, valid. In coming to its decision, the Supreme Court seemingly added further credence to the move away from strict contractual interpretation and towards a focus on the “factual matrix”.

Takeaways

The case serves as a useful reminder of the rules surrounding non-compete clauses and that they can be tricky to get right, demonstrating the importance of such clauses being narrowly drafted and not overly restrictive.

• If you are entering into a contract where a non-compete is necessary, take care to ensure the boundaries of the clause are clear. What exactly is being prohibited? Make sure that the non-compete clause is not too open-ended.
• If the contract is likely to run for any length of time, make sure that you periodically review the non-compete clause to check that it is still of relevance and does not require any updating.
• Always keep a written record of any negotiations when entering into a non-compete; it could be useful in the event of a dispute.
• Remember too that the bargaining position of the parties may affect a court’s decision as to whether a non-compete clause is reasonable or not. In the case of a B2B contract or a contract between experienced businesses where the bargaining power is fairly equal, a non-compete clause is more likely to be considered as reasonable, but if there is a discrepancy between the parties’ bargaining power, then a court may be less willing to uphold the provision.

When considering your non-compete clause do not forget the golden rules:

• Ensure there is a legitimate reason for its inclusion. If there is no reason, it probably doesn’t need to be in there.
• Make sure the length of time the non-compete is due to run is reasonable.

Lastly, and possibly most importantly, always remember there is no substitute for legal advice if you are thinking about requesting, or agreeing to, the inclusion of a non-compete clause.

The Facts

On the back of the Volkswagen emissions scandal, Your Lawyers Ltd (“Your Lawyers”) identified the probability of a large group action case against Volkswagen. Being a small firm, Your Lawyers sought to form an alliance with the larger firm of Harcus Sinclair LLP (“Harcus Sinclair”) and, as a result, the two entered into a non-disclosure agreement (the “NDA”) in respect of information to be provided by Your Lawyers to Harcus Sinclair in connection with the group action. Crucially, the NDA made no mention of the intended collaboration between the parties, but it did contain a non-compete clause that sought to prevent Harcus Sinclair accepting instructions to act “for any other group of claimants in the contemplated group action” without Your Lawyers’ consent for a period of six years. In essence, the clause sought to protect Your Lawyers’ position by preventing Harcus Sinclair from setting up its own group of claimants against Volkswagen which would be in competition with the Your Lawyers’ group of claimants.

The problem arose later down the line, when Harcus Sinclair eventually did establish a separate group of claimants under the group action. In response, Your Lawyers brought a claim against Harcus Sinclair, arguing that they were prohibited from so acting because of the non-compete clause.

The Judgment

The High Court found that the non-compete clause was enforceable and granted Your Lawyers an injunction that required Harcus Sinclair to cease acting in the group action for six years. This decision was subsequently overturned by the Court of Appeal which held the non-compete clause to be unenforceable as an “unreasonable restraint of trade”.

Your Lawyers then appealed to the Supreme Court. In a unanimous decision, the Supreme Court held that the non-compete clause was enforceable. In coming to its conclusion, the Supreme Court set out the two principles to be considered in deciding whether a restraint of trade clause is reasonable:

1. The person seeking the benefit of the non-compete clause (i.e. Your Lawyers) must establish that the clause is reasonable as between the parties by showing that the clause:

• protects their legitimate interests;
• goes no further than is reasonably necessary to protect their legitimate interests; and
• is commensurate with the benefits secured to the other party (i.e. Harcus Sinclair) under the contract.

2. If the person seeking the benefit of the non-compete clause is successful in the above, it is then up to the other party to establish that the restraint of trade goes against the public interest.

Importantly for Your Lawyers, the Court considered whether, in determining the legitimacy of their interests, they could take into account the parties’ “intentions or what they contemplated would occur as a consequence of entering into the contract” (in this case, the intended collaboration) as well as the express terms of the contract. Concluding that they should take into account the parties’ intentions, the Supreme Court found that the judge at first instance had been entitled to decide that “Your Lawyers did indeed have legitimate interests, flowing from the intended informal collaboration, which it was protecting by the non-compete undertaking”. It is likely that if only the express contractual terms had been taken into account, Harcus Sinclair would have been the party walking away with a smile on their face.

The next question was whether the clause was reasonably necessary to protect Your Lawyers’ legitimate interests. Although six years would generally be considered a lengthy period for a restraint of trade clause to last, the Court recognised that in these circumstances it was reasonable as it roughly mirrored the limitation period for claims in the emissions litigation. In addition, the restriction only existed in relation to the Volkswagen litigation; it did not affect Harcus Sinclair’s wider business. As such, the clause did not go beyond what was necessary to protect Your Lawyers’ legitimate interests.

In determining whether the restriction was commensurate with the benefits it afforded to Harcus Sinclair, the Court again relied on its findings that the parties’ intentions could be taken into account rather than just the express contractual terms, i.e. the benefits to Harcus Sinclair included those which were intended or contemplated as a result of the informal collaboration. On this basis, the restriction was commensurate with the benefits.

Finally, the Supreme Court held that enforcing the non-compete clause would not be contrary to the public interest for various reasons, including that there were many other law firms able to act for other claimants in the group action; prohibiting Harcus Sinclair from doing so would not significantly affect the public’s access to justice.

Thoughts

Although this case was very fact-specific, taking into account the parties’ intentions could lead to potential disagreement. Most non-compete clauses do not detail the parties’ intentions and in some cases adding in such intentions would not be possible. Take, for example, the situation where a non-compete clause is included in a confidentiality agreement entered into at the very start of negotiations when the parties’ plans may not be clear.

It will certainly be interesting to see the effects of the decision in the future.

Disclaimer

This note reflects our opinion and views as of 17 November 2021 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.

*Harcus Sinclair LLP v Your Lawyers Ltd [2021] UKSC 32