The approach to enforcing a non-compete covenant by an interim injunction is considered

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In the recent case of Planon v. Gilligan, the Court of Appeal (CA) considered the correct approach when asked to enforce a non-compete covenant by granting an interim injunction, finding against an employer hoping to enforce a non-compete covenant nine months after the ex-employee had ceased to work for them.

Background

Planon is a software company that designs, develops and sells software for managing facilities. Mr Gilligan was employed by Planon in February 2015. He worked as an account manager. He was promoted to sales manager in May 2020 and was provided with an amended contract. This contract included a covenant restraining him from working for a competitor for 12 months after the termination of his employment. The non-compete covenant was very similar to that upheld at first instance in the recent case of Law by Design v. Ali (which was discussed in a previous blog article here). On 23 August 2021, Mr Gilligan left his employment at Planon. At the beginning of September 2021, he joined ServiceNow, one of Planon's competitors, to work as a senior solutions sales manager. Planon became aware of this the very next day.

Planon did not send a letter before action until 20 September and applied for an interim injunction on 21 October, more than a month after Mr Gilligan started his new employment. 

Interim injunction applications/restrictive covenants – general principles

It is always a matter for the court's discretion (both at any interim and final hearing) as to whether an injunction should be granted to enforce a restrictive covenant, even if the covenant is considered reasonable and enforceable. This case principally deals with the factors that the court took into account in determining whether to exercise its discretion in favour of granting an injunction.

A number of general principles are considered by a judge when considering whether to exercise discretion to grant an application for interim relief. The claimant has to show that there is a serious issue to be tried, that damages are not an adequate remedy and that, on the balance of convenience, an injunction should be granted. Applying these to a restrictive (non-compete) covenant case:

  • Enforceability of a restrictive covenant is a matter to be decided at the final trial. However, although the judge will not make a final decision on the enforceability at an interim stage, they will normally wish to assess the likely prospect of the claimant succeeding at trial, where the relief sought at the interim stage will in practice be all or most of the relief that could be obtained at trial.
  • In terms of damages, from a claimant's point of view, it is often difficult to quantify the loss caused by breaching a restriction and an individual defendant may not, in any event, be able to pay an award of damages. 
  • If damages are not considered an adequate remedy for a claimant, the judge still has to consider whether, if the injunction is granted at the interim stage but not upheld at the final trial, an award of damages to the defendant will adequately compensate them for the loss they have suffered as a result of the initial grant. Note here that a claimant applying for an interim injunction has to give a cross-undertaking in damages to the court, in case the injunction is granted and then overturned (and will need to provide evidence to the court to satisfy it that it could meet any damages award).
  • The balance of convenience should be assessed, i.e. which party would suffer the most if the injunction was granted or not granted. It should be noted that the adequacy of damages (for either party) is often one of the factors in assessing where the balance of convenience lies. As can be seen below, that was a relevant factor in this case.
  • If the court considers that the balance of convenience is itself finely balanced, the court will generally try to maintain the status quo. A relevant consideration here is any delay in the claimant making the application for interim relief. The court will consider the status quo as at the time of the hearing.

The first hearing

The hearing took place on 5 November 2021. By this point, Mr Gilligan had been working for ServiceNow for more than two months. The judge refused to grant an injunction to enforce the non-compete covenant, on the basis that:

  • his assessment of Planon's likely success at trial of enforcing the non-compete was that their chances were "not that good". One of the significant factors he took into account as to likely enforceability was that, if enforceable, it could result in Mr Gilligan being unemployed for 12 months;
  • although he agreed that damages were unlikely to be an adequate remedy for Planon and that Planon was good for the money to support its cross-undertaking in damages (which would militate towards the grant of an injunction), he considered it would be difficult to adequately compensate Mr Gilligan, in purely financial terms, for his loss or hardship if the injunction were granted, on the basis that he would be unlikely to get a job during the period of the non-compete.
    The judge considered the delay point but, despite noting there had been some delay, did not consider it sufficient to disentitle Planon from interim relief, if otherwise he had been minded to grant it.

Appeal

On 18 November 2021, Planon applied to the court for permission to appeal against the interim judgment and for such an appeal to be expedited. Planon was not granted such permission (or expedition) until 1 February 2022. The appeal hearing did not end up taking place until 5 April 2022, by which point Mr Gilligan had been employed by ServiceNow for more than seven months.

The CA again refused to grant the injunction and dismissed the appeal, but disagreed with the judge on certain aspects of his decision.

The key points to note from the CA decision are:

  • Although the CA made clear that it was not determining the enforceability point (because that was a matter for the final hearing), it disagreed with the judge's assessment as to the merits of Planon's case on whether the non-compete was reasonable and likely to be enforceable. In particular, it considered that the judge had erred in finding that the fact that Mr Gilligan could be out of work for 12 months was a relevant factor as to the reasonableness and enforceability of the covenant (although it was relevant to the exercise of discretion – see below).
  • It dismissed Planon's argument that, once an assessment had been made that the restraint was likely to be enforceable, an injunction should, except in exceptional cases, be granted. That was, the CA said, the case at any final hearing (again, save in exceptional cases) once enforceability had been finally determined, but not at the interim stage.
  • The CA did not overturn the judge's finding that damages would not be an adequate remedy for Mr Gilligan, in the event that the covenant was found to be unenforceable at trial. It accepted that he could be out of work for the whole period of restraint and that money alone might not adequately compensate him.
  • There was, however, a divergence of views among the CA judges as to the strength of the damages point. One of the CA judges considered it was a borderline case as to whether damages would be adequate, while making it clear that there was no rule of law, as Planon had tried to argue, that damages would always be adequate to compensate a defendant. Another (Lord Justice Bean) took a much more robust view and considered that it was quite unrealistic for a claimant in this situation to argue that damages would be an adequate remedy. He said that this argument would have "no traction" except in situations where the defendant was very wealthy or the claimant was offering paid garden leave for the whole period of the restraint. 
  • The CA also accepted that the judge was entitled to find that the delay in Planon making its application for the interim injunction was not a reason for withholding relief. However, Lord Justice Bean considered that any damage by Mr Gilligan would probably have been done in the first few days of his employment and certainly within the first two months, thus suggesting that that would have led him to refuse to grant the injunction at the first hearing.
  • The main factor in the CA's decision was that the balance of convenience (which has to be assessed as at the time of the CA hearing) was against Planon. At that stage, Mr Gilligan had been in the post for more than seven months, with only about four months left to run, and the CA considered that it would be contrary to the balance of convenience to enforce the non-compete at that stage, given that they considered it likely that "much, if not all, of the damage which [his] employment … might have caused to [Planon's] legitimate business has already been caused". It therefore concluded that the status quo, meaning Mr Gilligan's employment by ServiceNow, should be maintained.

Practical points to note

Employers should be aware of the overarching implications of this case. It has always been the case that non-compete covenants are the most difficult covenants to enforce. This case is an additional reminder that the grant of an injunction is always a matter for discretion. Thus, even where a court's assessment at the interim stage is that the covenant appears reasonable and at trial likely to be held to be enforceable, other factors may militate against the grant of an injunction. They include, as here:

  • whether the court considers that damages will be an adequate remedy for the defendant, if the injunction is granted and then not upheld at trial; and
  • delay in making the application. Although that was not found, in this case, to be a reason for the judge to refuse the grant, the comments of Lord Justice Bean suggest that another judge could well have come to a different view. Certainly, and irrespective of where fault for the subsequent delay lay, the lapse of time between the start of Mr Gilligan's employment and the date of the CA hearing was fatal to the grant of an injunction. 
    In particular, the reasoning of the CA judgment demonstrates that, where an ex-employee has already gone to work for a competitor before their new employment comes to light and before an application for injunctive relief has been made, the ex-employee may be in a stronger position than was previously understood. 

Therefore, the following points are key for employers: 

  • Do not delay! It is important to move quickly, as soon as it comes to an employer's attention that an employee is either likely to begin working for a competitor in breach of a non-compete or has already done so.
  • Consider the length of any non-compete. It is likely to be easier to argue that damages are a sufficient remedy for the ex-employee, in the event of an injunction being granted but not then upheld at trial, if the period for which they are potentially out of work is shorter.
  • In certain cases, an employer may want to consider offering to continue to pay the ex-employee during the period of restraint, to try to address concerns about the adequacy of damages. It should be noted that this is the general European model if an employer wants to enforce post-termination restrictions and is also one of the proposals being considered by the government in its current consultation on restrictive covenants (see the previous blog article referred to above).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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