England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT QUEEN'S BENCH DIVISION
Ramsey J
HQ06XD1766

		A2/2006/2323 Royal Courts of Justice Strand, London, WC2A 2LL
		20th February2007

Lord Justice Toulson:

1. This case is about the enforceability of a clause in a contract of employment of a managing director of a firm of insurance brokers, prohibiting him from competing with the company for 12 months after the termination of his employment. The issue is whether it was an unreasonable restraint of trade.

   The Parties

2. Farr is an insurance broker which specialises in providing services for providers of social housing, in particular housing associations. Before he joined Farr, Mr Thomas had been employed in the insurance industry for about 10 years and was running an established regional brokerage with a general insurance business. He had no previous experience of the social housing market, but, as he said in one of his witness statements, "In whatever sector one works, the same skills are required in order to be a good insurance broker".

3. Mr Thomas began his employment with Farr as an account director, responsible for managing key client relations. After 18 months he was appointed a director. In 2000 he was appointed operations director. In December 2003 he was appointed managing director.

4. When Mr Thomas joined the company, Farr formed part of FMW International Insurance Brokers Limited. In 2000 the group was sold to Hercules Property Services PLC, which in turn was acquired in 2004 by Erinaceous Group PLC ("Erinaceous"). On 1 July 2006 there was a restructuring of Erinaceous' business under which the business of Farr was transferred to Hanover Park Commercial Limited another subsidiary of Erinaceous.

5. Mr Thomas terminated his employment with Farr by a letter dated 27 April 2006, because he was unhappy about the consequences of the proposed restructure on his employment and he contended that Farr was in repudiatory breach of contract. At the time Mr Thomas was on a salary of £176,900 and had the benefit of a bonus scheme which meant that he earned sums well in excess of his annual salary. He saw the proposed restructure as involving a demotion and potential loss of income.

6. Mr Thomas received approaches from a number of potential employers. He decided to accept an offer from a company which intended to compete with Farr. Farr had about one third of the market share of housing association work in England and Wales. The company which Mr Thomas proposed to join was a new entrant to the market.

7. The insurance market in social housing is a small and specialist market. There are in all about 1500 housing associations, of whom 350 were Farr's clients. About 20% of those clients were responsible for 80% of Farr's income.

8. Farr had between 40 and 50 employees. In a witness statement Mr Thomas described his role as follows:

   "As managing director of Farr my role was to develop and deliver Farr's strategic plan and to ensure Farr's objectives were met within its budget. I provided leadership and direction to Farr's employees, particularly those in management positions, and chaired the various management meetings. In respect of third parties, I was ultimately responsible for relations with Farr's housing association clients and with insurer suppliers with whom Farr was placing its insurance…

   Farr did not hold formal board meetings as such, but there was a monthly meeting between Farr and Erinaceous…

   The day-to-day management of Farr was the responsibility of a management board which consisted of…and me. The management board met monthly, normally a day of two before the Farr and Erinaceous meeting. All the detailed work in the business was overseen by the management board…and I directed and supported them in that work…

   There was in place a formal process of reporting to the management board and these same reports were also presented to the main board. These reports were first presented to me for comment and input and were a formal means by which I could receive feedback from the key areas of the business…These reports covered many different areas and typically I would have sessions with each individual to go through the reports and to ensure that I understood all the key issues. I would provide guidance when necessary or give authorisation for actions where required.

   For many years, I have not been involved in the detail of client management, negotiating individual cases with insurers, assessing appropriate levels of income on individual cases or rating individual policies using delegated rates from the insurers. Even where there were problems in such areas, they would be resolved by the relevant member of the management team.

   Farr has three main insurer suppliers, all of whom were needed by Farr to ensure it was able to provide clients with competitive quotations. Each insurer was anxious to grow their premium income and it was a delicate balancing act to keep each satisfied. It was essential that business was retained with each insurer and not moved unless absolutely necessary and that new business was shared as equitably as possible. Lost business had to be replaced with new business but at the same time it was crucial that the best possible terms were obtained for the client. I was the logical person to coordinate placements between existing and new business teams at Farr and the insurers themselves. I spent a lot of time with client managers of Farr and with the insurers insuring that everyone was happy and that insurers' and Farr's objectives were being achieved."

9. On 20 June 2006 Mr Thomas issued proceedings against Farr claiming damages for breach of contract, a declaration that he had been constructively dismissed and a declaration that the non-competition clause in the contract was an unreasonable restraint of trade and unenforceable. The issue as to unreasonable restraint of trade was heard by Ramsey J as a preliminary issue. In a reserved judgment given on 12 October 2006 he held that the clause was enforceable. Mr Thomas appeals against that judgment.

   The Contract

10. The relevant clause ("the clause") is contained in the first schedule to a written agreement dated 11 December 2000 but it is common ground that the agreement was varied when Mr Thomas was appointed managing director in December 2003, and that the reasonableness of the clause has to be judged at December 2003.

11. The clause provided as follows:

    "The Executive accordingly covenants with the Company that…he will not (other than for and on behalf of the Company or any company in the Group) without the prior written consent of the Board (such consent to be withheld only so far as may be reasonably necessary to protect the legitimate interests of the Group) directly or indirectly: -

    3.1 At any time during the Restriction Period:-

    3.1.1 (Except as the holder, by way of bona fide investment only, of shares or securities listed dealt in or traded on a recognised stock exchange not exceeding 3% in nominal value of the securities of that class) be engaged or concerned or interested or participate in any business which is the same as or in competition with the Business or relevant part thereof anywhere in any Restricted Territory provided always that this paragraph shall not restrain the Executive from being engaged or concerned in any business concern in so far as the Executive's duties or work shall relate solely to:-

    (a) geographical areas where the business concern is not in competition with the Business; or

    (b) services or activities with which the Executive was not concerned to a material extent during the 12 months prior to the Termination Date (or, if earlier, the start of any Garden Leave Period). "

12. The "Restriction Period" was 12 months from the date of termination of the agreement.

13. The "Restricted Territory" meant:

    "any geographic area in which any company in the Group conducts the Business or part thereof and for which the Executive was responsible or to which he rendered services in the 12 months preceding the Termination Date"."

14. "The Business" meant:

    "The business of providing the Specified Services or any part thereof carried on by the Company as at the termination date and during the 12 months prior thereto….and any other business carried on by the Company or any company in the Group at the Termination Date to which the Executive has rendered Material Services or about which he has acquired Confidential Information or by which he has been engaged at anytime during the period of 12 months prior to the Termination Date."

15. "Material Services" meant services to which he had devoted a substantial proportion of time in developing and promoting insurance products.

16. "The Specified Services" were defined as including property and buildings insurance and risk management and training.

17. "Confidential Information" was defined in clause 1 of the agreement as:

    "1.1.5.1 Any trade secrets, customer lists, trading details or other information of a confidential nature relating to the good will and secrets of any company in the Group (including, without limitation, details of the activities, businesses, forward planning programmes or finances of any such company and details of a confidential nature of the requirements terms of trade and identity of its suppliers and customers); and

    1.1.5.2 any other information specifically designated by any company in the Group as confidential; and

    1.1.5.3 any information in relation to which any company in the Group owes a duty of confidentiality to any third party."

18. There were also non-solicitation and confidentiality clauses. These are relevant because part of Mr Thomas' argument is that they were adequate to protect any legitimate interest of Farr.

19. Clause 3.2.1 of the first schedule to the agreement provided that Mr Thomas should not:

    "canvass solicit or approach or cause to be canvassed solicited or approached in relation to any business which may in any way be in competition with the Business the custom of any person who at the date hereof or at any time during the period of 12 months prior to the Termination Date (or, if earlier, the start of any Garden Leave Period) shall have been a client or customer of the Company or any company in the Group and with whom the Executive shall have had contact or dealings or for whose relationship with the Company or any company in the Group the Executive shall have had responsibility during such period."

20. Clause 3.3.3 provided that Mr Thomas should not:

    "disclose to any person (except as required by law) or any regularity authority or used to the detriment of the Company or any company in the Group any Confidential Information which he has acquired before the Termination Date provided always that this obligation shall not extend to any matter which is or shall be in the public domain otherwise than through the default of the Executive."

    The Judge's Findings

21. The only witness who gave evidence about the day to day involvement of Mr Thomas in Farr's business was Mr Thomas himself. Farr was under some difficulty because 17 of its employees had given notice on 30 June 2006, leaving a large gap at the top of the organisation. Its witnesses were Mr Halstead, who became a director of Farr after its acquisition by Erinaceous, and Mr Brindley, who became managing director of Farr on 3 July 2006, but they had only limited knowledge of the internal workings of Farr when Mr Thomas was managing director.

22. Farr's case was that the clause was necessary to safeguard it against the risk that on taking up employment with a competitor Mr Thomas would misuse information confidential to Farr, wittingly or unwittingly, to Farr's detriment and the competitor's advantage. Before the trial Farr's solicitors wrote to Mr Thomas' solicitors setting out categories of information on which Farr intended to rely. These were expressed in very broad terms, such as "business development, including information about plans to enter into new areas of business as well as developing existing businesses" and "financial information, including earnings and pricing information". Mr Halstead's and Mr Brindley's witness statements added further details.

23. As the judge observed in his judgment, Mr Thomas' position from his witness statements and pleadings appeared to be a denial of the existence of any confidential information. He seemed to be saying that the information which he had was either too general to be capable of supporting a claim of confidentiality, or was part of his general skill and knowledge as distinct from "a separate part of the employee's stock of knowledge which a man of ordinary honesty and intelligence would recognise to be the property of his old employer" (in the well known words of Cross J in Printers & Finishers Limited v Holloway [1965] RPC 239, 255), or was in the public domain. In cross-examination Mr Thomas accepted that he had received information which he would regard as confidential, but he denied that he had any information which would be of any continuing interest or relevance to a competitor.

24. In relation to Mr Thomas' knowledge of Farr's business, the judge made the following general finding:

    "I accept that, as Farr submits, the claimant was privy to all major and strategic operational decisions made by Farr and in his role as Operations and later Managing Director he had overall responsibility for all of Farr's existing business. In that position, he would have seen, read and discussed many matters relating to the operation of Farr. Whilst he will obviously not recall every detail from the documents, [from] the evidence of Farr's witnesses and my observation of the Claimant, he clearly has and will continue to have a recollection of major matters to a considerable level of detail. In this context, similar considerations apply to those in Commercial Plastics [1965] 1 QB 623 where at 642 Pearson LJ cited a passage from the judgment of Widgery J: "the defendant would be likely, when the need arose, to dredge up from the recesses of his memory" the particular item of information." "

25. The judge reviewed the authorities regarding the distinction between matters which an employer can require to be treated as confidential during a person's contract of employment and matters which the employer can require to be treated as confidential after termination of the employment. Only the latter category is capable of being protected by a post termination non-competition covenant.

26. Drawing a line between the two categories is a perennial and familiar problem. In his review of the law the judge cited Herbert Morris v Saxelby [1916] 1 AC 688, Printers & Finishers v Holloway, Faccenda Chicken Limited v Fowler [1987] Ch 117, Lansing Linde v Kerr [1991] 1 WLR 251, Lancashire Fires Limited v S A Lyons and Co Limited [1996] FSR 629 and FSS Travel and Leisure Systems v Johnson [1999] FSR 235.

27. In Faccenda Chicken Neill LJ, delivering the judgment of the Court of Appeal, said (at 137D) that information can only be protected after the employment has ceased

    "if it can properly be classed as a trade secret or is material which, while not properly to be described as a trade secret, is in all the circumstances of such a highly confidential nature as to require the same protection as a trade secret eo nomine."

28. In that case the court identified four factors that were relevant: the nature of the employment, the nature of the information, the extent to which the employer impressed the information's confidentiality on the employee and the ease with which the information could be isolated from other information that the ex-employee was free to use. But there is no universal formula for determining what is a trade secret or item of equivalent confidentiality. In PSM International PLC v Whitehouse [1992] IRLR 279, 282, Lloyd LJ described it as a question of degree. In Lansing Linde Limited v Kerr Staughton LJ (at 260 A-B) considered that "trade secrets" embrace information used in a trade, restricted in its dissemination, and the disclosure of which would be liable to cause real or significant harm to the party claiming confidentiality. In FSS Travel and Leisure Systems Limited v Johnson Mummery LJ came back to the approach of Cross J in Printers & Finishers v Holloway, observing that later decisions had not improved upon it. In Lancashire Fires Ltd v SA Lyons & Co Ltd Bingham MR (at 18) described the distinction as one which may often on the facts be very hard to draw.

29. Having identified the distinction and considered the guidance of the courts about how it should be drawn, the judge concluded that details of the budget overviews and business plans of Farr were

    "precisely the type of confidential information which in an highly competitive area of the insurance industry is likely to fall within the…category which can properly be protected by an express covenant."

30. The judge then turned to the particular categories of information relied on by Farr, with this preface:

    "…it is common ground that the question of enforceability has to be determined at the date of the relevant agreement. However, both parties have accepted that the evidence of the actual information to which the Claimant was exposed is relevant. In particular, in relation to most items of information, it is not contended that the later exposure to any of that information was not reasonably foreseeable at the time of the relevant agreement."

31. The judge found that Mr Thomas had confidential information, which Farr had a legitimate continuing interest to protect, within the following categories:

    (1) business development through the use of a captive insurer,

    (2) exploitation of new areas of business within social housing,

    (3) exploitation of new geographical markets,

    (4) business development through acquisition of other businesses, and

    (5) pricing and financial information relating to clients and insurers.

32. Certain parts of the judgment dealing with those topics were redacted for purposes of publication.

33. The judge considered next whether the non-solicitation clause provided adequate protection for Farr, so removing the justification for a non-competition covenant. He concluded that it was not adequate for two reasons, namely the problems of practical application and enforcement and the fact that not all the confidential information was client-specific.

34. The judge considered finally the scope and duration of the clause. He concluded that a clause which precluded Mr Thomas from operating as an insurance broker in the social housing sector in England and Wales, but which permitted him to operate in all other sectors of the insurance industry, was a reasonable limitation to impose in all the circumstances, and that the period of 12 months was also a reasonable period.

    Grounds of Appeal

35. In summary, Mr Nicholls advanced four grounds of appeal:

    1. The judge erred in law in finding that Farr had adduced sufficiently clear and cogent evidence to establish that Mr Thomas ever had, or was likely to have, any information which Farr could require to be treated as confidential after the termination of Mr Thomas' employment.

    2. If and in so far as he was wrong on his main ground, Farr was adequately protected by the non-solicitation and confidentiality clauses, and the non-competition clause was accordingly unreasonable.

    3. The non-competition clause was too wide.

    4. The period of any non-competition clause should not have been longer than six months.

    Ground 1

36. There were three main strands to the argument advanced under this ground:

    1. It was necessary for Farr to identify the supposedly confidential information which it relied upon to justify the non-competition clause with the same degree of particularity as would be required in a claim to enforce a contractual or equitable obligation of confidentiality, and the judge failed to apply a sufficiently strict test when examining the evidence advanced by Farr to justify the clause.

    2. If the correct test was applied, Farr failed to satisfy it because the information on which it relied was too vague and general to enable the court to identify any specific information which could fairly be regarded as a separate part of Mr Thomas' stock of knowledge confidential to Farr.

    3. Most of the examples of confidential information relied on by Farr related to matters which could not have reasonably been foreseen at the time of Mr Thomas' appointment as managing director.

37. In support of the first strand of his argument Mr Nicholls relied on observations of Mummery LJ in FSS Travel and Leisure Systems Limited v Johnson. In that case the employee was a 25 year old computer programmer. He worked entirely on a computerised booking system devised by the employer for the travel industry. The system consisted of a large number of separate programmes which interacted with each other and which were constantly updated. The employer conspicuously failed in its pleaded case or in its evidence to identify what it was about the system which was said to be confidential.

38. Mummery LJ set out what he described as "well settled legal propositions affecting restrictive covenants in an employment contract", beginning with the propositions that the court will never uphold a covenant from an employer merely to protect himself from competition by a former employee, and that there must be some subject matter which an employer can legitimately protect by a restrictive covenant. He cited the words of Lord Wilberforce in Stenhouse Limited v Phillips [1974] AC 391 at 400 that:

    "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."

39. Lord Wilberforce was using the word property only in a general sense, as he indicated, because it is now well established that (aside from any obligations undertaken by contract) the law relating to confidential information is an equitable invention and is not founded on the concept of information as property. (For the latest relevant authority rejecting the property theory, see Douglas v Hello! Limited (3) [2005] EWCA Civ 595, [2006] QB 125 at 126 to 127.)

40. Mummery LJ went on to observe that the employer had failed to adduce sufficiently cogent relevant evidence to identify and establish a separate body of objective knowledge qualifying for protection as a trade secret by means of a restrictive covenant.

41. In order to establish that the inclusion of a non-competition clause in an employment contract was reasonably necessary for the protection of the employer's interest in confidential information, the first matter which the employer obviously needs to establish is that at the time of the contract the nature of the proposed employment was such as would expose the employee to information of the kind capable of protection beyond the term of the contract (i.e. trade secrets or other information of equivalent confidentiality). The degree of the particularity of the evidence required to establish that matter must inevitably depend on the facts of the case. To say this is to say nothing new. Aldous LJ stated the principle in Scully UK Limited v Lee [1998] IRLR 263 at 23:

    "In cases where a restrictive covenant is sought to be enforced, the confidential information must be particularised sufficiently to enable the court to be satisfied that the plaintiff has a legitimate interest to protect. That requires an enquiry as to whether the plaintiff is in possession of confidential information which it is entitled to protect. (See Littlewoods Organisation v Harris [1977] 1 WLR 1472 at 1479F). Sufficient detail must be given to enable that to be decided but no more is necessary."

42. Provided that the employer overcomes that hurdle, it is no argument against a restrictive covenant that it may be very difficult for either the employer or the employee to know where exactly the line may lie between information which remains confidential after the end of the employment and the information which does not. The fact that the distinction can be very hard to draw may support the reasonableness of a non-competition clause. As was observed by Lord Denning MR in Littlewoods Organisation v Harris at 1479 and by Waller LJ in Turner v Commonwealth and British Minerals Limited [2000] IRLR 114 at para 18, it is because there may be serious difficulties in identifying precisely what is or what is not confidential information that a non-competition clause may be the most satisfactory form of restraint, provided that it is reasonable in time and space.

43. I do not accept the argument that the judge in this case applied the wrong test. On the contrary, he set out the relevant law with clarity and accuracy.

44. Applying the correct test, there was ample evidence to support the conclusion that in the nature of things Mr Thomas' appointment as Farr's managing director exposed him to information which Farr was entitled to require to be kept confidential after the termination of his employment.

45. The clearest example is pricing and financial information. I have referred to the judge's finding that detail of the budget overviews and business plans of Farr, with which Mr Thomas would inevitably be involved, was confidential information. It was part of Mr Thomas' job to know the turnover and profit which Farr intended to achieve for the group and its strategy for doing so. Only a small proportion of its budgeted income came from brokerage on the policies arranged for clients. The lion's share came from "facility management fees" negotiated with the insurers. That information was not in the public domain and was important in determining the price which Farr could afford to quote to its clients within its financial strategy. Knowledge of such matters would be valuable to a competitor in calculating how to undercut Farr in its dealings with clients and insurers.

46. Forward financial planning, which was part of Mr Thomas' responsibility as Farr's managing director, would not necessarily be limited to arranging future policies for its existing clients with its current insurers. There would be other potential means of growing the business, such as through acquisitions or through developing forms of policy for providers of social housing other than housing associations. Whether such alternative strategies advanced to the stage of Mr Thomas being in possession of confidential information relating to them at the time of the termination of his employment (as Farr maintained but Mr Thomas denied) is not the critical question. For that reason I do not consider it necessary to deal specifically with the findings in the redacted passages of the judgment. As a general proposition, Mr Thomas accepted in cross examination that, for example, acquisition strategy was likely to be part of the managing director's job. Similarly, the examination of new markets would be a proper part of his job. In short, the judge was entitled to conclude that when Mr Thomas was appointed managing director part of his job would be business development, and that this was liable to involve Mr Thomas in acquiring knowledge which it would be detrimental to Farr to pass onto a competitor on the termination of his employment.

47. Part of Mr Thomas' case was that he had no recollection of any truly confidential information after he left Farr. The judge did not accept that evidence. He found that while Mr Thomas would not be able to recall the details of every transaction, it was likely that for key clients and for important aspects of the insurance he would be able to recall key figures and percentages and strategies. I can see no proper basis on which that finding of fact can be challenged. I would only add that if it had been the case that, as events turned out, Mr Thomas was unable to recall any truly confidential information after leaving Farr, that could afford a reason for the court not granting an injunction in support of the non-competition clause. It would not follow that the clause was unreasonably in restraint of trade at the time of his appointment.

    Ground 2

48. Mr Nicholls submitted that there should be no difficulty in the policing of the non-solicitation and confidentiality clauses. The relevant market was not one in which customers were transient or difficult to identify, and the placement of insurance on behalf of housing associations is done by a publicly regulated tendering process which requires a substantial degree of openness. For those reasons, he submitted, it would be easy to detect any breach of covenant by Mr Thomas. I do not agree for three reasons. First, while information which was in the public domain would ex hypothesi not be confidential, the nature of Farr's business and of Mr Thomas' role in it were such that he would know a good deal of information of a sensitive nature which was not in the public domain, both at a strategic level (for example, in relation to Farr's budgets and business development plans) and at an operational level (for example, in relation to the fees negotiated with particular insurers for management services). Secondly, Mr Nicholls' argument does not meet the problem of policing that arises from the difficulty of differentiating between the confidential and the non-confidential, to which I have referred. Thirdly, Mr Nicholls' argument does not meet the further problem that the solicitation of clients was unlikely to be done by Mr Thomas himself. He made clear in his evidence that as managing director he did not as an individual deal directly with clients. On the judge's findings, Mr Thomas had sensitive information which would be helpful to a competitor in devising a strategy for seeking to undercut Farr, but the client negotiation was likely to be done by staff below him. In such circumstances, the practical problems of trying to police a non-solicitation clause are self evident.

    Ground 3

49. Mr Nicholls submitted that it was unreasonable to prevent Mr Thomas from engaging in competition with Farr in any place where it had conducted business in the 12 months prior to termination. The clause would, for example, prevent him from competing with Farr for business not only from its existing clients, but also from those who used another broker or none. That would be a good point if, but only if, the confidential information which it was reasonably foreseeable that Mr Thomas would acquire during the course of his employment would be relevant only to existing clients. That was not so on the judge's findings. More generally, the clause would not prevent Mr Thomas from acting as an insurance broker in sectors other than social housing, nor would it prevent him from acting for insurers in that sector as long as he did not do so in a way which was in competition with Farr. In my judgment the judge was justified in concluding that the clause was a reasonable limitation to impose in all the circumstances.

    Ground 4

50. Mr Nicholls noted in his skeleton argument that the non-competition clause was co-terminous with the non-solicitation clause, and he submitted that it ought in principle to be shorter. I do not see the logic of that submission. More generally, he submitted that Farr had failed to justify a 12 month restriction on competition. Since most housing association insurance policies were for periods longer than 12 months, a 12 month ban bore no connection with the clients' insurance cycle. Farr's case was that 12 months was a conservative estimate of the time for which its confidential information would retain its currency, and therefore 12 months was not an unreasonable period. The judge accepted Mr Halstead's evidence that information, for example, about arrangements with insurers or planned business developments could often remain confidential for more than a year. He was entitled on the evidence to conclude that the period of 12 months was reasonable.

51. I would dismiss this appeal.

    Lord Justice Scott Baker:

52. I agree.

    Lord Justice Chadwick:

53. I also agree.