Scottish Court of Session Decisions

The petitioners are a company which carries on business with direct selling of kitchens and bedrooms. The petitioners now seek interim interdict against the respondent from "at any time prior to 19 September 1999 being employed by any person, firm or company in the business of the direct selling of kitchens and bathrooms from the following areas: the towns of Stirling, Motherwell, Ayr, Dunbar, Dumfries, Paisley, Perth, Dundee, Kilmarnock, Glasgow, Dumbarton, Livingston, and Edinburgh: the Isle of Arran: and the County of Fife".

It is said for the petitioners that this business takes place in a highly competitive market in Scotland. Certain matters of fact were not in dispute between parties as regards the manner in which the petitioners carried on their business. They sell kitchens by direct sales methods. Their business is said to be conducted throughout Scotland. To that end they employ salespersons who operate by "cold calling", that is, by telephoning individuals and seeking to persuade them to purchase a kitchen or bedroom. The kitchen and bedroom units which are installed by them are neither designed nor manufactured by them, but are purchased from outside manufacturers who provide a number of designs. They are the market leaders in Scotland in the business of direct selling of kitchens and bedrooms, sales of kitchens making up some 90% of their total sales.

In November 1991 the respondent entered the petitioners' employment. Prior to that date he had many years' experience in the sales and marketing of kitchens and bathrooms. This was a reason for the petitioners employing him. Subsequently he was promoted to appointment as sales and marketing director. By contract entitled "service agreement" dated 27 April 1994 the respondent was engaged by the petitioners for a fixed term of one year and thereafter unless and until terminated by either party giving the other not less than 12 months' notice in writing. Clause 9.1 of the agreement provided that during the course of the contract the respondent should not divulge or communicate to any other except with proper authority or as required by law "any of the trade secrets or other confidential information of or relating to" the petitioners. The nature of such information was more particularly specified. The restriction was to continue to apply after the termination of the contract without limit in point of time. Clause 11 was concerned with "restrictions after termination" and included the following paragraphs:

In clause 1(c) of the agreement "Relevant Territory" was defined as meaning:

By letter dated 19 January 1998 the respondent gave twelve months' notice of termination of employment. Thereafter he ceased to attend board meetings of the petitioners. On 17 February 1998 he was given "garden leave" by the petitioners. On 3 April 1998 the petitioners and respondent entered into a further agreement in terms of which it was agreed that the respondent's employment with the petitioners was to terminate on that date. It was agreed that a payment of £40,000 be made to the respondent in full and final settlement of all claims which he had or might have against the petitioners. Clause 5 contained the following provision:

I would note at this point that in the petition it is averred that the respondent received the payment of £40,000 in consideration of a further restriction which was added at the end of clause 5. When regard is had to the terms of the compromise agreement, this averment appears to be without warrant.

The submissions of counsel for the petitioners proceeded on the basis that the respondent had at the date of termination of his employment an intimate knowledge of the petitioners' business including all aspects of marketing strategy, future sales plans and pricing structure, and further that he had intimate knowledge of the petitioners' suppliers and the prices paid thereto, all such information being (i) commercially sensitive, (ii) confidential to the petitioners and (iii) valuable to competitors such as D.M. Design Limited ("Design). The petitioners aver that following termination of his employment with the petitioners the respondent commenced employment in England in the kitchen sales business but that in early December 1998 it came to their attention that the respondent had returned to Scotland and had commenced employment with Design. The petitioners then say that they have ascertained that the respondent is working for Design and is working for that company throughout Scotland, including areas within the definition of "Relevant Territories" (sic) as defined in Clause 1(c) of the service agreement. The petitioners aver that they have been informed by the First National Bank, who act as business financiers for both the petitioners and Design, that the respondent is being held out as the marketing director of Design. In these circumstances, the petitioners say, they are reasonably apprehensive that the respondent is using his knowledge of their business in a manner which is prejudicial to their interests and to the direct commercial benefit of Design.

For the petitioners it was submitted that there was stated a prima facie case that the respondent was either employed by or had entered into a contract for services with a competitor of the petitioners and that they were entitled to prevent him from being employed in the direct selling of kitchens and bedrooms in the areas specified in clause 11.2. The respondent's knowledge of the petitioners' business was of recent origin. It was therefore a valuable commercial asset to a competitor such as Design. It was for that reason that he had been employed by Design. It would be difficult to calculate the damage done to the petitioners' business if the respondent continued to work for Design in the period until 19 September 1999. The balance of convenience lay in favour of pronouncing interim interdict more particularly since the limited period still remaining for the restriction meant that it was unlikely that any final order could be secured before that period expired.

It is appropriate to note at this point that there is a substantial dispute between the parties as to the position of Design in the market. It appears to be a matter of admission that Design have their head office and factory at Cumbernauld, that they design and manufacture their own fitted kitchens and bedrooms and that they have their own five showrooms at Paisley, Cumbernauld, Edinburgh, Kirkcaldy and Aberdeen. The respondent admits that Design also has a sales presence in a number of DIY and furniture warehouses. These consist of concession showrooms in two premises in Glasgow and one in Falkirk while at seven other DIY and furniture showrooms belonging to third parties, there are small photographic displays at which Design staff approach persons uninvited to gauge customer interest in Design products. He also admits that Design operate a "telesales" office in Glasgow and maintain telesales staff in their two smallest showrooms, at Kirkcaldy and Aberdeen. The petitioners aver that approximately 80% of Design's sales are achieved by such telecanvassing but this is denied on the respondent's part. So far as such telecanvassing is concerned, the respondent avers that Design's calls are targeted at a specific segment of the population in Scotland, being less than 25% of the total households in Scotland, which are those most likely to purchase their products and most prepared to accept cold calls, whereas (and this appeared to be admitted by the petitioners) the telecanvassing adopted by the petitioners utilised public telephone directories.

At this stage upon the admitted facts, it can be said that while the methods by which the petitioners and Design attract custom are different, this being reflected in the costs which each incur for their products, although their price ranges do overlap to some extent, and also while their designs are different in that Design, unlike the petitioners, design and manufacture their own products, though using certain items that are bought in from other manufacturers, both the petitioners and Design are operating in the same market, offering similar commodities for sale and to that extent are competitors. It can also be said that Design include within their methods of achieving sales that of direct selling, although it would not be correct to describe them as being wholly in the business of direct selling of kitchens and bedrooms. They do not therefore seek to attract custom only by way of direct selling of kitchens and bedrooms but in other ways as well in which they are not competing with the petitioners. It was said for the respondent that these differences were such that it could not be asserted that Design was in competition with the petitioners. While there are undoubtedly differences in their products and the manner in which each secure custom, I am not at present satisfied that the differences are such that it can properly be affirmed at this stage that Design are not competitors within the context in which the phrase "in competition" with the petitioners, appearing in clause 11.2, is intended to be understood.

The parties however are at odds in regard to the relationship that exists between the respondent and Design. The respondent states that he works as a freelance sales and marketing consultant under the aegis of a company called Pear Tree (Holdings) Limited of which though not a shareholder, he became a director on 1 October 1998 and subsequently resigned as director on 20 November 1998. The petitioners make reference to a contract for consultancy work entered into between the respondent and another company called Spring Ram based in England some time after September 1998 following an approach to the respondent by the sales director of Spring Ram, the respondent having previously advised them of his availability for employment by letter dated 15 September 1998. It is said that this contract was entered into because of the respondent's "intimate knowledge of, and experience in, direct sales of kitchens" and was for "work of this nature". The respondent admits that this was the case and that it was arranged that the invoicing for this work would be done by Pear Tree. The petitioners in this connection go on to aver that the respondent represented Pear Tree as "his company" and say that in the circumstances it is believed and averred that the respondent has an interest in Pear Tree. There then follows this averment "Yet further explained and averred that the Respondent is now, either as an employee or under the auspices of Pear Tree (Holdings) Limited, taking over the operation of all of D.M. Design Showrooms. Donald McLeod, a director of D.M. Design, has telephoned staff in showrooms advising them of the Respondent's responsibility for showrooms". In support of this averment counsel for the petitioners made reference to three productions, being documents bearing to have been issued by Design. The first was a memorandum dated 3 December 1998 whose subject was recruitment. It had been sent to members of Design's staff and had been copied, it appeared, to the respondent and to two directors of Design. It concerned advertisements placed in certain newspapers for positions which included those of telecanvassers. The second comprised Minutes of a meeting of Design's sales managers held on 14 December 1998, also copied to the respondent. This made reference to a review of sales figures for the previous week and to an update on recruitment. The third was a notice headed "holidays 1999 showrooms" intimating the dates of holidays and containing the phrase "all holiday arrangements and cover for your absence to be accepted by John Harris". In response the respondent avers that this notice had been issued in error after the respondent, in the context of his present consultancy, had advised Design that there had been insufficient staff cover in their Cumbernauld showroom over the Christmas period. Furthermore two affidavits have been lodged on behalf of the respondent. The first is sworn by Mr. Neil Finlay, a director and principal shareholder of Pear Tree, who states that the respondent is providing services for Pear Tree as a self-employed consultant and that Pear Tree have contracted to provide an investigation into the sales and marketing methods of Design. The second is sworn by Mr. Donald MacLeod who states that Design had a consultancy agreement with Pear Tree constituted by a letter of appointment dated 26 October 1998.

The petitioners' case is predicated upon the basis that the respondent has acted in breach of clause 11.2. All that is said in this regard by the petitioners on averment is that the clause imposed "restrictions upon the Respondent's ability to accept employment from business competitors of the Petitioners and in business areas competitive with the Petitioners in the event of his employment with the Petitioners". The petitioners aver that their business is conducted throughout Scotland by way of direct selling: otherwise on their averments there is no connection of their business with any of the particular towns or areas specified in the definition of "Relevant Territory", except that the petitioners' registered office is in Glasgow and that they conduct business throughout Scotland.

In his submissions counsel for the petitioners did not seek to explain how clause 11.2 was to be read other than that he took his stand upon the proposition that the respondent had been working within Design headquarters in Cumbernauld since December 1998, that it was fanciful to suggest that the respondent was concerned with consultative work in the face of documents which informed him about targets, recruitment and advertisements and that this indicated that he was involved in the day-to-day investment strategy and management of Design. Since Design operated in Scotland and were competitors to the petitioners, a prima facie case existed to the effect that the petitioners were entitled to seek interim interdict by reference to clause 11.2 in order to protect their legitimate business interests.

It is sufficient to say at present that while the matter remains in dispute, no conclusion can be reached as to the nature of the relationship between the respondent and Design. At best, the petitioners' averments add up to a weak prima facie case that he is working with Design in some managerial position other than as a consultant. That conclusion at this stage is insufficient for the petitioners unless it can be asserted that there is reasonable ground for holding that he is in breach of the restrictive covenant which is contained in the compromise agreement.

In that regard it is necessary to consider the terms of the restrictive covenant itself. At the same time it is necessary to have in mind that the compromise agreement relieved the respondent of the restrictions which were laid upon him subsequent to termination of under the service agreement with the exception of those referred to in clause 5 of the compromise agreement. Amongst those restrictions of which he was relieved was that in clause 9.1 of the service agreement relative to the divulging or communicating of trade secrets or other confidential information.

Counsel for the respondent pointed out that clause 11.2 constituted a restriction upon the respondent's livelihood. He said that when regard was had to the petitioners' case for holding that the terms of clause 11.2 had been breached , it amounted to no more than assertions that because the respondent worked for Design and because Design were competitors of the petitioners, then if the respondent continued to work for Design, the petitioners would suffer damage. That did not provide any prima facie ground for holding that there had been a breach of clause 11.2. In support of his submission that the restriction went far beyond what was necessary to protect any legitimate interest of the petitioners, counsel referred to Scully UK Limited v Lee 1998 IRLR and to Faccenda Chicken Limited v Fowler 1987 1 Ch 117 for certain statements of principle set out from earlier decisions cited in those cases. In the former case, Aldous L.J. referred to a passage in the speech of Lord Parker of Waddington in Herbert Morris Ltd v Saxelby 1916 AC 688 in which reference was made to the need, in determining whether the restraint secured no more than adequate protection to the party in whose favour it was imposed, to consider in each particular case what it is for which and what it is against which protection is required. Lord Parker observed that he could find no case in which a covenant against competition by a servant or apprentice had, as such, ever been upheld by the court. Wherever such covenants had been upheld it had been on the ground, not that the servant or apprentice would, by reason of his employment or training, obtain the skill and knowledge necessary to equip him as a possible competitor in the trade, but that he might obtain such personal knowledge of and influence over 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 utilise information confidentially obtained. In Faccenda Chicken Ltd v Fowler the Court of Appeal was concerned with the issue, amongst others, of whether an implied term, arising out of the employee's implied duty of good faith, not to use or disclose confidential information extended after the termination of his employment. It was held that in the absence of express stipulation, no term was to be implied which imposed upon the employee an obligation after his employment had ceased not to use or disclose confidential information. The nature of the information which would be protected was only that which could properly be classed as a trade secret or material which, while it could not properly be described as a trade secret, was in all the circumstances of such a highly confidential character as to require the same protection as a trade secret eo nomine. As was pointed out in the judgment of the Court at p. 137E:

In my opinion, counsel for the respondent was well founded in his criticisms of the meaning and scope of clause 11.2 as applicable to the circumstances on which the petitioners found. Looking to its terms in the context of the service agreement, as he pointed out, it could only have been intended to deal with trade secrets and confidential information. It is also to be observed that it is not concerned with the issue of enticing away custom which is the subject of clause 11.1 and of the additional protection in that regard introduced in clause 5 of the compromise agreement. When regard is had to the reference to the last part of clause 11.2 and its reference to "products or services with which the Executive shall have been directly concerned", I consider that it is clear that it can only take effect as intended to protect that kind of information and material to which the Court of Appeal referred in Faccenda Chicken Limited v Fowler. I am prepared to accept that the respondent might be said, on a broad reading of the averments made by the petitioners as regards the nature of his employment in his last twelve months with the petitioners, to have been "directly concerned" with the sale of kitchens and bathrooms. Counsel pointed to what he suggested was an ambiguity in the clause, namely that it was difficult to determine whether the phrase "in relation to products or services etc." qualified the reference to "any person, firm or company which is in competition with" the petitioners or whether it qualified the words "accept any employment" and "enter into a contract for services". He submitted that if it was former, then there was no averment as to what products or services the respondent had been directly concerned with, which were the same as those being made available to Design. It seems to me that this argument is not well founded in that the nature of the products of the petitioners' business, namely kitchens and bathrooms, is the same as that of Design. A more formidable argument arises if the phrase quoted above qualifies the reference to any person, firm or company which is competition with the petitioners. This, counsel said, went far too wide since it prevented "any" employment or contract for services with such a person, firm or company. Significantly it seems to me, the petitioners do not make clear which reading they seek to sustain. As noted above, the petitioners speak of their business as being conducted "throughout Scotland". They say that Design are "direct competitors of the petitioners". They go on in article 4 of the petition to say that the arrangements made in terms of the compromise agreement "did not preclude the respondent from working, for example in England, in exactly the areas where his experience was valuable". Indeed counsel for the petitioners in the course of his submissions accepted that the respondent was not prevented by these arrangements from pursuing a career as a consultant in Scotland and, it is to be presumed, from using his experience and the knowledge gained during his employment with the petitioners in that guise. That is to say that on this argument the phrase quoted is referable to the nature of the relationship which the respondent may enter into with a competitor and not to the competitor. That that is the meaning contended for, would appear to be consistent with the petitioners' averments in article 4 of the petition. There they say that they have ascertained that the respondent "is working for" Design "and is working for that company throughout Scotland, including areas within the definition of "Relevant Territories"(sic) ...".

If the restriction was intended to place a geographical restriction upon the area in which the respondent might accept employment or enter into any contract for services in the limited period after termination of employment to which it applied, namely until 19 September 1999, counsel for the petitioners was unable to point to any of the particular areas specified in the definition of "Relevant Territory" in which it could be said that the respondent had accepted employment, if he was an employee of Design, or entered into any contract for services, if he entered into such contract with Design under the auspices of Pear Tree, observing that Design are based in Cumbernauld and that Pear Tree are based in Fenwick. Nor could counsel for the petitioners explain how the relevant territory was composed for the purposes of protecting the petitioners' legitimate business interests in a business of direct selling of kitchens and bathrooms which was conducted by seeking custom by reference to names drawn from telephone directories which necessarily transcended the strict geographical limits of the particular towns, cities and other defined areas specified in the definition of "Relevant Territory" and otherwise had no substantial connection with the relevant territory. It was not clear whether the subject which it was sought to protect was custom obtained by business done from within the relevant territory or custom to be found in the relevant territory. As counsel for the respondents pointed out, under reference to Jack Allen (Sales & Service) Limited v Smith 1999 IRLR 19, it was also necessary for the petitioners to point to the existence of some perceived actual or potential harm which was real and not fanciful such as to justify the granting of an interim order of the kind sought. It is not enough, in my opinion, for the petitioners to say that Design are competitors of theirs in Scotland who have an ex-employee of theirs working for them. That would be to seek to limit unreasonably the right of the employee to make use of the skill and knowledge which he has legitimately acquired in the course of his career. To justify the order sought it is necessary, in my opinion, to point to some area of the information and material which became available to that employee which could be regarded as a trade secret or something akin to it, which if divulged would place the competitor in a better position relative to the petitioners than they would otherwise have been. The petitioners speak of the respondent's knowledge of "all aspects of marketing strategy, future sales plans and pricing structure" but the methods by which Design satisfies its customers' requirements are very different from those of the petitioners, e.g. they are their own manufacturers whereas the petitioners acquire the units which they sell from third party suppliers. So far as marketing strategy is concerned, there is no suggestion that the method of cold calling employed by the petitioners will be changed or indeed that there is anything secret about it. Indeed the petitioners themselves aver that the method of telecanvassing employed by them is industry standard. It is said that the respondent had intimate knowledge of the petitioners' trade suppliers and the prices paid to them. But it is said for the respondent that these outside manufacturers provide a limited number of standard designs in standard widths and this is met by the petitioners' averment that their units are purchased from outside manufacturers who provide a number of designs. Looked at broadly, as I can only do at present, it is difficult to see how these matters in the circumstances of the market in which it is said that the petitioners and Design are operating and in the particular sector in which they are said to be competing, namely that of direct selling, can amount even on a prima facie basis to that kind of information which can

In regard to the balance of convenience, even if I approach the matter on the basis that the petitioners have averred sufficient to constitute a prima facie case to support the interim order for which they apply, and I have to say that at the highest this case is of the weakest, it remains to consider where the balance of convenience lies at this stage. In this regard I consider it appropriate to have in mind the fact that there is a very substantial dispute on the issue of the relationship between Design and the respondent as well as the fact that Design are only to some extent competing with the petitioners using the direct selling method of acquiring custom. Even then Design supply their customers with design services on a different basis from the petitioners and are otherwise conducting business through showroom outlets which do not obtain custom by telecanvassing. I also take into account that even on the petitioners' averments it is difficult to pinpoint any way in which it is said, apart from being mere competitors, Design's operations have become more damaging to the petitioners than before, which damage can be traced to the fact that the respondent works for them, not as a consultant but as an employee.

In the whole circumstances, I consider that the balance of convenience lies firmly in favour of the respondent thus enabling him to make use in his career of the general knowledge and experience which he has built up over the years without let or hindrance at this stage. I shall accordingly refuse the motion for interim interdict.