Non-compete clauses following Ryanair DAC v Bellew

Introduction:

As 2019 came to a close, the High Court issued one of its final decisions of the legal calendar, determining that a 12-month non-compete clause in the contract of Ryanair’s former Chief Operations Officer, Mr Peter Bellew, was unenforceable and void. The airline attempted to halt his move to easyJet, which was to commence from 1 January 2020. While Ryanair had established a legitimate interest to protect, Allen J held that the clause in itself went beyond what was necessary to achieve said interest.

 

Background

Mr Bellew commenced employment with Ryanair as COO in 2017. He previously worked with the company between 2006 and 2015. Following his return, as part of a share option agreement with Ryanair, Mr Bellew signed up to a non-compete in June 2018, restraining him from working ‘wholly or partly’ with Ryanair’s competitors for up to 12 months post termination. The clause specifically stated the following:

‘for a period of 12 months after the termination of your employment you shall not, without the prior written consent of the company, directly or indirectly in any capacity either on your own behalf or in conjunction with or on behalf of any other person’

However, on 8 July 2019, Mr Bellew submitted his resignation and in accordance with his contractual notice period which would run until January 2020. Yet it was later agreed through mutual consent that Mr. Bellew’s end date would be 31 December 2019. However, on 18 July 2019, easyJet announced the appointment of Mr Bellew as COO. As a result, on 6 August 2019, Ryanair brought plenary summons for specific performance and an interlocutory injunction to prevent the appointment in accordance with the foregoing non-compete.

As part of Ryanair’s claim, they argued that by virtue of Mr Bellew’s position, he was privy to confidential material and sensitive commercial and operational information in relation to the past and future business, exposing them to significant loss. Interestingly, this was not denied by Mr Bellew and in fact reaffirmed that he was aware of his obligations pertaining to confidentiality and agreed to adhere to them post termination. Mr Bellew submitted that the non-compete clause was in itself unnecessary and excessive for the purpose of solely ensuring the foregoing obligation and was thus not required.

As a side point, Mr Bellew also noted the mistreatment he suffered whilst acting as CEO, particularly in regard to his contractual share options. He argued in such circumstances where his resignation was caused in ‘whole or in part’ by Ryanair, it would be unjust or inequitable to impose on Mr Bellew an unreasonable restraint of trade; thus permitting the court discretion to refuse equitable relief therein, as oppose to a repudiatory breach. In other words, even though Mr Bellew’s covenant was supported by consideration and even if it was not an unreasonable restraint of trade, nevertheless Mr Bellew was so badly treated by Ryanair that there ought not to be an injunction.

 

Non-Compete: Overview

Non-compete clauses, alternatively known as ‘restrictive covenants’ are employment contractual clauses historically connected to the implied duty of fidelity so as to guarantee and protect trade secrets and confidential information that inherently accompanies the employee’s former role. Non-compete clauses prevents that individual from competing directly or indirectly with the business of his former employer for a certain period of time, often within a defined region where the business of the company was conducted. Such boiler plate clauses frequently arise in the employment contracts of senior executives, who have particular influence over the customers or employees of their former employer.

Despite there being no common law rule pertaining to such clauses, courts have often treated same with a level of scepticism, in that employee’s rights, as a matter of public policy should not be interfered with. The question then becomes whether or not said clause can be enforced, particularly when the clause itself is excessive and goes beyond protecting the mere interests that were originally envisaged. Although normal terms and conditions of employment form a binding contract, in the circumstances of non-compete clauses, certain other factors come into being, such as an individual’s right to earn a livelihood

Yet at the same time it is widely recognised by the courts that an employer is entitled to act in a reasonable manner in order to protect the interests of his or her business. As a result, the law has attempted to strike a balance between preventing, what is in essence, a restraint of trade whilst also permitting restrictive terms of employment. If an employee attempts to renege on the terms of the agreement post-termination, this often leads to an interlocutory injunction application by the employer to prevent said employee taking up his/her new employment.

The construction of the clauses have traditionally been broken down into two parts when considering the reasonableness: (1) the time period to which the restriction applies; and (2) the geographical area to which the restriction applies.

 

  1. Duration of Restriction

The length of the time period for which an employee is restricted is in itself a major point of contention. What is reasonable depends on the time needed by your employer to protect the goodwill of the business or limit the damage done if you go to a competing employee.  Commonly, periods between 6 and 12 months are generally deemed appropriate. However, in Ideal Standard International SA v Herbert [2018] EWHC 3326, an 18 month non-compete was upheld. The employee restricted in this instance was a former shareholder who had dealt with Ideal Standard’s clients and had been significantly exposed to confidential information that would remain relevant for a long period of time post-termination and therefore, the clause was deemed reasonable in the circumstances. Yet 15 years was deemed unenforceable in Vancouver Malt & Sake Brewing Co v Vancouver Breweries (1936) Privy Council Appeal No 41 of 1933 as the individual to whom the restriction was being applied too, was entering into a sector wholly unrelated to the protected market.

Further, in Net Affinity Ltd v Conaghan & Anor [2012] 23 ELR 11 the plaintiff was the former employer of the first defendant. The employee’s contract was subject to a non-compete clause. The new employer was the second defendant. The plaintiff was a company engaged in the provision of internet booking engines for Irish hotels, as well as the facilitation of digital and social media marketing for such hotels. The first defendant had been employed by the plaintiff as Head of Client Development, which the plaintiff claimed was a pivotal role, and she was responsible for engaging directly with the plaintiff’s clients. The second defendant was a competitor of the plaintiff, engaged in the provision of similar services to the hotel market, albeit operating on a larger scale. The non-compete clause in the contract of employment which the first defendant had entered into with the plaintiff was part of a provision dealing with confidentiality and non-solicitation and it restricted the first defendant from setting up, consulting, contracting or working on a part-time basis for any individual or company providing services similar to the plaintiff’s services ‘for a period of 12 months after termination of contract’, but without prescribing any territorial limitation. The Court held the following:

‘The clause at issue in this case is far too wide to protect the legitimate requirements of Net Affinity. It is a clause which does in fact prohibit all competition by Ms. Conaghan in the area of services provided by Net Affinity… such a clause is too wide. In those circumstances… the non-compete clause is void and unenforceable.’

 

  1. Geographical Area of Restriction

The extent to which the employee is geographically restricted must go no further than required to protect the proprietary interest of the business. For example, if the non-compete goes beyond the market in which the company is currently operating in, then it exceeds what is necessary to secure protection.

This was examined in the case of Murgitroyd & Co Ltd v Purdy [2005] 3 IR 12. Here, the service agreement in question also contained a non-compete clause which provided that the defendant would not work within the Republic of Ireland for a period of twelve months following termination of his employment on his own account or compete with the plaintiff company. The defendant left the plaintiff’s employment and immediately recommenced working. Clarke J concluded that a geographical restriction based upon the jurisdiction of the Irish state was not unreasonable having regard to the way in which the business (patent attorneys) operated in Ireland and he was also satisfied that the period of twelve months was not unreasonable.

 

 

The Test

In line with his judgement in Ryanair v Bellew, Mr Justice Allen cited the case of Macken v O’Reilly [1979] I.L.R.M 79 O’Higgins CJ:

‘all interference with an individual’s freedom of action in trading is per se contrary to public policy and therefore, void. The general prohibition is subject to the exception that certain restraints may be justified… if they, in the circumstances obtaining, fair and reasonable.’

The foregoing case went on to state that when determining if such a clause is justifiable, the following needs to be examined:

  1. The need for the restraint;
  2. The object sought to be attained;
  3. Interests sought to be protected;
  4. General interest of the public.

This test was then restated by Clarke J in Murgitroyd & Company v Purdy [2005] where he simplified matters, stating:-  

'a restraint on a person working or being engaged in one or more lies of business is by definition a restraint of trade. It is well settled that such a term will not be enforced by the courts unless it meets a twofold test: -

  1. It is reasonable as between the parties; and
  2. It is consistent with the interests of the public.'

 

What Constitutes Reasonable?

Justice Allen, in his decision made reference to Lord Wilberforce on ‘reasonableness’ in Stenhouse Ltd. V Phillips [1974] A.C 391:

‘the employers 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.’

Again, further guidance on the matter is found in Murgitroyd & Company v Purdy, where Clarke J expands on the issue, stating:

‘They may be upheld only where the employee might obtain such personal knowledge of, and influence over, the customers of his employer as would enable him, if competition were allowed, to take advantage of his employer’s trade connection. . . .In those circumstances I have come to the view that the prohibition in this case on all competition is too wide. A prohibition on dealing with (in addition to soliciting of) customers of the plaintiff would, in my view, have been reasonable and sufficient to meet any legitimate requirements of the plaintiff. The wider prohibition which restricts dealing with those who might be, but are not, such customers is excessive.’

 

Justice Allen’s Decision

In determining the reasonableness in the case before us, Allen J acknowledged that there was no risk to Ryanair’s legitimate interest in preserving the stability of its workforce with Mr Bellew joining easyJet. Despite such, he noted that when it comes to sensitive commercial information obtained in the ordinary course of employment, said confidential material can be valuable to a competitor and thus be deployed, without the employee necessarily disclosing it. In other words, an employee in such a situation can be consciously aware of certain agreements, that would ultimately influence decision making in his new role.

Allen J was ultimately satisfied that the nature and extent of the confidential information under Mr Bellew’s knowledge obtained during his time at Ryanair, was such to justify a non-compete clause. Moreover, Justice Allen had no difficulty with the twelve-month timeframe as same was reflective of the life span of the confidential information within his grasp. However, Allen J drew focus to the encapsulating nature of the clause. He confirmed that Ryanair are in competition with all airlines within Europe, yet there are two divisions of airlines; that of low cost flights and ‘flag space’ or ‘legacy’ flights and whilst Ryanair sees itself in competition with such legacy carriers, the gap in respect of same is very large.

Due to the covenant in this case applying to ‘any’ business wholly or partly in competition with Ryanair for air service, Ryanair failed to demonstrate the interest in protecting its confidential information from disclosure beyond other low-cost airlines i.e. their immediate competitors. Meaning, in accordance with this point of view, despite not competing with higher end fares, the effect of the clause would of required Mr Bellew to seek the consent of Ryanair even though the commercial information at his disposal was confidential, was not sufficient to justify such, thus rendering the non-compete too wide and unenforceable.

 

Conclusion

This decision represents as stark warning to employers, that irrespective of their former employee’s seniority and/or influence within the company’s marketing sphere, blanket, catch all restraint of trade clauses will not be justified if challenged. Notwithstanding the length and geographical construction of said clauses, it seems employers should endeavour towards Allen J’s ‘reality based’ approach when assessing and drafting the specific market to which they are trying to protect and that any such restraint is purpose limited therein.

 

 

About the author:

Robin Hyde is a trainee solicitor at Alistair Purdy & Co Solicitors - a dedicated business law firm with offices in Dublin and Galway providing friendly, professional services. A firm that offer specialist legal advice in all areas of law, including commercial, corporate, litigation and all issues pertaining to private clients but with a particular focus on employment law. 

BPro Tax

Scottish Law & Tax Online

Online access to Bloomsbury Professional Scottish Law & Tax books, looseleafs and journals. Free Trial

Need Help?

Bloomsburyprofessionallaw If you need any help with finding publications or just ask a question. Talk to an Advisor: 01444 416119
customerservices@bloomsburyprofessional.com
or send us a message