Protecting your business from competition from within

Many successful businesses start small and grow big. Facebook for example, was started by the 19-year-old Mark Zuckerberg, along with fellow Harvard College students and roommates on February 4, 2004. Then called "thefacebook.com," the site was an instant hit and now the site has become one of the biggest websites in the world, visited by about 2.2 billion monthly active users.

Most businesses don’t grow as large as Facebook, but for any new business starting out, or any growing business, the need for written contracts and policies are normally relatively low on the list of priorities, behind other more pressing concerns such as cash flow, carrying out the work, business development and managing the business. Often a business relies only on verbal agreements and trust.

It is only as the business grows and needs to take on employees and/or engage consultants to help it deal with the workload that the risks to the business from competition from within can increase. This is despite the fact that the people taken on by new businesses are often well known personally to the business owner, so that the apparent need for protection and written terms and conditions may seem to be an unnecessary administrative and costly burden.

However, departing employees or consultants are often well placed to take advantage of confidential information, customer and client lists, data or strategic plans and Intellectual Property after leaving the business. They may attempt to use the information they have gained from the business to set up a rival business or use the information for the benefit of a new employer. All of this can cause serious harm to a business and also seriously impact a business’s ability to attract or retain investment and in some cases close the business down.

What can a business do to prevent this risk?

The best way of preventing risk to the business is through robust data security, IT processes and legally compliant written contracts, which are drafted for the specific business requirements and regularly reviewed and updated where necessary.

In terms of business risk, a written contract can deal with and limit many areas of potential risk including :- Confidential Information, Intellectual Property, Data Protection/GDPR, Social and Professional Networking and Restrictive Covenants e.g. non-compete, non-dealing, non-solicitation.

A contract can be used for employees, consultants and partners within a business, whether it be an employment contract, a consultancy agreement or a partnership agreement.

Restrictive Covenants are not enforceable and a deterrent only?

The case of Dyson Technology Ltd v Pellerey [2015] EWHC 3000 (Ch) demonstrates the value of a business putting in place a contract containing well drafted restrictive covenants which can be enforced in a court if necessary to protect a business’s legitimate interests in regard to its employees.

In this case, Dyson employed Mr Pellerey as a motor drives engineer under a contract of employment which contained a 12 month non-compete restrictive covenants. In November 2014 Mr Pellerey was contacted by a recruiter for Telsa, a leading manufacturer of electric cars in the US and was made a job offer which he accepted. In May 2015 Dyson told Mr Pellerey that Sir James Dyson wanted to develop an electric car and assigned him to the new confidential Project. In June 2015, Mr Pellerey resigned from his job with Dyson.

Once Dyson discovered his intentions they commenced legal proceedings to seek injunctions to enforce the 12 month non-compete covenant and sought to restrain any misuse of confidential information.

The Judge held that they were successful on all fronts because the restrictive covenant clause was clear, no wider than reasonably necessary for the protection of Dyson’s legitimate interests and there had been a breach of the covenant by Mr Pellerey, which included a specific continuing obligation to notify Dyson of an approach from a competitor.

Without the benefit of a carefully drafted contract of employment containing restrictive covenants, Mr Pellerey would have been free to work for Tesla with serious potential consequences to Dyson and their business share of the electric car market.

Consultants/self-employed

A business may also wish to protect its commercial interests by imposing restrictive covenants on its consultants, to apply for a limited period after the consultancy arrangement has terminated. This is because a consultant may build up close relationships with a business’s customers, suppliers and employees. They may also acquire valuable confidential information which they could use to their advantage in subsequent appointments with other clients.

In practice, it is rare for a business to impose a strict non-competition covenant on a consultant because it might lead to them being seen as employees, but this does not mean it is not possible. In determining whether to enforce a post-termination restrictive covenant against a consultant, a court would apply the same general principles as apply in the employment context: is there a legitimate business interest which it is appropriate to protect; and is the protection sought no more than is reasonable, having regard to the interests of the parties and the public interest.

A well drafted contract for a self-employed Consultant can cover all aspects of risk including insurance and liability, IP, Data Protection, Confidentiality, working for competitors, obligations on termination and thereby reduce the risk to a business of their actions or any person working as a substitute on their behalf. Without such a contract, unlike for an employee where certain implied duties exist, there is little to no protection to a business from the actions of a Consultant.

Is your business safe from competition from within?

If you are not sure if your business is adequately protected from competition from your employees, consultants or partners contact William Addis, Associate Solicitor, at Thackray Williams LLP by email - william.addis@thackraywilliams.com