ENFORCEABILITY OF COVENANT TO PROTECT CONFIDENTIAL INFORMATION

Employers are often concerned to protect their business interests when an employee leaves to work for a competitor. An important method of ensuring that an employee does not use his or her previous employer’s trade secrets or confidential information to benefit the new employer’s business is to include in the employee’s contracts of employment various restrictive covenants. Typically, such covenants will oblige an ex-employee not to divulge confidential information, such as product pricing or customers’ addresses, and not to work for a competitor for a certain period of time after employment has ceased.

However, it is sometimes difficult to enforce restrictive covenants in the courts. First, restrictive covenants are only enforceable if they are no wider than is necessary to protect the ex-employer’s legitimate business interests. Restrictive covenants aimed simply at restricting competition will be struck down as an unreasonable restraint of trade. Secondly, the law will not permit an employer to enforce a restrictive covenant if the employee ended the contract because of a repudiatory breach by the employer or where the employer wrongfully dismisses the employee without notice.

The case reported below is unusual because, whereas most of the case law in this area concerns restrictive covenants preventing ex-employees from working for a competitor, this concerns an independent contractor and a restrictive covenant that protects only confidential information.

Model’s assistant sells story to newspaper

C, a famous model hired F in January 2001 to work as her personal assistant. F was not an employee but an independent contractor working under contract for services. In addition to the contract, the parties signed a confidentiality agreement. This provided that without the express written consent of C, no information relating to C’s professional and private life which F might come to learn as a result of her work would be disseminated to the media during or after the performance of the contract.

On April 7 2001 relations between C and F broke down. F alleged that C had violently assaulted her and that she, F, had taken this conduct as repudiation of the contract for services with the result that the parties were discharged from all future obligations under the contract, including the obligation to protect confidential information. Shortly thereafter F gave an interview to the News of the World for which she was paid £25,000. In June 2001 the newspaper published an article using information F had supplied that revealed details of how C had conducted personal relationships with both her boyfriend and another man. It also reported F’s description of the manner in which C had treated her in the period leading up to and including the alleged assault that had terminated their working relationship.

Model claims breach of confidentiality

C began an action in the High Court alleging that F had breached the confidentiality agreement and claimed damages. F conceded that she had provided some of the information contained in the newspaper article, but claimed that she was not bound by the confidentiality agreement because she had accepted the alleged assault as a repudiatory breach of contract. F also counterclaimed for damages for the alleged assault.

C made an interim application claiming summary judgment in her favour, arguing that since F had conceded that she had supplied the newspaper with some of the information in the article, F had no realistic prospect of successfully defending the action if it went to trial. In reply, F argued that she had realistic defence since, if she could show at trial that the alleged assault had taken place and that it constituted a repudiation of the contract, she would not be bound by the confidentiality agreement.

The judge granted C summary judgment on that part of the action concerning the information that F conceded she had revealed, on the ground that there was no rule of law that could release F from the confidentiality agreement. It was also directed that the remainder of the claim should proceed to trial.

Assistant asserts covenant not binding

F appealed against the decision to a full judge of the High Court, arguing that the entirety of the action should proceed to trial. In support of her contention that the confidentiality agreement should not be enforced, F sought to rely upon two cases; General Billposting Co Ltd v Atkinson and Rock Refrigeration Ltd v Jones.

The General Billposting case concerned an employee who was dismissed without notice by his employers and who sought to avoid a restrictive covenant that prevented him from working with a competitor. The case established the principal – which was later confirmed by the Court of Appeal in Rock – that restrictive covenants do not survive the termination of a contract of employment when the employer repudiates the contract even where the covenant stated that it would continue to be operative after the determination of the contact “howsoever arising”.

Obligations of confidence not affected

The High Court began by noting that they had to decide two issues; first, whether the principle in the General Billposting case extends beyond restraint of trade covenants to confidentiality covenants; and, secondly, whether and to what extent the principle applies in cases of contracts for services.

Turning to the first issue, the High Court stated that the courts in General Billposting and Rock had not been required to decide whether the principle established in the former applied to covenants protecting confidential information, as they had been considering only covenants restricting an employee’s future ability to trade in competition with his previous employer. There were, however, passages in Rock which supported a finding that F could not rely upon the General Billposting principle to argue that she was no longer bound by the confidentiality covenant.

Confidential information is property

In Rock Lord Justice Morritt had stated that the principle in General Billposting would not restrict an employer’s rights to property after a repudiatory breach. For example, an employee would be obliged to return a company car to his or her employer. He added that similar situations might arise in relation to the employer’s trade secrets, papers and access to property. The High Corut interpret Morritt LJ’s approach to mean that since confidential information was a form of property belonging to the employer, the employer’s rights over it would survive termination of the contract.

The High Court also drew support for its decision from the judgment of Lord Justice Phillips in Rock. He had stated that the principle in General Billposting accorded neither with current legal principles regarding the effects of acceptance of a repudiation, which had developed since General Billposting was decided in 1909, nor with the requirements of business efficacy. Giving an example of the latter point, Phillips LJ had speculated that if an employer exercised his right to summarily dismiss an employee for a repudiatory breach of contract, the application of the General Billposting principle suggested that he would not be able to enforce his restrictive covenants even though it was the employee who was in breach of contract.

Contracts for services caught by confidentiality

The High Court went on to consider the second issue and stated that if the instant case had concerned a contract of employment, they would have found that the principle in General Billposting did not apply. In the Court’s view, there could be no justification for making a wrongfully dismissed employee a present of his or her employer’s trades secrets or other confidences. The Court stressed that there are only a limited number of situations in which an employee is released from his or her obligations. Former employees are protected from unfair and unreasonable covenants in restraint of trade because the law has always placed the highest importance on the right of former employees to obtain new employment. Employees are also protected from fair and reasonable covenants where they have been wrongfully dismissed. In addition, the law even allows former employees a degree of protection in respect of confidential information that they cannot reasonably help carrying away in their heads and using in their fresh employment. However, subject to this limited qualification, the Court stressed that an employee’s acceptance of the employer’s repudiatory breach cannot displace the employer’s established property rights, which include rights in respect of confidential information.

The instant case, however, concerned a contract for services, so it was not necessary, in the Court’s opinion, to decide the claim according to the principle in General Billposting. In a case involving a contract for service, there could be no conceivable basis for the suggestion that a repudiatory breach by the client entitles the independent contractor to be released from obligations of confidentiality. It was plain beyond question that the obligations of confidence of, for example, lawyers, doctors or security consultants survived acceptance by the service provider of the repudiation of the contract by the client. Indeed, that was surely the premise upon which the relationship between the client and service provider was created. It therefore followed that, in the Court’s opinion, F continued to be bound by her obligations of confidentiality even if she had accepted a repudiation of the contract. The decision of the Master was accordingly upheld.

Revelations not in public interest

The High Court also considered a second line of argument whereby F claimed that there was a public interest in the disclosure of the revelations made by her to the newspaper, and that this interest was protected by the Human Rights Act 1998. This argument was dismissed on the ground that there was no sufficient public interest in C’s personal life to justify protecting the breach by F of her obligations of confidence.

Comment

The decision in the case dealt specifically with a confidentiality clause in a contract for services. Accordingly, the Court did not have to decide whether a similar clause would have been enforceable had F been an employee working under a contract of employment. However, Mr. Justice Lightman, who gave judgment in the case, made it clear that he would have come to the same conclusion if F had been an employee. He could see no reason to treat employees and independent contractors differently, stating that their obligations of confidence should continue notwithstanding the fact that it was the employer’s breach that terminated the contract.

Restrictive Covenants are often a complex area of employment law and although often contained in a contract of employment, are often unenforceable. If you have any issues about restrictive covenants which may be contained in your contract, please do not hesitate to contact Lorraine Merry, Robinson King Solicitors, 0800 62 22 66.