Summary
In this article, we consider the recent judgment of Joanne Wicks QC In the matter of Score Draw Limited1, which concerned a claim for breach of a non-solicitation covenant in a shareholders’ agreement.
Background
The case concerned the supply of retro football shirts.
Score Draw Limited (“Score Draw”) is a retailer and wholesale supplier of retro football shirts. Prior to this claim, Score Draw had intellectual property licences granted by various football clubs, including a non-exclusive licence (the “Licence”) from Liverpool Football Club (“LFC”), dated 15 December 2011, to supply historic LFC football shirts (both to LFC and to third party retailers) until 31 May 2016. The Licence included a run-off period after its expiry.
The PNH group and its affiliated companies (“PNH”) manufactured retro football shirts and, for some years prior to the shareholders’ agreement, supplied shirts to Score Draw.
In 2012, Mr. Wong, a majority shareholder of PNH’s parent company PNH Holdings Ltd, acquired 20 per cent. of the shareholding in Score Draw.
By February 2013, Score Draw had built up a debt to PNH, in respect of goods supplied, of about US $3.5 million.
In October 2013, as part of a restructuring of Score Draw which included a debt-for-equity swap, the share capital of Score Draw was reorganised such that the founder of Score Draw held 50 per cent. of the shares and PNH held the other 50 per cent. of the shares.
The shareholders entered into a shareholders’ agreement (the “Shareholders’ Agreement”). Among other things, the shareholders covenanted not to solicit or accept business for the purchase of retro football shirts (which the Shareholders’ Agreement termed “Restricted Products”) from any of Score Draw’s customers (which the Shareholders’ Agreement termed “Restricted Persons”), and such covenant was to last for so long as they held shares in Score Draw or for a period of two years after ceasing to hold their shares.
Score Draw also entered into a rolling credit facilities agreement with PNH.
Cash flow issues continued (exacerbated in part by Campo Sports failing to pay Score Draw for supplies made to them) and soon Score Draw became unable to fulfil their supply obligations to LFC and required increasing levels of financial help from PNH in the form of additional loans and payment holidays. PNH eventually refused to supply Score Draw with the LFC shirts and, in 2015, LFC placed orders for retro shirts directly with PNH, and PNH shipped retro shirts directly to LFC. In the production of the shirts, PNH used Score Draw’s designs and security features, including holograms attached to each shirt to demonstrate authenticity.
PNH went on to hold further discussions with LFC with a view to becoming the main or sole supplier of retro shirts to LFC.
Ultimately, LFC decided not to renew the Licence.
Score Draw commenced legal proceedings for damages and injunctive relief. It claimed that PNH has breached the non-solicitation covenant.
The arguments
PNH accepted that the shirts supplied to LFC were a “Restricted Product” and that LFC was a “Restricted Person” in 2015 when the shirts were supplied. However, PNH denied that the non-solicitation covenant in the Shareholders’ Agreement applied to any sales to LFC after the expiry of the Licence on 31 May 2016. PNH also argued that the non-solicitation covenant was unenforceable as a restraint on trade.
Score Draw contended that LFC continued to be a “Restricted Person” for some years following expiry of the Licence, and that it was not necessary for Score Draw to hold a licence from a football club for retro football shirts to be “Restricted Products”.
Decision
Joanne Wicks QC carefully considered the definitions of “Restricted Person” and “Restricted Products” in the Shareholders’ Agreement.
A “Restricted Person” included a customer of Score Draw at the relevant time. Such customers included football clubs and associations from whom Score Draw has a valid licence to supply Restricted Products. The natural meaning of the word “customer” connotes a person with whom Score Draw has some ongoing business relationship. A club or retailer would not be a “customer” of Score Draw simply because Score Draw hoped, at some unspecified point in the future, to attract their business. The purpose of the non-solicitation covenant is to prevent the shareholders poaching Score Draw’s business. It follows that, if Score Draw has no business relationship with a particular club or retailer, there is nothing for the shareholders to poach.
“Restricted Products” identified the kinds of goods which Score Draw sells, and a retro football kit would be of the type supplied by the Company under license from various football clubs and associations, even if there were no longer a formal licence arrangement between Score Draw and the relevant club.
Accordingly, Joanne Wicks QC held that LFC was a Restricted Person to whom Score Draw was supplying Restricted Products until it ceased to supply LFC at the end of the run-off period under the Licence. During the run-off period, LFC continued to place orders with Score Draw and remained in a business relationship with it, so that it could properly be described as a customer. After the run-off period, LFC could not be described as a customer of Score Draw, as there was no ongoing relationship.
Before moving on to assess breach and remedies, Joanne Wicks QC considered PNH’s argument that the non-solicitation was an unenforceable restraint of trade. As a matter of common law, all covenants in restraint of trade are, on the face of it, unenforceable, unless they protect a legitimate interest and are proportionate.
Joanne Wicks QC held the non-solicitation to be enforceable because:
- there was a legitimate interest, namely, the substantial goodwill of Score Draw, both with retailers and with those clubs and associations. Further, Score Draw faced the obvious risk that PNH, being an established business manufacturing retro shirts and, as supplier to Score Draw, had knowledge of Score Draw’s products and access to its design and security details, would seek to take Score Draw’s business by going direct to its customers and encouraging them to “cut out the middle man”);
- it was proportionate, as it only protected Score Draw against competition for its “customers”, which is limited to those with whom it has a business relationship and does not extend to others to whom it might pitch for business but has no existing relationship, and only in respect of retro shirts, which are its core business, and not other products; and
- it was freely entered into between parties of equal negotiating strength. PNH was a sophisticated business party and had the benefit of legal advice.
It was then held that PNH had breached the non-solicitation covenant when it supplied LFC directly with the shirts in 2015. Damages were awarded (including for loss of earnings after the run-off period, as Score Draw had been denied the ability to try and renew their contract with LFC) and an injunction granted to restrain further breaches of the covenant in respect of their dealings with other accounts.
Comment
Although cases relating to restrictive covenants are fact-specific, this case highlights and should serve as a reminder that:
- the Courts will typically (and seem to be more willing to) uphold well-drafted restrictive covenants which protect a legitimate interest and are proportionate;
- the business activities of the parties are relevant when assessing legitimate interest and proportionality;
- duration, geographical coverage and the types of business or product or services which the restrictive covenant applies to are relevant for proportionality; and
- the Court is slow to strike down a restrictive covenant which has been freely negotiated between parties of equal bargaining strength. The degree of sophistication of the parties and whether legal advice is obtained are also relevant to a decision of the Court.
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1 [2021] EWHC 756 (Ch)
