On 4 and 5 July 2017 the City AM[1] and other outlets have reported on WPP and Sir Martin Sorrell’s likely upcoming battle over confidentiality and competition. Having exited WPP, the advertising and media goliath that he led as Chairman and Chief Executive Officer on less than good terms, Sorrell swiftly founded a new company called S4 Capital. Days after S4 Capital made a bid for a Netherlands based company called MediaMonks it transpires that WPP had shortly before made their own bid for the same outfit.
As reported by the City AM the corporate clash is expected to raise questions about WPP’s decision not to make Sorrell sign a non-compete clause preventing him from being involved in any rival marketing ventures after he resigned”. As such, now is an opportune time to consider our and our clients’ approach to the incorporation of restrictive covenants in employment contracts of staff of all levels, but particularly senior executives.
The basic position
The oft forgotten starting point when considering the terms of restrictive covenants contained within employment contracts is that restrictions must protect the legitimate business interests of the employer. A failure to closely align the terms of any restriction with this requirement creates a risk of unenforceability. Seeking an answer to what is a legitimate business interest is not a science. It is a question which must always be considered in light of the facts for each individual case. This will mean taking into account the nature of the employer’s business and the role of the employee in the employer’s business. Of particular importance is the employer’s likely exposure to confidential client information and/or client relationships or other matters which may give that employee some sway over the goodwill of the employer. In practice, we are frequently instructed on matters where an employer has not taken due care to tailor restrictive covenants to an individual employee’s circumstances. We suspect that the reader will also be familiar with employers rolling out standard form restrictive covenants across the workforce with little delineation between categories of employee.
Exposures
To be frank, it is rare to encounter an employer who has nothing to worry about when it comes to the restrictive covenants they apply to their workforce. We frequently find ourselves advising on methods to reduce the potential unenforceability exposures we identify.
An inbuilt protection against these exposures is that, in many cases, an employer benefits from their workforce’s inability to judge the enforceability of restrictive covenants for themselves. Some employers benefit from the deterrent effect of including restrictive covenants which are known to be unenforceable owing to the fact that many people do not understand the detail of the rules for determining the enforceability of such terms.
But what can a client do when faced by a sophisticated employee who is more attuned to these issues? In short, if a restrictive covenant has been included in a contract which is so broad or endures for so long that it does not reflect the realities of the employee’s position there is little for an employer to do besides engage in some posturing which more often than not would include the threat of issuing High Court injunctive proceedings.
At this point, it is again worth emphasising that the enforceability of a restrictive covenant is judged by reference to the point that it was entered into. Clients can be surprised to hear them that a restrictive covenant which would be enforceable if the employee agreed to enter into it now is nonetheless unenforceable because the restrictive covenants were not appropriate when they were entered into. The normal position is that even if an employee’s responsibilities and role enlarge despite not being issued a new employment contract, this development will not operate to make initially unenforceable restrictive covenants enforceable. Note, however, that there are certain limited exceptions to this rule.
Senior staff exits
When dealing with exit negotiations in relation to senior and executive staff like Sorrell, there is often an emphasis on sensitivity and a desire to preserve goodwill. Having regard to such factors is not misplaced; however, the board and/or those in a position to negotiate the terms of an exit including ongoing restrictive covenants must remind themselves of their overriding fiduciary (and sometimes statutory) duties. These duties require those bound by them to act in the employer’s, not the employee’s best interest.
Perhaps it was a failure to appreciate this which has resulted in WPP and its eponymous former leader being pitted against one another. It is certainly unusual for a senior executive of Sorrell’s pedigree to have the unrestrained freedom to act in ways that directly compete with the business of their former employer.
That WPP has ended up in this position is surprising. The apparent absence of a non-competition restrictive covenant in his employment contract/service agreement may be an oversight. What is doubly intriguing is that WPP appears to have missed the opportunity to include the same in any settlement agreement which may have been signed as part of the exit process.
This article should not be taken as definitive legal advice on any of the subject matter covered.
[1] Issues 3,158 and 3,159
