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Are Your Restrictive Covenants Enforceable? The Key Takeaways From Ryanair DAC V Bellew

The well-publicised recent High Court decision in the case of Ryanair DAC v Bellew [2019] IEHC907 has highlighted the importance of making sure restrictive covenants are tightly drafted and well-tailored to the facts of the situation.

The Facts:

In that case Mr. Bellew who had been employed as Chief Operating Officer with Ryanair resigned from Ryanair and notified them that he would be taking up the role of Chief Operating Officer with Easyjet.

Ryanair argued that Mr. Bellew was bound by post termination restrictive covenants including a non-compete clause and sought a High Court injunction against Mr. Bellew to prohibit him from acting contrary to those restrictions. In particular Ryanair sought to prevent Mr. Bellew from commencing employment with Easyjet for a period of 12 months. 

Ultimately Mr. Bellew was successful in defending the proceedings on the basis that the non-compete clause was unlawful and therefore unenforceable.

Main Points of note from the Judgement:

The Judgement referred to there being a presumption that post termination restraints are void and unenforceable. However, it stated that in certain circumstances they may be justified if the purpose of the restraint is legitimate and if the restraint goes no further than is necessary to protect the legitimate interest and is, in all the circumstances, fair and reasonable.

In this case the non-compete clause was expressed as applying for a period of 12 months after the termination of Mr. Bellew’s employment and sought to prevent Mr. Bellew during that 12 month period from being “employed, engaged, concerned or interested in any capacity in any business wholly or partly in competition with the Company for air passenger services in any market”.

Protection of a legitimate interest?

In summary the High Court appeared satisfied that Ryanair did have a legitimate interest in having Mr. Bellew sign up to a restrictive covenant as it needed to protect the “valuable sensitive and confidential commercial, operational and financial information” that would come into Mr. Bellew’s knowledge in the course of his employment.

However, it was common case that Ryanair is in competition with all European airlines. Consequently if the clause was enforced the way it was written, it would essentially have barred Mr. Bellew from being employed by any airline in Europe for 12 months.

The Court determined that while Ryanair had clearly demonstrated its interest in protecting its confidential information from disclosure to its competitors in “the low cost market, or the low cost sector of the market”, it had not demonstrated the same interest in relation to the “legacy or flag or high cost airlines”.

It did not matter that the airline Mr. Bellew was moving to was seen as being in “the low cost market or the low cost sector of the market”. The point was that the non-compete clause he had signed up to sought to go further than that and if it was enforced it would have stopped him from going to any European airline not just Easyjet. Consequently the clause was deemed unenforceable.

It appears that had the clause been more limited (for example had it just prevented him from taking up a senior management position with another European airline in “the low cost market or the low cost sector of the market”) it may have been enforceable.

In “any capacity”

Interestingly the Court also called into question wording that is frequently used by employers in drafting non-compete clauses; specifically the use of the words “in any capacity”. The non-compete clause dictated that Mr. Bellew would not for a period of 12 months after termination directly or indirectly “in any capacity” either on his own behalf or in conjunction with or on behalf of any other person be employed, engaged, concerned or interested “in any capacity” in any business wholly or partly in competition with Ryanair for air passenger services in any market. The Court had a concern that the use of the words “in any capacity” was too broad. In summary the Court’s concern was that if those words were interpreted literally the clause could potentially stop Mr. Bellew not only from working for another airline as a chief operating officer but also in “any” other capacity for example as a pilot or an air steward. The effect of the doubt cast over this wording by the High Court is potentially very significant given the relatively routine use of this wording in these kinds of clauses.

Duration of Restrictive Covenant

It appears that in this case the High Court would have been satisfied with a 12 month (which is a relatively long) non-compete clause if it had been drafted in a sufficiently narrow manner so that it only went so far as it needed to in order to protect the legitimate interest of the employer.

In fact the Court went so far as to find that the period of 12 months would have been “abundantly justified” in this case by the “likely useful life of the confidential commercial information that would come to Mr. Bellew’s knowledge”.  The Court did, however, highlight that the extent to which a time limit may or may not be reasonable depends on the facts of any given case.

By way of example of how the facts of each case will influence the outcome, in the case Sanoma Valley Ltd t/a GSLS v Frances Cahill, in which this firm acted for GSLS, the High Court, in March 2019, upheld a 9 month non-solicitation clause against the Plaintiff’s former sales manager. However, in granting the employer an injunction in that case, the Court made it clear that it was particularly mindful of the small size of the industry in question (there were only three main players), the nature of the industry in question and the employee’s knowledge of her customer base. Therefore, it may not have been enforced if it is was a larger industry.

Relevant Point in Time

It is also noteworthy that the Court in the Ryanair case emphasised that the point in time which is relevant in terms of assessing whether a restrictive covenant is enforceable is the time at which the employee signed the covenant and not the time at which the employer is trying to enforce the covenant. Employer’s therefore need to be careful to update employee contracts as staff progress up through the ranks.

Consideration

Another issue that came up in the Ryanair case was the question of legal consideration for entering into a restrictive covenant. It is well settled that an employee must receive some kind of benefit from the employer in return for signing up to restrictive covenants. In this case there was a dispute around whether there had been valid consideration as the employee was offered participation in an offer of share options for 2018 in return for signing up to the restrictive covenants. For various reasons (including assertions around the ultimate value of the share options) it was argued there had not been any valid consideration on the part of the employer in return for Mr. Bellew signing up to the restrictive covenants. It was argued the agreement should fail for lack of consideration. That argument on Mr. Bellew’s part failed and the High Court made it clear that it was satisfied that at the date of the grant of the shares “they were thought – on both sides to be valuable”. The Court held that there was valid consideration. Nonetheless the non-compete clause still failed on the basis of the other reasons outlined above.  

The Employer’s behaviour

Mr. Bellew also raised an argument in the case that the employer’s behaviour towards him in the lead up to his decision to leave was such that even if the non-compete was capable of enforcement, the Court should exercise a discretion not to enforce it in this particular case. He failed in this argument but the Court stated that if Mr. Bellew had made out a case that he was badly or unreasonably treated – short of constructive dismissal – an interesting legal issue might have arisen as to the extent to which the court might properly have regard to such conduct in the exercise of its discretion to enforce a post termination restraint. Therefore, there is in theory a chance that if an employer behaves in an unreasonable manner towards an employee it could compromise their chances of successfully enforcing restrictive covenants against that employee when the employment terminates.

Discoverability of correspondence regarding pre-employment negotiations

Another point of significant interest in this case is that during the course of the High Court proceedings correspondence (including emails and texts) between Mr. Bellew and Easyjet in respect of Mr. Bellew’s pre-employment negotiations with Easyjet were opened to the Court and are analysed in the judgement in some detail. 

Employer Takeaways:

Employee Takeaways:

28th February 2020

Anne O’Connell Solicitors

Fitzwilliam Hall

Fitzwilliam Place

Dublin 2.

www.aocsolicitors.ie

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