Decorus Ltd v Penfold & Anor [2016] EWHC 1421 (QB)

The Claimant was seeking damages and an injunction from a former employee who it was alleged had broken the terms of the restrictive covenant contained in his employment contract.

The Defendant was accused of poaching the Claimant's clients after he left their employment and set up on his own contrary to the restrictive covenant in his employment contract. The court found that the conduct of the Defendant amounted to a breach of his duty of confidence. The information which he used was a combination of contact details and information from the purchase logs from which he was aware of the Claimant's customers' likely needs. This information was acquired during his employment.

The Claimant was awarded damages of almost £30,000 and injunctive relief.

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Case No: HQ16X00856

Neutral Citation Number: [2016] EWHC 1421 (QB)

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 20/06/2016

Before :

HER HONOUR JUDGE MOLYNEUX

Between :

Decorus Limited (Claimant)

- and -

(1) Mr Daniel Penfold

(2) Procure Store Limited (Defendant)

Mr Chris Quinn (instructed by Lamb Brooks LLP) for the Claimant

Mr Spencer Keen (instructed by Fox Whitfield Solicitors) for the Defendants

Hearing dates: 23rd May 2016

Judgment

HHJ Molyneux :

An agreed list of issues is attached to this judgment.

  1. The Claimant carries out the business of IT reselling, including purchasing computer software and hardware and selling this on to clients. At the date of the hearing the Claimant employed some 14 people, of whom half were engaged in sales. The remainder were employed either full or part time in marketing, accounts, or in the warehouse. The business is a technical one and includes the marketing of a product developed by the Claimant known as "Pay as You Go". The Claimant describes this as "very unique product" which is highly specialised. The main part of the Claimant's business is HP Enterprise hardware and software. This equates to 50% of total sales.
  1. On 2nd April 2012, the First Defendant, Mr Penfold, commenced employment with the Claimant. His job title was "Sales Account Manager". He had already acquired experience working in sales within the IT field. He signed a contract of employment ("The 2012 Contract") which specified his starting salary and commission, to be paid as 15% of net profit calculated from sales attributed to him. His salary was to be reviewed annually in January of each year, although a review would not necessarily lead to an increase in salary.
  1. Clause 18 of the contract set out post-employment restrictions. The relevant part of that clause reads:

"To protect the legitimate and genuine business interests of Decorus, the employee shall not directly or indirectly, for his own benefit or that of any third party, in whatever capacity:

(a) for the period of 9 months from the termination date, in competition with Decorus, deal with, solicit, canvas, seek to secure business or assist in soliciting, canvassing, seeking to securing business or accept custom or business of any customer or client of Decorus with whom the employee had dealings or for whom the employee was directly or indirectly responsible in the 12 months preceding the termination date."

  1. Mr Penfold was responsible for managing new and existing clients. He was to build rapport with those clients and develop relationships with them. There was a high level of client contact, involving daily communication.
  1. In the course of his employment Mr Penfold had access to the Claimant's management software, a system known as NetSuite. On NetSuite were stored the address and contact details of the Claimant's clients, details of the prices they had paid for services and products and their full order history. Mr Penfold accepts that he had access to this information for the 16 or so clients for whom he was responsible. He further accepts that he had access to wider information. The Claimant's offices were small and were such that, in reality, employees were aware to some extent of the nature of each other's work and of information in respect of each other's clients. Mr Penfold accepts that this information was confidential.
  1. Mr Penfold received training in the Pay as You Go model, the product developed by the Claimant. The information regarding this product was confidential.
  1. Following his employment clients were allocated to Mr Penfold by the Claimant and he was tasked to go into the market and bring in new clients. Mr Penfold was good at his work; he brought in a number of clients and was considered by the Claimant to be "a good reliable member of the team".
  1. On 31st May 2013, Mr Penfold signed a new contract of employment ("The 2013 Contract"). The material clause of that contract provides:

"Post Termination Obligations

18.1 For the purposes of this Clause 18 the following words have the following meaning:

(a) 'Restricted Services' means any services (including but not limited to technical and product support, technical advice and customer services) supplied by the Company with which your duties were concerned or for which you were responsible during the 12 months immediately preceding the Termination Date;

(b) 'Confidential Information' has the meaning given to it at Clause 21;

(c) 'Customer' means any person, firm, company or other organisation whatsoever to whom or which the Company distributed, sold or supplied Restricted Services during the 12 months immediately preceding the Termination Date and with whom or which, during such period: (i) you had material personal dealings in the course of your employment by the Company; or (ii) any employee who was under your direct supervision with whom you had personal dealings in the course of their employment by the Company;

(d) 'Prospective Customer' means any person, firm, company or other organisation whatsoever to whom or which the Company shall have had negotiations or discussions regarding the possible distribution, sale or supply of Restricted Services during the six months immediately preceding the Termination Date and with whom or which during such period: (i) you shall have had material personal dealings in the course of your employment by the Company; or (ii) any employee who was under your direct supervision shall have had material personal dealings in the course of their employment by the Company;

(e) 'Restricted Period' means the period of six months immediately following the Termination Date, provided always that if the Company has not assigned duties to you during a period immediately preceding the Termination Date in accordance with sub clause 15.2/15.3, the Restricted Period shall be reduced by the same period as duties have been assigned to you under sub clause 15.2/15.3;

(f) 'Main Competitors' means any person, firm, company or other organisation that operates in the same industries for which the Employee has operated;

(g) 'Termination Date' means the date of termination of your employment.

18.2 You hereby undertake with the Company you will not either during your period of employment or during the Restricted Period without the prior written consent of the Company whether by yourself, through your employees or agents or otherwise and whether on your own behalf or on behalf of any person, firm, company or other organisation, directly or indirectly: (i) in competition with the Company be employed or engaged by the Main Competitors in the business of researching into, developing, manufacturing, distributing, selling, supplying or otherwise dealing with Restricted Services; (ii) in competition with the Company, directly or indirectly solicit or attempt to solicit business from or canvass any Customer or Prospective Customer in respect of Restricted Services; (iii) in competition with the Company directly or indirectly accept orders or deal with orders for Restricted Services from any Customer or Prospective Customer.

18.3 While the restrictions in this clause 18 (on which you have the opportunity to take independent advice, as you hereby acknowledge) are considered by the parties to be reasonable in all the circumstances, it is agreed that if any such restrictions, by themselves or taken together, shall be found to go beyond what is reasonable in all the circumstances for the protection of the legitimate interest of the Company but would be considered reasonable if part or parts of the wording of such restrictions were deleted, the relevant restrict or restrictions shall apply with such deletions as may be necessary to make it or them valid and effective.

18.4 The contact details of business contacts made during the course of your employment are regarded as our confidential information, and as such you will required to delete all such details from your personal social networking accounts, such as Facebook accounts or LinkedIn accounts, on termination of employment.

Clause 21 (Entitled 'Confidentiality of Information'): You will not, either during your employment or thereafter, use to the detriment or prejudice of the Company or any of its clients or customers or, except in the proper course of your duties, divulge to any person, firm or company or otherwise make use of: (i) confidential information; (ii) any confidential information about the Company, its business, accounts, finances, research products, pricing policy, future business strategy, marketing strategies and plans, employee details, client or customer lists, discount rates, sales figures, arrangements with suppliers, tenders, pitches, plans or strategies; and (iii) any other information designated as confidential which may have come to your knowledge in the course of your employment.

You will not at any time take or carry away any papers or other materials or copies thereof being the property of the Company or loaned to the Company by any client or customer.

This restriction will continue to apply after the termination of your employment without limitation in time but shall cease to apply to any information or knowledge that subsequently comes into the public domain, other than as a result of unauthorised disclosure by you.

For the purposes of this Agreement, 'Confidential Information' shall mean: (i) any trade secret, customer information, trading detail or other information relating to the business, goodwill, secrets or personal information of the Company or any Group Company, which is not publicly available; (ii) any version of any code, algorithm, programme or similar item capable of being recorded, copied or transmitted, which has been originated, developed or modified by the Company or any Group Company; (iii) any information specifically designated by the Company, any Group Company or any Customer as confidential; (iv) any information supplied to the Company or any Group Company by any third party in relation to which a duty of confidentiality is owed or arises; (v) any information required to be treated as confidential by any legislation; (vi) any informational item which should otherwise be reasonably regarded as possessing a quality of confidence."

  1. Within The 2013 Contract the job title ascribed to Mr Penfold was "Corporate Account Manager" but he accepted that his role was unchanged and that his duties did not change substantially during the course of his employment. Commission was to be paid as 30% of gross sales made by Mr Penfold.
  1. In early 2015, Mr Penfold handed in notice to terminate his employment. He explained that he was finding the travel to the office difficult and that he had been offered alternative employment. After discussion Mr Penfold elected to remain in employment with the Claimant. His basic salary was slightly increased and he was permitted to work from home for three days per week. His employment continued much as before.
  1. On the 7th January 2016, Mr Penfold resigned, providing a letter of resignation bearing that date. Mr Sheppard, Managing Director of the Claimant, described the letter as "something of a shock to me".
  1. There was a discussion between Mr Sheppard and Mr Penfold. In the Particulars of Claim (paragraph 10(b)) the Claimant says:

"[The Defendant] orally informed Mr Sheppard that he planned to set up a new business and forge a new client base for the purpose of this new business. He said that he had an urge to go out on his own. During this discussion Mr Sheppard reminded Mr Penfold of his post-termination restrictions in his contract of employment. Mr Penfold replied that he had no intention of taking the Claimant's customers and would be establishing a 'new customer base' partly because he had become 'bored' with the Claimant's customers."

  1. In his defence, at paragraph 10(b), Mr Penfold says:

"The first Defendant did have a conversation with Mr Sheppard along these lines."

  1. In evidence at trial Mr Sheppard said:

"I asked him to review his situation to ensure that he could afford to do it. I asked him why he was doing it, he said he needed money for a house and I offered to lend the money to him. I offered to support him in his venture because he was a good friend. I also offered to incubate his clients for him for a period of six months in case he wanted to come back."

  1. In his evidence at trial Mr Penfold said:

"I did not say to Mr Sheppard that I had no intention of taking his customers and would establish a new customer base. I did say that I would be setting up on my own. We had a conversation about covenants and I said 'do you not expect my customers to follow me?' to which Mr Sheppard replied 'yes'."

  1. Mr Penfold left the Claimant's employ on 8th February 2016.
Law Governing Conduct during Employment
  1. It is an implied term of every contract of employment that the employee should serve the employer faithfully: Robb v Green [1895] 2 QB 315 (CA). This case was approved by the Court of Appeal in Faccenda Chicken Ltd v Fowler [1987] CH 117 (CA). In this case Neil LJ held:

"In the absence of any express term, the obligations of the employee in respect of the use and disclosure of information are the subject of implied terms. […] While the employee remains in the employment of the employer the obligations are included in the implied term which imposes a duty of good faith or fidelity on the employee. […] It may be noted that the duty of good faith will be broken if an employee makes or copies a list of the customers of the employer for use after his employment ends or deliberately memorises such a list, even though, except in special circumstances, there is no general restriction on an ex-employee canvassing or doing business with customers of his former employer."

  1. In Faccenda Chicken v Fowler Goulding J set out three classes of information which employees might have access to during the course of their employment: (a) trivial information or information that was already public; (b) confidential information which the employee should treat as confidential because (a) he has been told it is confidential, or (b) it is clear from its character that it is confidential; (c) trade secrets which are so confidential that even though they may have been learnt by heart and even though the employee may have left service, they cannot lawfully be used for anybody's benefit but the employer's.
  1. The principles of the duty of fidelity are summarised by Haddon-Cave J in QBE Management Services (UK) Ltd v Dymoke [2012] EWHC 80 (QB), as follows:

"1. It is indisputable that an employee owes his employer a contractual duty of fidelity and how far it extends will depend on the facts of each case.

2. The more senior the staff the greater the degree of loyalty, fidelity and diligence required.

3. The first task of the court is to identify the nature of the employee obligation of fidelity and then to decide whether the employee's activities are in breach.

7. It is a breach of the duty of fidelity for an employee to misuse confidential information belonging to his employer.

8. The court should ask whether the activities in which the employee is engaged affect his ability to serve his employer faithfully and honestly and to the best of his abilities."

Conduct during Employment
  1. On the 2nd September 2015, the Second Defendant, "Procure Store Limited", the company through which Mr Penfold intended to trade, was incorporated. It was set up by a friend of his and Mr Penfold was appointed as a director of Procure Store on the 10th February 2016, after his employment terminated.
  1. Shortly before the 8th February 2016, Mr Sheppard accessed Mr Penfold's LinkedIn account. Mr Sheppard told the court that he was working from Mr Penfold's "NoteBook" and noticed that his LinkedIn account had been left logged in. Mr Penfold disputes this and says that his account must have been deliberately opened by Mr Sheppard. However the account was accessed, Mr Sheppard saw a message which had been sent to the IT manager of John Graham, a construction company client of the Claimant whose account had been managed by Mr Penfold. The screenshot, which was before the court, shows that on the 25th January Mr Gregg had produced a suggested reference for Mr Penfold at Decorus and Mr Penfold had replied saying:

"That's amazing thanks… I'll give you a call tomorrow as I am leaving Decorus and wanted to thank you for all the business you've put my way."

  1. Mr Sheppard was concerned at this and shortly afterwards approached Mr Penfold to ask him about it and to ask whether he had told anyone else that he was leaving. At first Mr Penfold denied that he had told anybody at all. When told by Mr Sheppard that he had seen the LinkedIn screen Mr Penfold accepted that he had messaged Mr Gregg, and also volunteered that he had sent messages to a Ms Cobb at John Graham and a Ms Archer at Lush. Mr Sheppard's evidence was that in the course of this conversation he again reminded Mr Penfold of his covenants and was again assured by Mr Penfold that he had no intention of taking the Claimant's clients to his new business.
  1. In oral evidence Mr Penfold told the court:

"Mr Sheppard asked me and I said I haven't told anyone I was leaving. That was a lie. I accept it. It was a mistake to lie."

  1. Following this conversation Mr Sheppard gave Mr Penfold the benefit of the doubt, still considering him to be a friend, but shortly after Mr Penfold left Mr Sheppard noticed that there was a significant drop off in orders being placed by clients whose accounts had previously been managed by Mr Penfold. Further investigations began. Mr Penfold's NoteBook was sent for analysis.
  1. The Claimant instructed a company, Kroll on Track, to prepare a report. Mr Penfold objected to the production of expert evidence at trial since the court had ordered, this being a speedy trial, that expert evidence should not be produced by either party. A report prepared by Kroll on Track was in the trial bundle, but neither party took the court to it and it was not considered in evidence, beyond the fact, ultimately agreed, that Mr Penfold had accessed the Claimant's Purchase Logs for the periods 2012, 2015 and 2016. It was also accepted that Mr Penfold had not downloaded, printed or by any other discernable means transferred or copied any of the information which he had seen from those logs.
Purchase Logs
  1. The purchase logs are highly sensitive documents. They did not appear in the trial bundle, it being the Claimant's case that they contain information which includes commercially sensitive business secrets. The purchase logs were not disclosed to the Defendants but were disclosed to his lawyers for inspection, were produced at the hearing and were available for inspection by counsel instructed on Mr Penfold's behalf.
  1. Mr Sheppard's evidence was that the purchase logs contain a large amount of highly confidential and commercially sensitive information to those who know how to read them. They contain details of the Claimant's customers and details of the dates of their orders, quantity and price of those orders. Most importantly the logs contain details of profit made on each transaction and renewal dates when further purchases would be likely. In oral evidence Mr Sheppard said:

"An informed reader would know what software and hardware would need renewing by each customer."

  1. Mr Penfold had access to the purchase logs for all his own clients. His access was password protected.
  1. Mr Penfold's evidence relating to his access to the purchase logs was not consistent. In the Particulars of Claim at paragraph 10(J) the Claimant stated:

"On a date or dates unknown to the Claimant between the 1st December 2015 and the 29th February 2016 the First Defendant accessed electronic copies of historic purchasing logs of transactions between the Claimant and its customers. In particular the First Defendant accessed the purchasing log pertaining to October, November and December 2015 33 and 10 times respectively. It is averred that there was no reason for the First Defendant to access such information in the course of his employment. It is to be inferred that the First Defendant has retained or copied the purchase log information for the benefit of himself or a third party."

  1. Mr Sheppard made further reference to this in his witness statement but Mr Penfold did not deal with access to purchase logs in his own witness statement. However at a hearing in this case before Mr Justice Openshaw on the 15th March 2016, Mr Penfold told the court that he had looked at the purchase logs. He told the court that he had looked at the logs because he was considering setting up a business and wanted to see how difficult it might be to do so.
  1. In paragraph 10(J) of his defence, however, filed after **that hearing Mr Penfold denied that he had accessed the purchase logs.
  1. At the trial on the 24th May 2016, Mr Penfold was asked about a message which he had sent on the 15th September 2015 stating that he had decided to set up on his own. It was put to him that that message had been sent before he accessed the purchase logs in December 2015 so that his access to them cannot have been to enable him to decide whether or not to set up a business. Giving evidence at trial Mr Penfold told the court:

"*I

had already decided to set up the business when I looked at the logs. When I looked at them it was to figure out how much profit I would make. I looked at the 2012 logs which were for the period when I started at Decorus. I looked at the six month period from when I had started from fresh to see how long it had taken me to build up a profit. I wanted to figure out from a profit point of view how long it would take me to build up. This was entirely for my own business. If I had taken any information it would have been unlawful. That is not what I did. I did not make a note, I glanced through to see how much I would make month on month.*"

  1. Mr Penfold sought to persuade the court that this was not a breach of his duty of fidelity. He argued that the information he viewed was not confidential and could have been ascertained from his payslips which showed the commission which he had been paid as a percentage of profit.
  1. Even accepting Mr Penfold's evidence as to the purpose for which he accessed the purchase logs, which, having regard to the inconsistencies in the manner in which it was given, might be giving it more credence than it deserves, there can be no doubt that the information which he viewed on the purchase logs was confidential sensitive information which belonged to his employer and to which he was allowed password protected access in the course of his employment. To use that information to assist him to establish a business so that he could compete with his employer cannot be other than a breach of his duty of fidelity. The information which Mr Penfold accessed from the purchase logs is not information which would have been available from his payslips. His payslips would show him only the percentage commission which he had been paid and would not show him the clients from whom such commission was attributable. He used confidential information other than in the execution of his duty on the Claimant's behalf.
InPrint Litho
  1. InPrint Litho is a customer of the Claimant. It was operated by Mr Penfold's brother-in-law. It was a small company and not a significant customer of the Claimant in terms of its contribution to the Claimant's sales or net-profit.
  1. Mr Penfold accepts that between October 2015 and February 2016 whilst he was still employed by the Claimant, he processed five orders for InPrint Litho through the Second Defendant. He accepted that he could have done this business through the Claimant. He accepts that ordinarily this would constitute a breach of the duty of fidelity, but says that the principal question is whether it affected his ability to serve his employer faithfully and honestly and to the best of his abilities. He asked that, as he accepts exceptionally, this should not be seen as the breach of the implied duty of fidelity.
  1. No doubt had this been Mr Penfold's only breach of the duty of fidelity the matter would not have been brought before the court. However the matter is before the court and Mr Penfold's conduct in supply to InPrint Litho cannot be other than a breach of his duty of fidelity.
Lush
  1. Lush had been a customer of the Claimant for many years and were an important customer. Their account was managed by Mr Penfold whilst he was employed by the Claimant. His evidence was that Ms Kim Archer of Lush, the principal point of contact, was a close personal friend of his. Ms Archer provided a witness statement in support of the Defendants. She was subsequently asked to disclose documents showing communication and dealings between herself and Mr Penfold. She did not disclose any such documents and did not attend trial to be cross-examined on the evidence which she had given. The content of her witness statement is not consistent with documents which were disclosed and little if any weight can be given to her evidence.
  1. Mr Penfold told the court that he and Ms Archer were good friends. He said:

"She was the first person I told. I told her sometime in January that I was leaving and I told her my new company name."

  1. On the 28th January 2016, at 11am, Mr Sheppard emailed Ms Archer to advise her that Mr Penfold would be leaving the Claimant on the 8th February. Mr Sheppard was unaware that Ms Archer already knew. Mr Sheppard was equally unaware that on the 29th January Ms Archer forwarded his email on to Mr Penfold with the message "FYI". This email was sent by Ms Archer to Mr Penfold's Procure Store email address.
  1. On the 1st February 2016, Ms Archer sent a further email to Mr Penfold at Procure Store which reads:

"Hi Ya. This is the spreadsheet I was talking to you about."

  1. There is a spreadsheet attached to the email. Shown the spreadsheet and asked about it Mr Penfold told the court in oral evidence:

"We had a conversation. Lush was going out to price review. She sent the spreadsheet to Procure Store. I did not reply to it. Our conversation was a general one about supply review. She knew I was setting up. She sent the spreadsheet so that I could compete against Decorus. I did nothing about it until after I left. I speak to Ms Archer regularly."

  1. On the 3rd February 2016, Ms Archer sent a further email to Mr Penfold at Procure Store:

"Hi Ya. Not sure if work has taken your work phone, need to pick your brains on something – Adobe and Autocad."

  1. Mr Penfold's evidence about this email was:

"I would have spoken to her, I cannot be sure when I spoke to her, but my best guess is that I spoke to her before I left Decorus."

  1. Ms Archer's witness statement does not deal with this communication. In his witness statement of the 14th March 2016, Mr Penfold says:

"*Two companies did get in touch with me

following my departure from the Claimant. The first was Lush. They got in touch with me after the Claimant provided them with a quote for some equipment and they were not happy with the price.*"

  1. This is not supported by the evidence. The quote which Mr Penfold refers to is in fact dated the 25th February 2016, which is after communication between Mr Penfold and Lush.
  1. The communication between Mr Penfold and Lush after he left the Claimant's employ is also relevant in understanding his conduct whilst still in the Claimant's employ. Mr Penfold accepts that there were regular telephone conversations between himself and Ms Archer. He did not produce his telephone records at trial, despite a request to do so. He explained that it was too difficult for him to obtain this information as his phone was provided via a friend and billing information was not easy to obtain.
  1. On the 10th February 2016, a number of emails were exchanged between Ms Archer and Mr Penfold relating to the transfer of the Adobe licence. It is inconceivable that this cannot have been discussed prior to the 8th February.
  1. On the 15th February 2016, Ms Archer emailed Mr Penfold saying: "Do you have the prices yet?". Mr Penfold replied saying: "Almost done. Can you tell me what I need to beat?".
  1. Mr Penfold submitted a quote to Lush on the 25th February 2016. The Claimant also submitted a quote on the 25th February. The quote submitted by the Claimant was lower than that submitted by Mr Penfold. Ms Archer forwarded the Claimant's quote to Mr Penfold on the 1st March as a result of which Mr Penfold altered the prices which he had quoted to Lush.
  1. The communication between Mr Penfold and Lush which took place whilst he was an employee of the Claimant is a breach of his implied term that he would serve his employer faithfully. Not only was he receiving communication from Lush via the email address of the Second Defendant, but he received information from Lush whilst still an employee of the Claimant that would allow him to compete with it when he ceased to be so.
  1. The communication between Mr Penfold and Lush which followed almost immediately after the termination of his employment is evidence of a pre-existing agreement between himself and Lush that he would compete with the Claimant and that Lush would provide him with information to enable him to do so effectively. This is a clear breach of the duty of fidelity.
Agreed List of Issues: Findings for Questions 3 and 4
  1. The First Defendant acted in breach of his duty of good faith and fidelity whilst still employed by the Claimant to the extent set out above. There was a misuse of contacts and information from the purchase logs. His post employment conduct and extent to which it is evidence of breach of duty of fidelity whilst still employed will be addressed below.
Agreed List of Issues Question 1: Which Express Written Terms Governed D1's Employment?
  1. The Claimant submits that Mr Penfold's employment was governed by The 2013 Contract. Mr Penfold submits that The 2012 Contract applies.
  1. The principle issue raised by Mr Penfold is his allegation, which is contested, that he did not receive any additional consideration in respect of The 2013 Contract. The Claimant disputes this and also submits that, in any event, it does not matter.
  1. Mr Penfold asserts it is well established that post-termination restraints must be supported by consideration, even if contained in a deed. When a restriction is included in a contract that is offered at the start of employment there is no difficulty, because the employer can rely on the employment itself. However, once the employment has started an employer cannot simply introduce restrictions unsupported by consideration. The employer has to provide consideration and that consideration must be adequate so as to make the restrictions in the interests of both parties. The court was referred to two leading texts on restraint of trade:

(a) Brearley and Bloch Employment Covenants and Confidential Information, 3rd edition:

"11.33 In conclusion, at the inception of employment there will rarely be a problem. No consideration is necessary beyond the agreement on the terms which include the covenant. However, where covenants are later introduced into the contractual documentation, the employer should provide consideration which is substantial and not nominal, e.g. a pay rise or promotion."

and (b) Goulding, Employee Competition, 3rd edition:

"6.22 Any variation of contract may be agreed between the parties. Consideration (normally some benefit to the employee) must be given in return for the covenants. How much benefit is sufficient to form valid consideration? There is no right answer but nominal consideration is risky, as is reliance on the employee continuing to work for the employer on otherwise unchanged terms as is the introduction of a variation by way of a deed unsupported by consideration. Ideally there should be some real or monetary other benefit (promotion, for example) conferred on the employee, for the purpose of causing the employee to agree to the restrictive covenants. In such a case the promotion should be conditional on the employee entering into the new contract… there would need to be some evidence that if the employee did not sign the new contract he would be dismissed."

  1. In Reuse Collections Ltd v Sendall (2014) EWHC the court held that post termination restrictions were unenforceable because they had been imposed in the course of employment and without proper consideration.
  1. The court had written statements from Mr Sheppard, Mr Penfold and from Ms Joanne Roden of HR Solutions 4 U Ltd ("HR Solutions"). All three gave oral evidence at trial.
  1. In 2013 the Claimant engaged HR Solutions to review all of the Claimant's employment materials. A staff handbook was to be introduced and contracts of employment were to be redrafted. In February and March of 2013 meetings were held in which HR issues were discussed. The meetings were attended by Mr Sheppard, his wife Carly Baker who was responsible for HR matters within the Claimant, and by employees of HR Solutions.
  1. Mr Sheppard's evidence was that the detail of the new contract was not something with which he had personal involvement. His oral evidence was:

"My wife was involved in the new contracts, advised by HR Solutions. I sat down with HR Solutions early in the year. It was to be a three phase review. I do not recall discussing changes in the contract. I cannot say what business aim my wife had in mind when discussing changes in the contract. My wife dealt with all the Claimant's HR matters."

  1. On the 5th March 2013, Mr Sheppard sent an email to all staff, including Mr Penfold. The email asked all staff to set aside the 26th March so that they could be introduced to HR Solutions. On the same day Mr Penfold confirmed his availability to attend the meeting.
  1. One of the matters to be discussed at the March 2013 meeting was the introduction of a new appraisal system. On the 13th March, Mr Sheppard emailed Mr Penfold along with other members of the sales team to say that the appraisals would have to be postponed as he was going away. In the email he said:

"I will now be doing them over two days (17th and 23rd April), a pack will be sent out whilst I am away from HR Solutions for you to complete."

  1. On the 17th April 2013, Mr Penfold had an appraisal. An appraisal form was completed. On the 18th April, Mr Penfold and other members of the sales team received a further email from Mr Sheppard which reads:

"Following on from yesterdays appraisals I will be completing the outstanding appraisals next week… This is the first part of a three phase review, the stages are as follows: 1. appraisal 2. the sign off on the agreed milestones and actions from the appraisals 3. updated contract – all the existing contracts are somewhat outdated with regards to employment legislation and are being updated."

  1. On the 18th April 2013, Mr Sheppard sent an email to the accounts department reading:

"Following Dan's appraisal yesterday can you please increase his salary to £27,000 per annum."

  1. On the 8th May 2013, Ms Roden of HR Solutions held a meeting with all of the Claimant's staff who were able to attend. Mr Penfold attended the meeting. The updated contract and company handbook were handed out, together with a document prepared by Ms Roden headed "Summary of Changes to HR Practices" and a covering letter. The covering letter stated:

"Your main terms and conditions of employment have been transferred to your new contract of employment. Please ensure that you read this document in full as once accepted this contract will replace your existing terms and conditions."

  1. Ms Roden's evidence was that the restrictive covenants contained in the new contract were as drafted by HR Solutions' solicitors. She said that in her view, The 2012 Contract was contradictory in its drafting and that the nine month period for restrictive covenants was, in her view, longer than industry standard. She said:

"I thought six months would be more enforceable than nine. The template I used had been reviewed by our solicitors and I had worked in the IT sector and had experience in it. I thought it better to reduce the period to six months. The clause I used was standard from our standard contract. I discussed with Carly Baker whether it could be reduced to six months and she confirmed that it could. We also resolved the conflict in the original contract. I did not discuss with Carly Baker the aims of the clause or what she was trying to achieve. I understood the industry pretty well."

  1. Ms Roden said that at the meeting on the 8th May 2013, the purpose of the changes was discussed. Employees were encouraged to read the contract in full and to ask any questions that they had. She confirmed that the contract was a generic one used for all the Claimant's employees, regardless of their role. Ms Roden did not recall any discussion with employees about the wording of the covenants or any discussion in which pay rises were said to be specifically linked to the signing of the new contract.
  1. On the 15 March 2015, Mr Penfold told Mr Justice Openshaw that he was not part of any consultation about the new contract. He told the court at his trial that what he meant was that there had been no consideration for the new contract. Mr Penfold confirmed that he had attended the meeting in May 2013 but said that he had not read the contract. He said that after the meeting he had been busy and so had put the contract in his drawer. He said:

"I was asked to sign it a couple of times. Carly came and asked me to sign it. I did not read it. I just signed it. I accepted that it was part of a three phase review. I had received the email on the 18th April, I had had an appraisal, I had had a pay rise. I do not accept that the pay rise was part of this. It did not cross my mind to ask what would happen if I did not sign the contract. I expected that it would contain a non-solicitation clause but I did not expect that I would not be able to work at all."

  1. Mr Penfold signed the contract on the 31st May 2013. He said:

"If I was asked about it on the day I signed it I would say that I thought the new contract applied. I changed my mind when I saw the restrictive covenant. I read it through after I left the Claimant. I had not read it in detail before. It was after I left that I read it and then I thought I am not bound by it."

  1. Mr Penfold's appraisal form was signed by Mr Sheppard on the 28th June 2013.
  1. Mr Penfold argues that there is no consideration for the new contract in that the pay rise was awarded on the 18th April 2013, before the new contract was signed and before its terms had been published to him, which must mean that the pay rise cannot be considered as consideration for the new contract.
  1. However, the new contract was always expressed to be a part of a three phase process. Mr Penfold had an appraisal which he had not had before. That was the first part of the process. Thereafter, in April 2013 the accounts department were directed to increase his salary, although under The 2012 Contract the date for salary review was in January. Mr Penfold was provided with a draft contract, urged to read it carefully before signing it and Mr Sheppard's evidence was that if Mr Penfold had not signed the contract his employment would have been terminated. Mr Penfold did sign the contract and continued in employment at the increased salary. Taken together the appraisal, pay rise and continued employment amount to valid consideration for The 2013 Contract.
  1. Mr Penfold's employment was governed by the terms of The 2013 Contract.
Agreed List of Issues Question 2: Are the Applicable Restrictive Covenants Enforceable?
  1. The law is not disputed by the parties. Covenants in restraint of trade are prima facie void and will only be enforced if they go no further than reasonably necessary to protect the employer's legitimate interests of client connections and confidential information (Lord Parker – Herbert Morris Limited v Saxelby [1916] Appeal Cases). In that case Lord Parker said:

"In fact the reason, and the only reason, for upholding such a restraint on the part of an employee is that the employer has some proprietary right in the nature of a trade connection or in the nature of trade secrets, for the protection of which such a restraint is, having regard to the duties of the employee, reasonably necessary. Such a restraint has, so far as I know, never been upheld, if directed only to the prevention of competition or against the use of the personal skill and knowledge acquired by the employee in his employer's business."

  1. In TFS Derivatives v Morgan [2005] IRLR 246, Cox J set out a three stage approach to be adopted in considering whether a restrictive covenant was enforceable:

"Firstly, the court must decide what the covenant means when properly construed.

Secondly, the court will consider whether the former employers have shown on the evidence that they have legitimate business interests requiring protection in relation to the employee's employment.

Thirdly, once the existence of legitimate protectable interests has been established, the covenant must be shown to be no wider than is reasonably necessary for the protection of those interests. Reasonable necessity is to be assessed from the perspective of reasonable persons in the position of the parties as at the date of the contract, having regard to the contractual provisions as a whole and to the factual matrix to which the contract would then realistically have been expected to apply."

  1. Guidance on the ascertainment of legitimate protectable interests is found in the case of Office Angels Ltd v Rainer-Thomas [1991] IRLR 214, where Sir Christopher Slade stated:

"In a case where the wording of a covenant restricting competition by an employee after leaving his employer's service does not specifically state the interest of the employer which the covenant is intended to protect, the court is, in my judgment, entitled to look both at the wording and the surrounding circumstances for the purpose of ascertaining that interest, by reference to what would, objectively, appear to have been the intentions of the parties."

  1. Severance or the use of a blue pencil to remove offending clauses thus leaving in place an enforceable contract is to be approached with care. The court cannot simply amend the clauses in order to make them enforceable. (JA Mont (UK) Ltd v Mills) per Simon Brown J.
  1. It is for the Claimant to prove that the covenants are reasonable.
  1. The evidence before the court came principally from Ms Roden of HR Solutions. She confirmed that the clause which she had used was a generic clause, used as a standard by her, which had been drafted by a firm of solicitors. She confirmed that she had not had specific discussions with Ms Baker on behalf of the Claimant about the clause or the wording of it other than a discussion about the duration for which the clause was to be applied. She confirmed that she had advised the Claimant, Ms Baker, that the prohibition within the clause should be reduced from nine months in the original contract to a period of six months. She also confirmed that she could not recall any specific discussion with any of the Claimant's employees about the wording of the covenant. The document which she prepared headed "Summary of Changes to HR Practices" contained no reference to it.

The Three Stage Approach

  1. Clause 18.2(ii) says that the employee will not:

i) in competition with the company

ii) directly or indirectly

iii) solicit or attempt to solicit business from or canvass

iv) any customer (which is defined in Clause 18(1)(c) and is effectively any customer with whom the employee had material personal dealings in the course of his employment by the Company) or

v) any prospective customer (which is defined in Clause 18(1)(d) to mean any firm or company with which the employee had material person dealings in the course of his employment by the Company)

vi) in respect of restricted services (which are defined in Clause 18(1)(a)).

  1. The meaning of Clause 18(2) (ii) is that Mr Penfold may not solicit customers of the Claimant or prospective customers of the Claimant with whom he has had material personal dealings whilst employed by the Claimant.
  1. Next, has the Claimant shown on evidence that they have a legitimate business interest requiring protection in respect of Mr Penfold's employment? Mr Penfold has confidential information about the customers and prospective customers. That information extends to their contact details, their purchasing history and profit made from transactions with them and importantly their future business needs. The information which he has relating to those customers is confidential information. The profitability of individual transactions and likely dates of further transactions is highly sensitive information belonging to the Claimant. Shortly stated, it can be described as a legitimate interest which requires protection.
  1. Thirdly, the final question is whether Clause 18(2) (ii) can be shown to be no wider than is reasonably necessary for the protection of the Claimant's interests. Mr Penfold says that it is wider than necessary for two reasons:

i) Its duration

ii) Its scope, extending as it does to prospective customers as well as actual.

  1. In oral evidence Mr Sheppard accepted that since Mr Penfold left the Claimant's employ he has had expressions of interest for employment from others. At least one of those who expressed interest is an experienced sales person within the IT field. Mr Sheppard maintained, however, that a period of six months was necessary. Experience within the IT field is not enough. Mr Sheppard described this as an area in which "people buy from people". He explained that a period of time to build up a relationship with a customer was essential to an effective business relationship.
  1. Further, in giving evidence, Mr Sheppard accepted that he did not seek to enforce the covenant against Mr Penfold insofar as it relates to prospective customers. The Claimant's aim was to enforce the covenant against Mr Penfold relating to customers he had dealt with and to protect the commercial model. Mr Penfold argued that this was fatal to the enforcement of the covenant since the court cannot blue pencil prospective customers from the covenant thus leaving in place a valid contract. However this is to misconstrue the effect of Mr Sheppard's evidence. Mr Sheppard's evidence was to the effect he did not seek to enforce the covenant against Mr Penfold so far as it related to prospective customers. He did not venture any opinion upon whether such a covenant would be enforceable and did not express any view as to whether such a covenant would be necessary or reasonable to protect the company's legitimate business interests.
  1. Having considered the three stage approach to Clause 18(2) (ii) I conclude that it is an enforceable covenant. Mr Penfold's own evidence to the court was that he had expected that his contract would contain a non-solicitation clause. Giving evidence before Mr Justice Openshaw he told the court that he did not want to breach any of his restrictive covenants. Asked about that at trial, he explained that he was referring to non-solicitation of customers which he expected as a term of his contract.
  1. Clause 18(2) (i) is a very wide clause. In effect it prevents Mr Penfold from being employed in any industry in respect of which he has operated during his employment. Not only that but it also prevents him from being a researcher, developer, manufacturer or distributor not simply a sales person. The Claimant has offered no explanation as to why such a wide provision is necessary in order to protect its business interests.
  1. Clause 18(2) (iii) is a non-dealing covenant. In Towry v Bennett [2012] EWHC 224, Cox J stated that: "The reasonableness of a non-dealing clause of this kind will depend upon the nature and specialism of the market in which the employee is engaged. The financial advice sector is one where strong client connections may well be held to justify a post-termination restriction of this kind".
  1. The Claimant has developed what is described as a unique business model in the Pay as You Go system. Mr Penfold had been trained in this system. The details of it are a legitimate business interest of the Claimant.
  1. Applying the 3 stage test to this covenant the combination of the strong client connections and the specialism of the market in which the employee was engaged are such that this is an enforceable covenant.
  1. Clause 18 (2) (i) can be severed or blue pencilled form the contract. The remaining parts of the covenant are enforceable.
Issue 5: Do D1 and D2 Owe and Continue to Owe a Duty in Equity Not to Misuse Trade Secrets or Confidential Information?
  1. In Coco v AN Clark (Engineers) Ltd Megarry J stated: "First the information itself, in the words of Lord Greene, M.R. in the Saltman case must have the 'necessary quality of confidence about it'. Secondly, that information must have been imparted in circumstances importing an obligation of confidence. Thirdly, there must be an unauthorised use of that information to the detriment of the party communication it".
  1. In Lansing Linde Ltd v Kerr (1991) 1WLR Staughton LJ stated that in appropriate cases trade secrets can include the names of customers and the products they buy.
  1. The information imparted to Mr Penfold in the course of his employment includes business secrets and confidential information. The client contact details and their purchasing patterns and requirements are confidential. It was imparted in confidence. An equitable duty not to misuse the information arises. The duty must extend to the Second Defendant to the extent that it misuses any information supplied to it by Mr Penfold.
Issues 6 and 7: Did D1 Breach the Duty of Confidence and If So To What Extent?
  1. Following his departure from the Claimant Mr Penfold sent a number of emails to his former customers. Some of those emails were to advise of his new contact details.
  1. However on 11 February Mr Penfold sent an email to a customer of the Claimant with the subject heading "New Contact Details" which reads "are you still looking to purchase new HP Laptops/Desktops soon?".
  1. On the same day Mr Penfold sent an email to another of the Claimant's customers which reads "I have just been speaking to Angela to advise that your Creative Cloud agreement is up for renewal and I was hoping that you would consider moving it across to Procure Store. It's a simple process of changing reseller which I can assist with if your (sic) happy for me to do so. Once it has changed over it would be business as usual and you could simply carry on as before with no disruption to the business. I look forward to hearing from you".
  1. Building Design Partnership ("BDP") is one of the Claimant's biggest longstanding customers. On 11th February Mr Penfold emailed his contact details to two individuals there. On 12th February BDP gave permission for the Second Defendant to have access to their HP bid pricing. It is clear that Mr Penfold intended to quote for business for BDP in competition with the Claimant. Mr Sheppard had invested much time and effort negotiating and agreeing future business with BDP. After Mr Penfold left he was advised by BDP that there was a competitor, as a result of which the Claimant had to reduce its own prices in order to retain the custom. The prices which the Claimant had charged to BDP were well known to Mr Penfold and the Claimant lost a significant amount of profit.
  1. The exchanges between Mr Penfold and Lush both before and after his departure from the Claimant have already been referred to above.
  1. The conduct of Mr Penfold amounts to a breach of his duty of confidence. The information which he used was a combination of contact details and information from the purchase logs from which he was aware of the Claimant's customers' likely needs. This information was acquired during his employment.
Relief
  1. The Claimant is awarded damages in the sum of £29,852.17 as set out in Mr Sheppard's witness statement. This figure was not effectively challenged by the Defendants.
  1. Final injunctive relief in the terms of paragraphs 2, 3, 6 and 7 of the order made on 16th March 2016.
  1. Neither party addressed the court on the question of costs, which should be awarded on the usual principles and be assessed if not agreed.
  1. The parties to draw and agree an order.

Published: 21/06/2016 10:07

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