knowledge | 26 February 2020 |
Restrictive covenants in employment contracts – one size does not fit all
On 20 December 2019, the High Court delivered its decision in a high profile dispute involving low cost carrier Ryanair and its former Chief Operations Officer, Peter Bellew.
The decision, which paved the way for Mr Bellew to commence employment with Ryanair’s largest competitor EasyJet, serves as a cautionary tale for employers as it is clear that ‘standard form’ restrictive covenants, which go beyond what is necessary to protect the employer’s interests, will be void and unenforceable as an unjustified restraint of trade.
In July 2019, Peter Bellew resigned from Ryanair and he agreed with the airline’s Chief Executive Officer Mr Michael O’Leary that his employment would terminate on 31 December 2019. Shortly thereafter, Mr Bellew informed Mr O’Leary that he would be taking up a new role as Chief Operations Officer in EasyJet in January 2020.
Ryanair issued High Court proceedings seeking to restrain Mr Bellew for taking up employment with EasyJet by compelling him to comply with a restrictive covenant that he had entered into as a condition for accessing a 2018 share option plan. This restrictive covenant prohibited him, for a period of twelve months following the termination of his employment, from being involved in a business in competition with Ryanair ‘for air passenger services’.
The action, which was heard over 8 days in December 2019, was ‘hard fought’ on both sides.
Mr Bellew defended the case on three grounds, arguing that (i) the options that he had signed up to were worthless and as such, that Ryanair had not given him any consideration in return for him entering into the restrictions, (ii) the CEO’s behaviour towards him was such that it was reasonable for him to resign and that the Court should not enforce the restrictive covenants against him, and (iii) the scope of the restriction was too broad, such that it was an unjustified restraint of trade and was unenforceable.
Obsolete and worthless
Mr Bellew argued that the share options that he had been granted in 2018 were ‘obsolete and worthless’ because Ryanair’s commercial performance had not resulted its share price achieving the level required to enable him to avail of his options. He argued that this gave rise to a ‘total failure of consideration’ such that the restrictive covenants should not be enforced.
In the High Court, Mr Justice Allen disagreed. In his view, the time at which the consideration must be assessed is the time of entry into the restrictive covenant and he was quite satisfied that, at this time, the 2018 grant was considered by both parties to be valuable. The fact that the targets by reference to which the options might vest now appeared unlikely to be reached did not in law mean that the consideration for the covenant had failed.
The employer’s behaviour
Mr Bellew argued that in circumstances where his resignation had been encouraged by Ryanair, and in particular its CEO, it would be unjust or inequitable for the court to exercise its discretion and grant relief to which Ryanair might otherwise be entitled. This behaviour was alleged to include treating Mr Bellew differently to other executives in relation to access to share options and otherwise acting in “a wholly unreasonable manner”, including by shouting and screaming, towards him.
The High Court, which questioned the reliability of Mr Bellew’s evidence on this point, was satisfied that Mr Bellew was fully aware of the CEO’s “inimitable management style” and that he was “unapologetically demanding of his managers”. In the judge’s view, while the CEO could be “abrasive and rude from time to time – which he accepts – that goes with the €1 million plus remuneration package.” In these circumstances, this defence was also rejected.
The protection of legitimate business interests
Ryanair’s evidence was that it saw its key ‘competitive edge’ over its rivals as being cost and efficiency, and that confidential information relating to those issues was the focus of its concern. Mr Justice Allen was satisfied that the nature and extent of confidential information to which Mr Bellew would inevitably be privy in the course of his employment was such as to justify a post-termination restraint. In this regard, the judge accepted that, given that sensitive commercial information can be deployed to the advantage of a competitor without an employee necessarily disclosing it, that a restriction beyond a mere confidentiality obligation may be warranted. “There are good reasons”, he said, “why a confidentiality clause is no substitute for a non-compete clause.”
What troubled the Court most however was whether the restraint went further than what is necessary for the protection of Ryanair’s legitimate business interests.
Mr Justice Allen indicated that he had “no difficulty” with the twelve-month period of the restraint, stating that this was “abundantly justified by the likely useful life of the confidential information” to which Mr Bellew was privy. However, having considered the evidence, he held that while Ryanair had clearly demonstrated its interest in protecting its confidential information from disclosure to its competitors in the low-cost market, it had not demonstrated the same interest in relation to the legacy flag, or high-cost, airlines. As the restraint applied to any European airline, including legacy airlines, the restraint was too wide.
The judge also found that the prohibition on Mr Bellew taking up employment with another airline “in any capacity” was overly broad, as it would restrain him from taking up employment with another airline, even as a “pilot or air steward or janitor”. This is despite there never having been any question of him being employed other than as a senior executive. To confine the meaning of this restraint to the position for which Bellew was employed, or in a capacity in which the employee is likely to contemplate employment with a rival, would be to modify the words of the contract, something the court is not permitted to do. This was further highlighted by the language of Mr Bellew’s employee non-solicitation clause, which was expressly limited to prohibit Mr Bellew from soliciting Ryanair employees who were engaged in a senior executive, managerial or technical capacity.
In these circumstances, with “considerable reluctance, but without misgivings as to the applicable law”, Mr Justice Allen found the restrictive covenant to which Mr Bellew had agreed to be void and unenforceable as an unjustified restraint of trade.
During the course of the hearing, Ryanair had sought to argue that this was not a simple employer and employee relationship, and that because Mr Bellew was a senior executive who was participating in a share options plan, the restrictive covenant should be subject to the more liberal view taken towards restrictive covenants on the sale of a business, rather than the more restrictive view taken of employee covenants.
While Mr Justice Allen accepted that a less restrictive view is taken towards restrictive covenants entered into by parties on the sale of a business, he rejected the argument that any less restrictive view should be taken towards the covenants entered into by Mr Bellew. In this context, Mr Justice Allen was satisfied that the share options given to Mr Bellew were part of his remuneration as an employee, albeit as a senior executive, and that the share option plan was not limited to senior executives.
While Ryanair was unsuccessful in its attempt to enforce the restrictive covenants against Mr Bellew, it seems clear that the Court would have done so had the clause been drafted in a manner which did not go beyond what was necessary to protect Ryanair’s legitimate interests – in this case, the confidential information which gave it it’s ‘competitive edge’.
It is therefore crucial for employers to be aware that standard form or template restrictive covenants which have not been tailored to the specific employment in question, may not be enforceable.
In these circumstances, employers should review restrictive covenants that they have in place with key employees to identify issues that might impact their enforceability, and update those covenants to ensure that their interests are appropriately protected.
The Employment Group at McCann FitzGerald can assist organisations in reviewing and updating restrictive covenants for key personnel and advising on enforcement of those covenants should the need arise.
Also contributed by David McCauley
This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.