The High Court case between Ryanair DAC and Peter Bellew is an important one because it gives us further guidance in the area of restrictive covenants in the contract of employment. A restrictive covenant is basically a covenant in a contract of employment preventing a departing employee from working for a competitor for a certain period of time after departing from his employment.
In Ryanair DAC the airline sought to prevent Mr Bellew from working for a competitor in any capacity for a period of 12 months after leaving Ryanair. This was what Mr Bellew had signed up for when he signed his contract of employment.
Ryanair sought to prevent him from taking up employment with Easyjet and sought an injunction in the High Court to enforce the covenants in his contract of employment with Ryanair. One of those covenants was as follows:
For a period of 12 months after the termination of your employment you shall not, without the prior written consent of the Company, directly or indirectly in any capacity either on your own behalf or in conjunction with or on behalf of any other Person;
a. be 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;
b. solicit or entice or endeavour to solicit or entice away from the Company any person who was employed within in (sic.) a senior executive, managerial, or technical capacity by the Company.
1.2 If you receive an offer of employment or engagement during your employment with the Company, or before the expiry of the restriction period set out in this clause, you shall give the person or entity making the offer a copy of this clause.
The defendant in this matter fully admits that he freely signed the covenant and at the time of signing he fully understood its meaning and purpose but makes the case that he is not bound by said covenant.
The case law in this regard provides to be useful and instructive as to the approach adopted by the Irish Courts in relation to restrictive covenants.
Macken v. O’Reilly 1979 I.L.R.M 79
“All interference with an individual’s freedom of action in trading is per se contrary to public policy and, therefore, void. The general prohibition is subject to the exception that certain restraints may be justified. Restraints, restrictions or interferences are permitted if they are, in the circumstances obtaining, fair and reasonable. Whether what is complained of can be justified on this basis involves a careful examination of all the circumstances – the need for restraint, the object sought to be attained, the interests sought to be protected and the general interest of the public. What is done or sought to be done must be established as being reasonable and necessary and on balance to serve the public interest”
Murgitroy & Company Ltd v. Purdy 2005 IEHC 159
This a much more recent decision where the Chief Justice Clarke J. outlined that a restrictive term will not be implemented unless it satisfies the limbs of the following test
- The restriction is reasonable between the parties
- The restriction is consistent with the interests of public policy
The facts of Murgitroy are as follows. A restrictive covenant in a contract of employment restricted a Patent Lawyer from working in same sector for a period of twelve months in the Republic of Ireland. Clarke CJ. Found the restriction in relation to the geographical nature (not working in Ireland) and the length of the restriction was reasonable and justified based on the nature of the employers business. However Clarke J. found that the result of allowing the aforementioned restrictions would create another, being the restriction to approach clients who are not pre-existing clients of the employer from being engaged by the ex-employee was too restrictive. The position of this case was affirmed in the more recent example of Net Affinity v Conaghan 2012 3 I.R 67.
Stenhouse ltd v. Philips 1974 A.C 391
The covenant entered into needs to be reasonable between the parties. The holding of this case outlines that the restriction sought must be a reasonable one and cannot restrict an employee from using his skill and knowledge in future endeavors. However, the employer can restrict the employee from using assets or ‘insider knowledge’ that must be regarded as company property.
The accepted proposition that an employer is not entitled to protection from mere competition by a former employee means that the employee is entitled to use to the full any personal skill or experience even if this has been acquired in the service of his employer: it is this freedom to use to the full a man’s improving ability and talents which lies at the root of the policy of the law regarding this type of restraint. Leaving aside the case of misuse of trade secrets or confidential information … the employer’s claim for protection must be based upon the identification of some advantage or asset inherent in the business which can properly be regarded as, in a general sense, his property, and which it would be unjust to allow the employee to appropriate for his own purposes, even though he, the employee, may have contributed to its creation.’
This becomes especially necessary when discussing trade secrets/ confidential information or market sensitive information. Any property or assets of the company that the employee is leaving must be protected by restrictive covenant because it is essentially, company property. Even if the employee may have contributed to the ‘company property’ the employer will still be granted protection for what is ultimately their property.
However, with regard to skill, knowledge and essentially the employee’s property, no restrictive covenant can restrict this movement. It must also be noted that if an employer is seeking to enforce a restrictive covenant simply to protect himself from mere competition, this will not be allowed.
In the Ryan Air case, Allen J. opined that that covenants are generally never reasonable unless if the competition was allowed it would take advantage of the employers trade position.
The High Court also looked at Hernandez v. Vodafone Ireland LTD 2013 IEHC 70 andTillman v Egon Zehnder Ltd from the United Kingdom Supreme Court.
High Court decision
The High Court recognized the difficulty in practice of enforcing a confidentiality clause and referred to Lord Denning in Littlewoods Organisation Limited v Harris [1978]
“It is thus established that an employer can stipulate for protection against having his confidential information passed on to a rival in trade. But experience has shown that it is not satisfactory to have simply a covenant against disclosing confidential information. The reason is because it is so difficult to draw the line between information which is confidential and information which is not; and it is very difficult to prove a breach when the information is of such a character that a servant can carry it away in his head. The difficulties are such that the only practicable solution is to take a covenant from the servant by which he is not to go to work for a rival in trade. Such a covenant may well be held to be reasonable if limited to a short period.”
The High Court had a difficulty with whether the restraint that Ryanair sought went further than was necessary for the legitimate protection of its interests. It had no difficulty, interestingly, with the time period of 12 months.
It noted that it could, if the circumstances permitted, use the “blue pencil rule” to remove an unenforceable provision if the character of the contract was not changed as a consequence. However, the covenant in this case applies to “any business wholly or partly in competition with Ryanair for air services”.
With considerable reluctance, but without misgivings as to the applicable law, or my application of the law, I am driven to the conclusion that the clause is void and unenforceable as an unjustified restraint of trade.
195. The other provision of the restraint in this case which troubled me was the prohibition on employment in any business in competition with Ryanair “in any capacity”. It appeared to me that literally construed it would restrain Mr. Bellew from taking up employment with another airline as a pilot or air steward.
208. I find that the plaintiff has discharged the onus of proving that it had a legitimate interest in exacting a covenant from the defendant to protect the valuable sensitive and confidential commercial, operational and financial information that would come to the defendant’s knowledge in the course of his employment. For the reasons given, I find that that interest has not been shown to extend beyond those airlines in competition with the plaintiff in the low cost or low fare sector, to those airlines operating in the legacy or flag or high cost sector.
209. I find that the covenant in this case, properly construed, would prevent the defendant from taking up employment with any European airline, including the legacy carriers, and so goes beyond what the plaintiff has shown to be justified.
210. The legitimate interest of the plaintiff in restraining the defendant from taking up alternative employment is limited to roles which would risk the disclosure or use of its protectable information. I find that the restraint on employment in any capacity goes beyond that interest and has not been shown to be justifiable.
211. For the reasons given, I find that the covenant to which the defendant, for valuable consideration, freely agreed is, as a matter of law, void and unenforceable as an unjustified restraint of trade.
Conclusion
Ryanair DAC were refused their injunction because the High Court found
- The restraint preventing the departing employee from working “with any European airline” went beyond what was justified
- The restraint preventing Bellew from taking up employment “in any capacity” goes beyond the legitimate interest of Ryanair and was not justifiable.
For these reasons the High Court decided the covenant was void and unenforceable and an unjustified restraint of trade.
Takeaway for employers
- Employers need to understand that any restrictive covenant is drafted to reflect the specific relationship between employer and employee in any particular circumstance and a “one size fits all approach” runs the risk of being found unenforceable. If it goes too far and is too wide it is unlikely be justified as being necessary to pursue a legitimate interest.
- Twelve months, as a temporal restraint, is acceptable and unproblematic.
- Confidentiality clauses, whilst necessary and acceptable, are difficult to enforce in practice as confidential information can be used and abused without any evidence of the breach-for example in negotiating terms with competitors.
Read the full decision here: Ryan Air DAC v. Peter Bellew 2019 6239 P , Decided 23rd December 2019.