What can employers claim from an ex-employee if they breach their restrictive covenants? A recent Supreme Court case provides welcome clarity.
Picture the scene: one of your star employees has left and joined a competitor. There were restrictive covenants in their contract but you think the employee may have broken them by contacting a key client because your orders have dropped since they left. You want to bring a claim against the ex-employee.
The issue for an employer in this situation is often how to prove what they have actually lost. The ex-employee might argue that the key client would have reduced orders irrespective of the employee joining a competitor. Alternatively the ex-employee might argue that someone else within their new business could have obtained the key client’s contact details from an entirely legitimate source.
The case of Marathon Asset Management LLP v Seddon exemplified the difficulty in proving loss – a client list was misappropriated by an ex-employee but only £2 was awarded in damages because the employer could not prove that they suffered any loss as a result.
Until recently, the workaround might have been to claim ‘Negotiating Damages’ (assessed by reference to a hypothetical sum which the employer would have charged the employee to release them from their obligations).
Negotiating Damages have historically been a key tool for employers because they help to get around the difficulty of proving what you have actually lost as a result of a breach of restrictive covenants.
In the landmark case of Morris-Garner v One-Step the Supreme Court has recently clarified when Negotiating Damages are available. Unfortunately for employers Negotiating Damages will now be limited to cases where an asset (such as intellectual property rights) has been exploited in such a way that claiming mere compensatory damages for the breach is not possible. The Supreme Court effectively said that just because it is going to be very difficult to prove your loss, it doesn’t mean that damages aren’t the remedy you should seek.
On its face therefore this case is good news for employees and bad news for employers. Employers will have to be very careful to ensure they can show what their losses are before they bring claims against ex-employees and will be well advised to seek legal advice early to ensure they do not wait too long to seek an injunction.
That being said, the position of the law in this area had been confusing and unsatisfactory for some years and it is at least useful for employers to have some clarity as to what they can and can’t claim – which will help avoid a situation where expensive litigation results in the award of nominal damages.
For more information on the subject in the above update please contact Ed Belam or one of your regular contacts at Marriott Harrison.
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