Crash Landing for Restrictive Covenants?
Most employment contracts, in particular those of senior key individuals, will likely include a set of post-termination restrictive covenants. For example, a promise not to join a competitor for a set period post-employment. However, the question of whether such a contractual commitment is, in fact, truly enforceable, was recently addressed by the High Court following the 8 day hearing of Ryanair DAC v Peter Bellew.

Introduction

Ryanair sought to prevent its Chief Operations Officer (COO) from joining easyJet in an apparent breach of a contractual non-compete clause. 

In a cautionary tale for employers, although the Court concluded that the nature of the confidential information Mr Bellew was privy to in his senior role at Ryanair justified a non-compete, the scope of the restraint (which covered all airlines in any capacity) was too wide and, therefore, void.

So, what should employers be doing to bolster the enforceability of their restrictive covenants?

What happened?

Mr Bellew was recruited to the role of COO of Ryanair in 2017. This COO role was regarded as "one of the most senior executive roles in Ryanair".  Mr Bellew was paid an annual salary of €550,000 (with a maximum bonus potential of €500,000). 

In April 2018, Mr Bellew agreed to a post-termination non-compete clause in consideration for which he could participate in Ryanair's share option scheme. In brief, Mr Bellew agreed not to 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" for 12 months on termination.

Following a "difficult year" for Ryanair in 2018, Mr Bellew received a disappointing performance review. Mr Bellew ultimately resigned on 8 July 2019 before informing Ryanair of his new role with easyJet on 17 July. The following day easyJet announced that Mr Bellew would be joining it as COO on 1 January 2020. 

What did Ryanair do next?

Ryanair commenced injunctive proceedings in August 2019 seeking to prevent Mr Bellew from commencing employment with easyJet until the expiry of the 12 month non-compete period. 

Ryanair asserted that, as a result of his senior role, Mr Bellew was privy to "confidential material and sensitive commercial and operational information". It was also claimed that Ryanair would be "exposed to irremediable and unquantifiable loss and damages" if Mr Bellew were to commence employment with easyJet.

What was Mr Bellew's response?

By way of defence Mr Bellew conceded that his role as COO had given him "insight and involvement into key business strategies, decisions and relationships" and that he had "sensitive protectable information". However, Mr Bellew submitted that he was "fully aware of his obligations of confidentiality" and intended to honour those obligations. In addition, he argued that the restraint Ryanair sought to impose was "wholly unnecessary, unreasonable and unwarranted". 

What did the High Court decide?

Addressing the crucial issue of the enforceability of the restraint, the Court relied on Irish and English case-law, confirming that any restraint on a person working is "by definition a restraint of trade" and such a restraint is void and unenforceable unless it passes a two-fold test: (1) it is reasonable as between the parties; and (2) it is consistent with the public interest. 

The Court assessed whether the imposition of the non-compete was "justifiable" to protect Ryanair's business. The Court ultimately agreed that the "nature and extent of the confidential information that would inevitably come to the knowledge of Mr Bellew in the course of his employment" justified a post-termination restraint. However, crucially, the Court went on to consider whether the restraint went "further than is necessary for the legitimate protection of Ryanair's interest".

Of some relief to employers, the Court concluded that it had "no difficulty with the time constraint" of 12 months.

Rather the crux of the issue was the scope of the restraint which sought to prohibit employment in any business (and in any capacity) in competition with Ryanair. Ryanair sought to differentiate between two "spaces" in the air services market – the "low cost space and the legacy or flag space" (i.e. high cost airlines like Lufthansa etc.). Ryanair argued that, while it is in competition with all airlines, the main competition it faced was not from legacy airlines, but from low cost carriers of which easyJet was its "most immediate rival".

However, from the Court's perspective, the restraint, in its "plain terms", applied to any business in competition with Ryanair for air services, including the legacy airlines.  The Court noted that Ryanair's prior written consent would have been required had Mr Bellew sought to move to a legacy airline, such that the restraint as drafted was "too wide".  

Although the Court noted its "considerable reluctance" to do so, it found that the restrictive covenant was too wide and consequently "void and unenforceable as an unjustified restraint of trade".

What should employers be doing?

There is a delicate balance to be struck between a reasonable and justifiable restrictive covenant and a restraint designed simply to "hobble" an employee in the "legitimate pursuit of his career".  

In an effort to strike this balance, employers should:

  1. Beware of boilerplate clauses – there is no "one size fits all" formula workable for all employees. Employers should be wary of over-reliance on standard, boilerplate restrictive covenants that have not been tightly tailored to reflect the particular employee's seniority and level of access to confidential information. It is vital that drafting of bespoke restrictions that are appropriate to the specific employee go no further than absolutely necessary to protect the employer's legitimate interests.
  2. Regularly review - such covenants should also be kept under review, to reflect the changing life-cycle of an employee. A restrictive covenant that may have been appropriate at hiring may no longer suffice following a significant promotion.

For further information, please contact Ailbhe Dennehy (ailbhe.dennehy@williamfry.com) or your usual William Fry contact.

Contributed by: Maeve Griffin

 

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