Is Your Non-Compete Clause Unenforceable?

Considering a non-compete clause in a corporate transaction? Ensure it is narrowly tailored. Overly broad restrictions may be unenforceable, leaving your business vulnerable. A recent UK decision highlights this risk and offers valuable guidance for Irish businesses. Learn how to protect your interests by crafting enforceable clauses. Read the full article from our Corporate team for detailed analysis.

Note: This article considers non-compete clauses only in the context of corporate transactions. Different considerations apply in the context of employees.

Signing a shareholders’ agreement or buying a business? Avoid the temptation to impose an unduly broad non-compete clause on former shareholders. Otherwise, you may find the clause is void and unenforceable.

The recent decision of the English High Court in Literacy Capital Plc v Vanessa Jane Webb[1] offers a timely reminder of the need for balance. While this judgment is not binding in Ireland, it does offer some helpful guidance.

Are non-compete clauses enforceable in Ireland?

Non-complete clauses are a common feature of Irish corporate transactions. They are essential to protect a business against competition from its former owners and can be enforceable under Irish law provided they are appropriately limited.

However, when drafted too aggressively, a non-compete clause is a mere paper tiger – offering apparent protection that is not actually effective.

Sale of a business

Vanessa Jane Webb developed Mountain Healthcare Limited (Mountain) into a successful company. Mountain provided medical services to sexual assault referral centres for police services in England. Ms Webb and the other shareholders of Mountain sold the business to Literacy Capital plc. (Literacy Capital) in 2018. Ms Webb remained as a director for several more years. Ms Webb decided to resign from Mountain and all other directorships connected with Literacy Capital in 2021.

In connection with her departure, Ms Webb renegotiated the sale of her shares which by that time had increased in value to approximately £7 million. Ms Webb entered into an investment agreement and a loan note agreement which had restrictive covenants in them.

Three essential elements of a non-compete

The three essential elements of a non-compete clause are the duration, the geographical scope and the subject matter of the covenant. The parameters of the non-compete prohibited Ms Webb from competing:

Why was this too wide?

The Court took issue with every element of the scope of the non-compete clause.

• Duration: The duration, which effectively meant up to 10 years, was far past the duration allowed in UK former employee or sale of business cases.
• Geography: The nationwide scope was not justified by any evidence that Mountain did business outside of Norfolk and Suffolk.
• Business: Applying the non-compete to the other subsidiaries of Literacy Capital, which had businesses wholly unrelated to Mountain, went far beyond any legitimate protectable interest it had.

Is your non-compete clause unenforceable?

Non-compete clauses are not a “one size fits all”. The judgment in Literacy Capital v Webb highlights that these clauses must be tailored to the individual circumstances of the business.

Businesses may adopt a strategy of seeking extremely broad non-compete clauses to assert maximum protection. However much like a paper tiger, the protection can be illusory. If not drafted appropriately, the entire clause may be struck-down as void when the company seeks to enforce the clause.

While a court might sever elements of an offending clause to make it enforceable, there is no guarantee a severance clause will save an offending non-compete. It did not save the clause in Literacy Capital.

Businesses should review their shareholders’ agreements to consider whether the obligations imposed on shareholders are appropriately limited regarding:

1. Duration
2. Geographical scope, and
3. Relevant business

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For more information, contact a member of our Corporate team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.

[1] [2024] EWHC 2026 (KB)