by Ken Casey , Pauline Foster, Sabrina Burke February-10-2020 in Commercial & Business, Corporate, Employment Law
Background and decision of the High Court
In the recent decision of Ryanair DAC v Peter Bellew [2019] IEHC 907, the Irish High Court refused Ryanair’s application for an injunction to restrain its former COO, Peter Bellew, from taking up employment with rival budget airline easyJet. The decision, which is being appealed by Ryanair, focused on a restrictive covenant in his employment contract which aimed to prevent Mr Bellew from being “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 a period of 12 months following the termination of his employment.
The Court agreed that the inclusion of a restrictive covenant in the former COO’s contract was necessary to protect Ryanair’s valuable sensitive and confidential commercial, operational and financial information from use by Mr Bellew in competing businesses and that a 12 month restriction was a reasonable duration. However, it decided that the scope of the restriction was unjustifiably wide and unenforceable.
Based on the Court’s analysis, if Ryanair had limited the post-termination restriction to other low-cost airlines in direct competition with it and to roles in which Mr Bellew could make valuable use of Ryanair’s confidential information, it would very likely have been upheld.
Due to the limited number of decisions on restrictive covenants in business sales, the Ryanair decision provides authoritative commentary that can be usefully transposed to the business sale context.
Lessons for restrictive covenants in business sales
1. Restrictive covenants in business sales will be construed less conservatively than those in employment contracts.
In the Ryanair judgment, the Court stated that non-compete provisions in business sales are more likely to be successful than those in employment contracts because their purpose is to preserve the value of the business that is being sold. This recognises the legitimate business interest of a buyer to obtain (and protect) the benefit of the goodwill of its newly-acquired business.
In contrast, restrictive covenants used in employment contracts are more narrowly interpreted in order to ensure that a former employee is not deprived of the ability to earn a livelihood.
2. Restrictive covenants must work as originally drafted as the courts will not necessarily rewrite a restriction in order to enforce it.
The Ryanair decision also makes clear that, to be enforceable, restrictive covenants must be drafted only to protect the legitimate interests of a buyer in the business being bought and not to unfairly restrict competition.
It is possible for a restriction to be removed or reduced by a court if it is found to be excessive and unenforceable. This will only be considered if the unenforceable part of the restraint can be removed without changing the character of the contract or rewriting the remaining part of the restriction. In this case, the restriction attempted to restrain Mr Bellew from joining any other competing airline in any capacity whatsoever. The Court decided that no parts of the restriction could have been severed so that it would apply only to other budget airlines or only to particular positions within other airlines without changing the remaining wording or substantially changing the restrictions in the contract.
The judgment also highlighted that the reasonableness of a restriction will be assessed as at the date of the contract in which the restriction was given.
3. Confidentiality or non-disclosure provisions are rarely sufficient in themselves to protect the confidential information of a business from being used in a competitor’s business.
The Court recognised that it is advisable to include both confidentiality clauses and restrictive covenants in contracts to protect valuable sensitive commercial information rather than rely solely on confidentiality provisions. This is due to the evidentiary difficulties inherent in proving a breach of confidentiality provisions as well as in distinguishing between information which comes within the scope of confidential information and that which is outside its scope.
4. Scope (duration and geographic territory) – what is reasonable and likely to be upheld?
In the Ryanair decision the Court confirmed that a post-termination restriction period of 12 months may be reasonable and necessary in employment contracts with key executives to protect a former employer’s legitimate business interests. Mr Bellew’s senior executive role which gave him access to highly sensitive and confidential strategic, operational and commercial information (with a shelf life of one to five years) meant that the 12-month duration of the restriction was justified.
In a business purchase a longer post-sale restriction period of up to 24 months is generally accepted as being the period necessary to facilitate the proper and complete transfer of the goodwill of the business. However, as the Ryanair decision demonstrates, the enforceability of particular restriction periods must be justifiable on the facts and circumstances of the transaction under examination.
The Court specifically addressed and rejected the proposition by Ryanair that the greater latitude permitted for business sales should be afforded to the restriction on Mr Bellew because his non-compete obligations arose in the context of a grant of share options. The Court rejected this on the basis that Mr Bellew was not selling a business.
It is also well accepted that the geographic scope of restrictions must be confined to the relevant operating territory of the business being transferred. Enforceable restrictions must be strictly necessary to preserve the value of the business rather than solely to restrict legitimate competition.
Conclusion
This Ryanair decision illustrates the pitfalls of including restrictions which are broader than those needed to protect legitimate business interests, whether in an employment contract or in a business sale. If an employer is to rely on a non-compete to clip the wings of its high-flying executives after their employment ends, the restrictions should be tailored to the executive’s role and access to sensitive commercial information. Non-compete clauses should be reviewed regularly to reflect changes in the law and changes in the executive’s role and responsibility.
While the courts permit longer periods of restriction for business sales, it is essential that the scope and duration of the restrictions are crafted to protect the goodwill of the specific business being acquired and do not go beyond what is necessary.
Click here for an analysis by our Employment Department of the implications of the Ryanair decision for employment contracts.
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About the Authors
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Ken Casey
Ken is Head of the Corporate team and has built a practice in acquisitions, disposals, and capital markets transactions across various industry sectors; joint ventures and corporate re-organisations of publicly quoted and private companies; and advises on corporate governance and general corporate law. He has extensive expertise in the financial services, aviation, gaming, technology, media and sports sectors.
Pauline Foster
Pauline Foster is a solicitor in the Corporate team at Hayes Solicitors. Pauline specialises in company law and provides transactional and advisory services to private companies and financial institutions. She assists in advising on domestic and cross-border mergers and acquisitions, corporate reorganisations, shareholder agreements, business structuring and formation, corporate governance and compliance.
Sabrina Burke
Sabrina is a senior associate solicitor in the Commercial & Business team at Hayes solicitors. Sabrina's main area of work is mergers and acquisitions, where she acts for buyers and sellers across various industry sectors. She also advises on corporate reorganisations, shareholder agreements and other commercial arrangements and contracts including agency/franchise/distribution agreements.