Restrictive covenants; protecting your business
DENTAL BULLETIN, ISSUE 43
Making sure restrictive covenants are worth more than the paper they are written on
You work hard to build up your practice, only for an ex-employee or ex-associate to leave, set up business down the road and take all of your patients with them. In most cases this will be a breach of the restrictive covenants in their contracts. When clients come to us with this problem it is often too late to stop the action taking place, meaning they are only able to claim damages. However, if you are able to act quickly you may be able to obtain an injunction to stop the breach occurring at all. Any delays in seeking an injunction can be used against you and this is why it is so important to take steps early on.
What is an Injunction?
An injunction is an order that either requires a party to do a specific act (a mandatory injunction) or requires a party to refrain from doing an act (a prohibitory injunction). The courts will make such orders where a party has been or is likely to be wronged by another.
The benefit of obtaining an injunction from the court is that if the employee or associate breaches the court order they can face imprisonment, confiscation of assets or a fine. It is therefore more forceful then the contractual terms alone.
Types of Injunctions
The courts have avoided setting a list of available injunctions because the needs of society are ever changing. However, examples of the types of injunctions the courts can grant are:
• Requiring a person to deliver up property, including confidential information;
• Restraining unlawful competition by employees or associates;
• Protecting the use of confidential business information; or
• Preventing employees and associates contacting patients.
When will the court grant an Injunction?
First and foremost, you will need to ensure your covenants are actually enforceable before deciding whether to take any action, whether for injunctive relief or damages. If the courts are not going to enforce your covenants in the first place, then there is little point wasting money in pursuing a claim. In our article Are Your Business Interests Protected? we set out the test the courts apply when assessing enforceability.
An interim injunction is designed to protect the interests of the parties before a final hearing on the dispute takes place. Sometimes obtaining the interim injunction is enough to avoid future litigation so they can be useful to seek from the outset. However, they can be costly and you often will not recover the legal costs spent in obtaining the injunction.
The starting point for the courts is to ask whether it is ‘just and convenient’ to order the interim injunction. To determine this they ask:
1. Is there a serious question to be tried?
The threshold for this is relatively low. Therefore if there has been a potential breach of a restrictive covenant the court is likely to find that there is a serious question to be tried.
2. If so, what is the ‘balance of convenience’?
This question is much harder to satisfy and is broken down into a further three stage test:
a. Would damages be an adequate remedy in the alternative? If yes, the injunction will not be granted.
b. Will the applicants cross undertaking in damages be adequate to compensate the defendant if the interim injunction is wrongly granted? If you are applying for an interim injunction you have to promise to pay the defendant a set amount of damages should you later lose the case at the final hearing. If this amount is inadequate the interim injunction will not be awarded.
c. If the above damages are evenly balanced then the courts look at the balance of convenience more generally and how to protect the ‘status quo’.
A final injunction, as the name suggests, is normally granted at the end of a final hearing of the dispute. Where you are able to show that a breach of the restrictive covenants has occurred the court will consider if it is equitable to grant the injunction. This means looking at the circumstances of the case and as such generalisations cannot be made. However, again the courts will consider if damages would be an adequate award instead of injunctive relief.
Given it can take some time to progress through the court proceedings we consider an interim injunction is the better option in the employment field, as you need to protect your business interests from the outset.
Alternative types of relief
In addition to seeking injunctive relief, you may also want to consider the following:
• ‘Norwich Pharmacal’ disclosure orders. These require a third party, such as the new practice, mixed up in wrongdoing to provide information or documents. This could be asking the new practice to confirm if the associate is working for them and/or if any of your patients are being treated by the new practice;
• Orders for specific performance. These require the employee or associate to perform their contractual obligations. For example, if the staff member does not work out their notice period you can seek an order requiring them to do so.
Whether or not you decide to seek an injunction, we would always recommend the following:
1. Regularly monitor emails, make sure databases are password protected and change passwords every quarter. If you have any inclination that something suspicious may be happening, investigate it straight away;
2. When an associate or employee resigns write to them to re-iterate any post termination covenants in their contract and get them to sign an undertaking that they will not breach those covenants.
3. In the case of ‘team moves’ where a number of staff resign together to go to a competitor or set up their own practice, hold meetings with staff to find out the reasons why they are leaving and where they are going. You may be able to persuade certain staff to stay. If not remind staff of their restrictive covenants;
4. Consider if you should impose any garden leave provisions within an employment contract to take the employee out of the business during their notice period. This will prevent them having contact with patients and you can then employ someone new to start building a relationship with your patients;
5. If the ex-staff member starts working in a practice in breach of any covenants consider writing to the practice and setting out the breaches that have occurred. In certain circumstances the practice may also be liable for breaches by the member of staff if they have knowledge;
6. Protect the relationship you have with patients and employees. Reassure employees that the matter is in hand. If you suspect patients have been contacted, contact the patients yourself to reassure them that you have replaced the member of staff and give details of who that replacement is. Politely let the patient know that the member of staff is in breach of their contract, but that the patient is not at any risk and this will in no way affect the service you will continue to provide them.
If you do want to obtain an interim injunction then along with the steps above you should do the following:
1. Gather as much evidence as possible. Take statements from any staff members or patients involved. You need to do as much of the preparation work as possible up front and quickly to have any chance of securing an interim injunction;
2. Instruct a solicitor early on. As already stated you need to act quickly. A solicitor will be able to help you identify whether your covenants are enforceable and what evidence you need to obtain injunctive relief.
Whilst injunctions can be costly to obtain, they should be seen as an investment for your business. If your associate runs off with your patients, it can take years for you to build that client base back up. You will also only receive damages from the courts, which will never truly compensate you for the time you will have to put back into rebuilding your business.
If you need advice on whether your restrictive covenants are enforceable or if you are concerned about an ex-member of staff breaching their contract, please contact Laura Pearce on 0207 388 1658 or by email at firstname.lastname@example.org for advice.
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Laura Pearce, Senior Solicitor
Please note that the information contained in this article was correct at the time of writing. There may have been updates to the law since the article was written, which may affect the information and advice given therein.