Can your ex-employer legally stop you from working for a competitor?

Some say that a company’s most valuable assets are its employees. There is some truth to it – companies try to stop their employees from joining their competitors when they quit, or at least make them wait a few years before they could do so via restrictive clauses in their employment contracts.

Such agreements or covenants are, on its face, restraints of trade, and an example may read like this: “For a period of three years from the termination of this Agreement, the Employee may not be an employee of, own, manage, or participate in any business that directly competes with the Employer.”

Are such restrictive covenants legal? It depends, but the general principle is that a person is free to trade wherever, whenever or howsoever.

So, restraint of trade covenants, without more, are contrary to public policy and are invalid unless they protect an employer’s legitimate interests and the covenant is not wider than is necessary to protect these legitimate interests.

Legitimate Interests

Trade secrets and special trade connections are some interests which are considered legitimate. It is not enough for an employer to say that the restraint of an employee’s trade is valid because it deserves protection from its competitors.

Trade Secrets

Trade secrets are essentially confidential information that has commercial value. As such trade secrets include both scientific formulae of commercial products, or non-technical information. Some examples include the recipe for KFC or Coca-Cola or Google’s search algorithm.

In Tang Siew Choy v Certact Pte ltd [1993] 1 SLR(R) 835, Singapore’s highest court decided a few factors to determine whether a piece of information could be considered a trade secret. These factors include the nature of the information itself, whether the employee was in a position where confidential information was handled, and whether the release of such information would injure the employer or be advantageous to the competitor.

On the other hand, the skills, experience, or general knowledge acquired during employment do not amount to a trade secret. Therefore, an employer cannot stop an ex-employee from taking advantage of such gains at his or her new employer.

Special Trade Connections

In Man Financial (S) Pte Ltd v Wong Bark Chuan David [2008] 1 SLR(R) 663, the Court of Appeal accepted that another common legitimate proprietary interest of the employer isits trade connections with its customers. The Honourable Court highlighted that the employee must have personal knowledge of as well as influence over the customers of the employer. For example, a doctor’s knowledge of the patients of the business would likely be considered a legitimate proprietary interest as was the case in Smile Inc Dental Surgeon Pte Ltd v Lui Andrew Stewart [2012] 4 SLR 308.

Even information on suppliers who deal on special terms or who are limited in number could be considered legitimate proprietary interests.

Reasonableness between Employer and Employee

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A reasonable restraint of trade covenant must also not be wider than necessary to protect the employer’s legitimate interests in terms of the scope, territorial area and duration of limitation.

Further, whether the restriction is justified is determined at the time of contracting, and not after, such as the date of the supposed breach of the restrictive covenant.

The reasonableness of these covenants depends on several factors, including the nature of the employer’s business, the industry and the role and length of service of the employee in the employer’s business. The law would take a broad and common sense approach in determining reasonableness.

Scope of Limitation

The reasonableness of the restrictive covenant about its scope relates to the type of work or employment that the employee is prohibited from engaging in upon termination of employment.

In the case of Lek Gwee Noi v Humming Flowers & Gifts Pte Ltd [2014] 3 SLR 27, the claimant Ms Lek agreed “… not undertake or be employed in the same or similar business as the relevant company, or in any other business carried on by the relevant company in Singapore, Malaysia or any country in which the “relevant company” had offices on 31 December 2011” following the sale and purchase of the company’s business to a competitor.

Ms Lek subsequently left the defendant company after 20 years’ service to start her own flower and gifts business. The company threatened to sue Ms Lek for the alleged breach of that covenant.

The court in Lek Gwek Noi decided that the restrictive covenant was void and unenforceable because it would have prevented Ms Lek from competing against the company, its parent or related companies on any business, and not only in the flower and gifts business. That contractual clause was found too wide.

Territorial Limitation

If an employee works only in Singapore and with Singapore clients, a clause restricting him to work worldwide in the same industry (even though for a short duration) would likely be deemed unreasonable. On the other hand, it would likely be reasonable to subject senior management of a multi-national company to the same restrictive clause.

Duration of Limitation

The reasonableness of the duration of a restraint of trade clause is reasonable depends on factors like the employee’s role in the business, experience and capabilities.

In CLAAS Medical Centre Pte Ltd v Ng Boon Ching [2010] 2 SLR 386, one of the issues was whether the duration of the restrictive covenant of three years was reasonable in the circumstances. The appellant, an aesthetic medicine business, sought to restrict the respondent from practising aesthetic medicine for three years (among other things) arising from the sale by the respondent of his own aesthetic business to the appellant.

The Court of Appeal decided that the duration of three years was reasonable given that the respondent had 25 years of standing and goodwill as a medical practitioner in that area. In the Honourable Court’s own words, the respondent had “…prominence, seniority and experience.”

Reasonableness in the Public Interest

The employee being restrained may also show, as is his or her burden in any event, that a restraint of trade clause is void and unenforceable because it is unreasonable in the public’s interest.

In Thomas Cowan & Co Ltd v Orme [1961] MLJ 41, the clause restricting the employee from setting up a pest extermination business in competition was found to be void and unenforceable. Although the court found that the clause was reasonable between the parties, to uphold the clause would result in the employer continuing to enjoy a monopoly in the pest extermination industry which would be against the public interest.

Conclusion

This article has only briefly introduced the legal underpinnings of restraint of trade. In this short time, one could see that this is a multi-faceted area of law which could prove difficult. One might find that the liberty and agency to trade are not unlimited.

Whether you are an employer seeking to protect your interests or an employee seeking greener pastures, you could do a lot worse than seeking timely legal counsel when faced with the restraint of trade issues.