Restraint of trade covenants – post-termination non-compete clause invalid as no legitimate interest to protect

Credico Marketing Limited and another v Lambert and others [2022] EWCA Civ 864

The question

In what circumstances will a non-compete clause imposing restrictions on a party after the termination of an agreement be enforceable?

The key takeaway

For a non-compete clause that prevents a party from undertaking a certain activity after the termination of an agreement to be upheld, it must protect a proprietary interest of the party relying on it, such as the special knowledge, support and experience given to the other party. 

The background

Credico Marketing (Credico) organises marketing campaigns for its clients by identifying and contracting with marketing companies, who then recruit sales representatives who in turn approach potential customers door-to-door or by using “pop-up” booths in shopping centres. 

S5 Marketing (S5), owned by Mr Lambert, entered into an agreement with Credico whereby S5 would run marketing campaigns for Credico’s clients and Credico would provide support in the form of training, back-office services and manage the payment of commission in return. 

The agreement contained two non-compete clauses. Clause 1 provided that S5 could only provide marketing services for Credico while the agreement was in force. Clause 2 prevented S5 from conducting any similar business or activities within a ten-mile radius of its current principal place of business for six months after the end of the agreement. 

Credico alleged that S5 breached both clauses in the agreement by encouraging and assisting S5 sales representatives to conduct door-to-door sales campaigns for third parties. The agreement was terminated by S5 on 11 December 2020 in response to Mr Lambert receiving a letter before action from Credico’s solicitors. 

At first instance, the court found that both restrictive covenants were binding on Mr Lambert and S5 and enforceable. Mr Lambert and S5 appealed. 

The decision

The critical issue for the Court of Appeal was whether the restraint clauses were enforceable or whether they were an unreasonable restraint of trade. The applicable case law was not in dispute and so the focus was on its application to the facts of the case. There were two distinct issues: first, whether the restraint of trade doctrine was engaged at all; second, if so, whether the restraint was reasonable in all the circumstances. Since it was accepted that the restraint of trade principles applied to both covenants, the only question remaining was whether in each case the restraint was reasonable.

The court highlighted that for a restraint to be reasonable between the parties it must be no more than what was reasonably required by the party in whose favour it was imposed to protect their “legitimate interests”. The protection of customer connection, goodwill, the protection of confidential information and know-how were all stated to be legitimate interests often relied upon.

The court held that Clause 1 was valid and enforceable. Credico provided campaigns for S5 to work on and provided support such as back-office training and managing commission payments. This required Credico to invest time and resources in S5 and having exclusive use of S5’s workforce was held to be a reasonable “quid pro quo” for the support provided by Credico. 

However, Clause 2 was held to be unenforceable. Once the agreement had come to an end Credico could not expect to have the workforce available to it and therefore had no legitimate interest in seeking to impose a restriction on S5’s ability to operate. A business should be entitled to use its knowledge and experience gained in the course of business dealings, if not this would be anti-competitive. 

Why is this important?

Non-compete clauses are common in commercial agreements and act as a valuable mechanism for parties to protect their commercial interests. However, parties should tailor each individual restrictive covenant and not adopt a blanket approach to them. Particular care must be taken to ensure that a post-termination non-compete clause protects a legitimate right held by the party seeking to rely on it and is not simply an attempt to stifle competition.

Any practical tips?

Post-termination non-compete clauses should seek to protect a proprietary interest, such as goodwill or know-how. Seek to identify the specific interest that is being protected and ensure that the covenant is reasonable. Also divide out covenants into separate clauses and sub-clauses where possible, so that if a provision is unenforceable it is severable. 

Autumn 2022