Supreme Court upholds six-year non-compete clause signed by law firm

Supreme Court: Court of Appeal was wrong

A non-compete undertaking given by one law firm to another ahead of them working together was reasonable and not a restraint of trade, the Supreme Court ruled today.

The court overturned the Court of Appeal and ruled that the parties’ non-contractual intentions were relevant when deciding whether such an undertaking was reasonable.

Chesterfield firm Your Lawyers (YL) approached London practice Harcus Sinclair in 2016 for help with the group it was building to sue Volkswagen over the diesel emissions scandal.

As a first step, Harcus was required to sign a non-disclosure agreement (NDA), which included a ‘non-compete’ clause, which provided that Harcus undertook “not to accept instructions for or to act on behalf of any other group of claimants in the contemplated group action” without the express permission of YL.

The undertaking was stated to last for six years.

The parties then worked together informally but, although a draft was discussed, no formal collaboration agreement was ever signed. Harcus Sinclair then recruited its own claimants and issued a claim form on their behalf in October 2016.

Edwin Johnson QC, sitting as a deputy High Court judge, found that this action derived from Harcus’s work and not from YL’s confidential information. However, he ruled that Harcus was in breach of the NDA and granted an injunction preventing it from acting for its group for six years.

This was overturned by the Court of Appeal in 2019, which said the restriction “cannot possibly be reasonably necessary”.

Giving the unanimous ruling of the Supreme Court, Lord Briggs, Lord Hamblen and Lord Burrows disagreed with Mr Johnson that the non-compete clause was a solicitor’s undertaking – the issue was not considered in depth by the Court of Appeal – but reinstated his decision that it was not an unreasonable restraint of trade.

The key question of law, the Supreme Court said, was whether Mr Johnson was right, when considering whether the non-compete clause was protecting YL’s legitimate interests, to take into account the parties’ non-contractual intentions or what they contemplated would occur after entering into the NDA.

“No doubt it will be rare for this question to arise and to be critical to the determination of the case. Not surprisingly, therefore, the authorities on the restraint of trade doctrine have approached legitimate interests almost entirely through the lens of the contractual provisions,” the court said.

But this, and therefore the Court of Appeal, was wrong. “In determining the legitimate interests of the promise, one can take into account what the parties (objectively) intended or contemplated, consequent on the contract, at the time the contract was made as well as the contract terms…

“It follows, with great respect, that the Court of Appeal made an error of law in overruling the judge’s reasoning that one could take into account the parties’ non-contractual intentions to collaborate informally.

“Your Lawyers did have legitimate interests to protect through the non-compete undertaking and the Court of Appeal was wrong, as a matter of law, to determine Your Lawyers’ legitimate interests without taking into account the parties’ non-contractual intentions (or contemplation) to collaborate informally.”

The Supreme Court went on to uphold Mr Johnson’s decision that the non-compete clause was reasonably necessary to protect YL’s legitimate interests.

“Once it is seen that Your Lawyers had legitimate interests in protecting its own proposed group claim from Harcus Sinclair setting up a rival group claim, it was logical and necessary for the non-compete undertaking to last for a six-year period that would roughly equate to the limitation period for claims in the emissions litigation.”

Similarly, the benefits to Harcus Sinclair at the time of signing the NDA “extended beyond the contractual provisions to include the contemplated business opportunity arising from that collaboration”.

The court said it was of “general relevance in considering reasonableness between the parties that the parties here were two law firms of equal bargaining power. If anything (as the Court of Appeal recognised), Harcus Sinclair may be regarded as being the ‘stronger’ party, because it was more experienced in these matters, than Your Lawyers”.

The court also saw “some force” in YL’s broader submission that, even if a party was just protecting confidential information, a non-compete undertaking may be needed.

“This is because it is often difficult to prove what is and what is not confidential information and, in particular, whether that information has been misused.

“A non-compete undertaking may be a useful means of ensuring that confidential information is protected without needing to prove, through protracted litigation, that the information has been misused.”

Once YL had established that the clause was reasonable as between the parties, the burden shifted to Harcus Sinclair to prove that it was nonetheless contrary to the public interest.

But the Supreme Court again agreed with Mr Johnson’s decision that it was not.

The deputy judge had found no public policy against a solicitor undertaking not to continue to act for a client.

Further, he considered that the restriction here was limited in scope to this one matter, and there were other law firms that could run a group claim of this nature, meaning the choice of solicitor was not being significantly affected.

Aman Johal, director of Your Lawyers, said: “This is such an important victory for Your Lawyers but also for the dignity and sanctity of the legal profession.

“We have lived and breathed this case for four long years and were forced to take the matter all the way to the Supreme Court simply to oblige a law firm to honour an agreement that they freely entered into.”

Mr Johal indicated that a claim for damages may now follow.

Harcus Sinclair has since split into two separate firms, with the group litigation work now handled by Harcus Parker. The firm had no comment on the ruling.

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