Category Archives: Contract drafting

Post-employment restrictions on scientists

The judge referred to this leading textbook in his judgment

The case of Invista Textiles (UK) Ltd & Anor v Botes & Ors [2019] EWHC 58 (Ch) (Birss J) has now been published. It is a good illustration of how difficult it is for an employer to impose post-termination restrictions on scientists.

General context

Disputes with ex-employees tend to take several, related forms. They include:

  • has the individual taken documents that belong to the employer;
  • has the individual used the employer’s trade secrets; and
  • has the individual become involved in a competing business, in breach of a non-compete clause in their contract of employment

Defences to such actions tend to include:

  • the information that the individual is using is part of their “general skill and knowledge” rather than their employer’s trade secrets
  • the non-compete clause is “in restraint of trade” and therefore unenforceable, e.g. because it is too widely drawn in terms of territory, field, or duration, and doesn’t focus on a legitimate interest of the employer (such as to protect the employer’s trade secrets)

Some of the leading cases in this field concern obvious wrongdoing with clear evidence, e.g. a salesman taking a list of customers with him when he leaves the company, or someone setting up a rival business in the same town in breach of a non-compete clause. In other words, many of the cases are about local businesses and sales activities.

When IP Draughts has drafted non-compete clauses for high-tech clients, it has sometimes been difficult to apply the case law to the facts of those clients’ employees. For example, in the case of a molecular scientist working for a biotech company, the company’s main competitors may be based in another continent. Case law about territorial restrictions of a few miles is of limited relevance. There has been very little English case law about scientific staff working for a technology-based, internationally-focussed company.

Background to this case

Invista is part of a large, international group that owns the Lycra trade mark. The first three defendants were scientists employed in Invista’s Sustainability Group (SG). The SG was researching the possibility of genetically engineering microorganisms for use in the production of polymers such as nylon, as an alternative to generating polymers from oil.

After the defendants left Invista, their employer discovered that they might have taken documents relating to their employment. Invista sought an interim injunction against them, which was compromised on terms that allowed Invista to conduct forensic searches of their laptops and other devices. Thousands of documents were discovered, many of which had been deleted (and emptied from the deleted box) from the computers but which could be recovered from the hard drives using a special program. There was no evidence that the defendants had sought to recover them. Some of the documents were on a memory stick that one of the defendants had used at a conference while employed by Invista. The memory stick was found in a barn at the defendant’s property; the defendant had forgotten that she had it. In some cases the documents were password-protected, and the evidence was that the password had been forgotten.

Retention of documents

Part of the case is about whether the defendants had wrongfully retained property belonging to Invista, after leaving its employment. Birss J found that a small number of documents had been wrongfully retained out of the thousands that were recovered from computers through forensic techniques.

The impression given by his judgment is that these were technical breaches rather than deliberate wrongdoing. Essentially, the judge found the defendants to be honest, despite the apparent “smoking gun” of Invista documents being found on various devices.

Misuse of confidential information

Birss J considered the obligations of confidentiality that were provided for in the contract of employment, as well as the general duties of confidentiality of an ex-employee towards their former employer.

He thought the wording of the written confidentiality obligations was far too wide to be enforceable against an ex-employee, as it was not limited to trade secrets. For example, he focused on clause 1.1.2 of the contract, which formed part of the definition of the employer’s confidential information and was drafted very broadly:

Business methods and processes, technical information and know how relating to the Employer’s business and which is not available to the public generally, including inventions, design, programs, techniques, data base systems, formulae and ideas.

Together with other clauses (e.g. clause 1.2 which required the employee not to use the employer’s confidential information after termination of the contract) this was too wide to be enforceable.

He also found that none of the information highlighted by the claimants was genuine trade secret-type information. Their best shot was some Powerpoint slides.

His conclusion:

Therefore I dismiss the case based on misuse of confidence either in contract or in equity altogether.

Non-compete clauses

The contract included various obligations not to work for a Competing Business or solicit staff, customers, etc, for a period of 3 months after termination of the employment. Some key definitions in this part of the contract included:

“Competing Business” means any entity or persons engaged in or about to become engaged in research, development, production, marketing or selling of a competing product(s).

“Competing Products” means product(s) process(es) or service(s) with which the employee has worked within five years preceding termination of such employment, or about which the employee has acquired the employer’s trade secret, technical or non-technical information.

Birss J considered that these definitions were very broad. In relation to the obligation not to work for a competitor, he considered:

All this clause achieves when applied to employees like the individual defendants is to prevent them from exercising the very same skills they were hired for in the first place for three months post-employment. That does not benefit Invista at all. I find that the clause, in its operation as it operates after the employment has ceased is an unreasonable restraint of trade. The period in the clause is just a relatively short period to try and make an unreasonable clause seem more reasonable. That is not a justification.

In relation to the non-solicitation part of the clause, he found that the first defendant had breached it by seeking to recruit the second and third defendants to her new business during the 3 month period.

So, he found a few technical breaches. But he decided not to order an enquiry as to damages:

Overall, I will not order an inquiry as to damages in relation to the proven breaches of contract. It would be entirely disproportionate. There is no justification for it. There is no evidence any of these activities cause any substantive or quantifiable loss to Invista. I am prepared to hear submissions about what sum by way of damages (if any) ought to be awarded for the proven breaches, including the failure to return documents in the Chen Library, at the hearing to deal with the consequences of this judgment but that is as far as it will go.

Comments

This case is interesting to IP Draughts because it sheds a light on the enforceability of non-compete clauses in the case of scientists working for a technology-based company. Much of the case law in this field concerns very different types of industry and employee role.

IP Draughts has tended to advise companies to limit their non-compete obligations to 6 months after termination. In this case, it seems the company’s lawyers took an even more cautious approach, going for 3 months, but the judge decided that even this was too long when the obligations were too broad in scope.
There are various other techniques for improving the enforceability of these clauses, including explicitly limiting their post-termination application to trade secrets. Not all of those techniques seem to have been used in the contract under discussion in this case.

IP Draughts doesn’t recall a case of this kind where the judge’s sympathies lay with the defendants. At one point, when discussing whether he believed the witnesses, he commented on the defendants of “being sued personally by a major multinational corporation which has deployed all the resources at its disposal to do so. The strain that that would place on anyone would be significant.”

In IP Draughts’ view this is a significant judgment on non-compete clauses for scientific staff. It will be interesting to see if it is appealed.

tailor

Tailor-made is best

IP Draughts understands that the UK Supreme Court heard a separate case about non-compete clauses earlier this week, and he looks forward to reading the judgments in due course, to see whether they give further guidance on this subject.

In light of these cases, including any appeal in the Invista case, high-tech (including life science) companies may wish to review the non-compete clauses in their contracts of employment, and obtain specialist advice on whether any revisions are appropriate.

UK companies that have US parents (as in this case) may wish to “push back” against using template wording provided by the parent company for use by all employees in the group, and instead draft tailor-made clauses in light of UK case law.

 

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Managing contractual risk by not contracting

This is a story about legal risk, and how a supplier of goods and services should manage that risk. After taking all sensible precautions, a small risk of a catastrophic event remains. And the risk is increased because of the special qualities of the purchaser, in this case their food allergies.

How should the supplier manage that risk? By (a) including a disclaimer in the contract of sale, (b) refusing to supply to that purchaser, or (c) simply taking the risk and hope it doesn’t happen (perhaps with some insurance in place to mitigate the financial consequences)?

Readers of UK newspapers may have seen, in the last few days, a story about a restaurant chain’s attitude to people with allergies. The LEON fast-food chain has about 50 outlets, most of them in London. It seems that managers of their restaurants, when faced with someone who mentions allergies, have been instructed to ask them whether their allergies are life-threatening. If the answer comes back “yes”, the manager advises them not to eat at LEON. Or to consider carefully whether they want to eat at LEON. Some customers have heard this as a refusal to serve. Or perhaps the subtlety of the official message has not been correctly communicated by the manager in all cases.

Some customers are upset about either a perceived refusal to serve, or about the advice being, in effect, a disclaimer of responsibility for ensuring that their food is not accidentally contaminated in the kitchen.

From LEON’s perspective, and as their website seeks to demonstrate, they are very careful about sourcing and checking the ingredients of their meals, they label those ingredients on their menus, and have in place procedures and staff training to avoid cross-contamination between safe and non-safe foods in the kitchen. But they do use allergens in some of their foods, e.g. peanuts are an essential ingredient if you are making satay sauce. And they are aware that mistakes can be made by fallible human beings in the heat of the kitchen, despite the best systems.

So, in light of this information, how should a restaurant behave? By relying on their systems and not raising the topic with customers, by banning customers, or by having a frank conversation with them?

Leon explains their approach as follows:

The idea that LEON could cause harm to one of our guests is horrifying. And we would therefore ask those of you with serious allergies, to consider carefully whether you choose to dine with us.

At least, that is IP Draughts’ interpretation of what Leon is saying. Their Twitter feed, which mentions this topic, is here.

Some of the customer comments that have been reported are, to IP Draughts’ mind, confusing. One, the mother of a child with multiple allergies who was allegedly turned away from a branch of LEON, is reported to have said:

No allergy sufferer expects to be catered for by every provider. Nor do we ask for 100 per cent guarantees. If with one hand they say “we can do this” but on the other “we can’t guarantee this” it negates all the good things they do.’

If with one hand you say you are not looking for the restaurant to give a 100% guarantee, but on the other you object to the restaurant saying they can’t give an absolute guarantee, what the hell are you saying?

It seems that LEON’s message to people with serious allergies is not one that they want to hear. Perhaps part of the anger being expressed on social media arises because LEON are forcing  sufferers to confront the issue at a human level, rather than letting them assume that no risk exists because they have chosen items that are marked in a particular way on a menu. Some people don’t really understand the concept of risk and probability.

If you have life-threatening food allergies, then every meal presents a risk. The risk is greater if someone else prepares the meal, and this must make social intercourse, travel, etc difficult. IP Draughts was astonished to read, a few months ago, that merely being in the same aircraft as people eating nuts could be life-threatening for some people, and as a result nuts were not served on a flight at the request of an allergic individual.

In IP Draughts’ view, a responsible board of directors of a restaurant chain should be concerned about harming its guests, for moral, legal and business management reasons. Consumer protection laws make it difficult to exclude liability in contracts with consumers. LEON has taken what appears to be a novel approach to dealing with this issue, and in doing so has put its head above the parapet for others to shoot at.

IP Draughts wonders about other food-poisoning issues that can arise in restaurants. Seafood has a higher than average risk of harming people who eat it. (Some people are allergic to it, but that is a separate issue.) Some seafood can be purged of bacteria by a process known as depuration (leaving it in running, clean water for a period of time), but it is more difficult to get rid of viruses. Where the seafood is served raw, as in the case of oysters, the risk is increased. Apparently, 100 people die each year in the United States from vibriosis, which is picked up from eating oysters.

Should restaurants have a frank conversation with people before serving them seafood? It might well put them off eating it, even if the probability of serious harm is low.

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Restrictions on assignment in contracts

It may be of marginal relevance to many IP-related contracts. But there will be some situations where, in future, a contract term that prohibits assignment of the benefit of the contract is not enforceable.

The Business Contract Terms (Assignment of Receivables) Regulations 2018 apply to any term in a contract entered into on or after 31 December 2018. In the words of the explanatory memorandum which accompanies the Regulations:

These Regulations deal with terms in contracts to which the law of England and Wales or the law of Northern Ireland applies which prohibit or restrict the assignment of receivables. A receivable is a right to be paid under a contract for the supply of goods, services or intangible assets. Various types of contract are excluded from the scope of the Regulations.

The main purpose of the Regulations is to make is easier for SMEs to enter into debt financing arrangements. If you are an SME, you may want to “sell” to a finance house the right to recover debts you are owed by your customers. The finance house will give you a percentage of the amount of the debt and they will then take on responsibility for recovering the debt. IP Draughts understands that Lloyds Bank is, or has been, a market leader in this sector.

As an aside, this only really works for the sale of routine products. For anything more complicated, a customer who doesn’t want to pay would likely raise allegations that the product or service had not been provided correctly, and the result would be a messy dispute.

Unfortunately, the drafter of the legislation has tried to address much more than this simple situation, and in doing so has ended up with an unlovely mess of detailed definitions, terms, and exceptions, which (in IP Draughts’ view) raise too many questions of interpretation.

Summary of the Regulations

At the heart of these Regulations is Regulation 2(1), which provides:

…a term in a contract has no effect to the extent that it prohibits or imposes a condition, or other restriction, on the assignment of a receivable arising under that contract or any other contract between the same parties.

Thus, if you have a boilerplate assignment clause in your contract that prevents a party from assigning the benefit of the contract, this may in some situations be unenforceable.

Regulation 2(3) lists the situations in which a party is so prevented, and they include terms that prevent the supplier from disclosing certain details about the contract, e.g. the names of the contracting parties and the amount owed. Thus, some confidentiality terms in contracts could potentially be unenforceable to the extent they prevent disclosure of information about the contract itself.

There are some restrictions in the Regulations on when the above-quoted provision applies. They include:

  • “Receivable” is defined as a right (whether or not earned by performance) to be paid any amount under a contract …for the supply of goods, services or intangible assets.
  • “Intangible assets” are defined as including electricity and data which are produced and supplied in digital form. IP Draughts’ initial reaction is that many software supply agreements should be treated as being for the supply of intangible assets. He also wonders whether research agreements would be treated as contracts for the supply of a research report (if it is supplied in digital form). Alternatively, these may be contracts for services.
  • However, Regulation 4 sets out a long list of excluded categories that are not within the scope of the Regulations. This includes, at item (m): “a contract, not falling within paragraph (a), entered into wholly or mainly for the purpose of granting by one person of a right to possession or control of an object to another person in return for a rental or other payment.” IP Draughts speculates that the drafter had in mind things like photocopier leasing agreements. Object is not defined in the Regulation. (Is it defined elsewhere?) Is software an object? IP Draughts’ instinctive view is not, but applying common sense doesn’t always lead to the right legal answer (!)
  • The Regulations don’t apply if the supplier is a “large enterprise”. Confusingly, large enterprise is defined as anything other than organisations that fit within the categories in Regulation 3(3).
  • Regulation 3(3) sets out a long list of non-large enterprises, which includes: (b) a company to which the small companies regime (within the meaning given by sections 381 to 384 of the Companies Act 2006) applied in the relevant financial year and which was not a member of a large group in the relevant financial year;(c) the supplier is a company which qualified as medium-sized (within the meaning given by sections 465 to 467 of the Companies Act 2006) in respect of the relevant financial year and which was not a member of a large group in the relevant financial year;
  • Some other categories are excluded from the Regulations, including, under Regulation 4(c): “a contract where one or more of the parties to the contract is acting for purposes which are outside a trade, business or profession”. Might this conceivably cover some university research contracts?

Comments

The Regulations form part of the present UK government’s initiatives to support small businesses, e.g. when faced with large customers who don’t pay on time. The drafter was presumably mainly focused on simple contracts for the sale of stock items of goods, which is where debt financing is most likely to be available.

As to whether the Regulations cover niche topics like software supply, IP licensing or academic research contracts, it is probably too soon to give a definitive answer – we need to see some case law from the senior courts. IP Draughts looks forward to being instructed to bring such a case to the UK Supreme Court!

There doesn’t appear to be any sanction for including an unenforceable restriction on assignment in your contract. The consequence of doing so is simply that the term “has no effect to the extent that” it includes such a restriction. Drafters may want to think about the severance clauses in their contracts, with a view to mitigating the possibility that an unsympathetic court might strike out the entire assignment clause. And you might want to think about including wording such as “to the extent permitted by applicable law” in your assignment clause.

This is an other example of politicians eroding the principle of freedom of contract in support of political objectives, here to support the “nation of shopkeepers” who run SMEs. The previous article on this blog, about new EU-derived terms in trade mark agreements, is another example, though in that case the political objective is removing national barriers to trade within the EU.

Back in the 1970s, we had lots of new legislation to protect consumers and workers, such as unfair dismissal legislation and the Unfair Contract Terms Act 1977. Now the focus is on protecting SMEs. In both cases, they create work for lawyers, particularly when the legislation raises as many questions as it answers. So, perhaps IP Draughts should be glad of the government’s latest lawyer-job creation scheme.

 

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IP rights in geospatial data

Several strands of information come together. On 14th December was published the latest court decision in the long-running saga between 77M Limited and Ordnance Survey Limited.

77M is a private company that has developed and is commercialising a database of UK land and properties and has, or at some time in the past had, a licence from the UK Land Registry (HMLR) to access one of the latter’s databases.

The Ordnance Survey (OS) was formed several hundred years ago and was originally part of the army. Nowadays it is a company owned by the government. It is best known for providing high-quality maps of the United Kingdom. When IP Draughts was at junior school, he was taught about the the OS’s 1 inch to 1 mile (or 1:36,360) map. Since metrication in the UK in the late 1960s and 1970s, this set of maps was discontinued, and the closest equivalent has been the 1:50,000 map. In other words, like HMLR, OS has developed so-called geospatial data in relation to the UK.

The case linked above is a decision of Mr Justice Arnold, who rejected an application for summary judgment by OS. OS sought to have a claim by 77M rejected, that OS had induced HMLR to breach a contract under which it supplied property-related data from its database to 77M.

The arguments in that case are only of passing interest, and anyway the underlying facts are not fully explained in this interim decision. Arnold J noted that the contract in question was described as a “contract schedule” (suggesting to IP Draughts that it might have originally been part of a larger master services agreement, although this is not stated in the decision) and provided for a fee of £2,500 in return for undertaking certain searches. 77M argued that this was an “ongoing” contract, while OS argued it was a one-off contract. After reviewing clauses of a “lamentably badly drafted” contract that pointed in either direction, Arnold J declined to hold that OS’s case was so strong that it should get summary judgment. The interpretation of the contract should await full trial of the action.

The larger dispute between 77M and OS has been rumbling through the courts, and has not finished yet. An earlier hearing considered the question of when it was appropriate to transfer cases between the low-cost Intellectual Property Enterprise Court and the High Court.

Standing back from the case, what is going on? IP Draughts has no inside information about the case, but he is aware that the UK government is pressing ahead with plans to develop a national strategy to commercialise the UK’s geospatial data, much of which has been developed by government bodies and agencies, including OS and HMLR.

To help formulate this strategy, the government is forming a Geospatial Commission. The appointments of the chair and vice-chair were recently announced. The deputy chair is a former CEO of OS. The announcement refers to the commission’s role being to “drive the use of location-linked data more productively, to unlock up to £11 billion of extra value for the economy every year”.

Other documents identify OS and HMLR as some of the main custodians of this data.

IP Draughts wonders whether small, private companies that are already using UK geospatial data may compete with the government’s ambitious plans. This doesn’t necessarily mean that it is wrong for a government agency to terminate a commercial licence agreement, or for another government agency to encourage it to do so. IP Draughts doesn’t have enough information (geolegal data?) to form a view on this question. But it is curious that this case is rumbling on at the same time as the Geospatial Commission is being formed.

 

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