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Non-Compete Agreements and Restraint of Trade – Supreme Court Ruling

Commercial negotiations routinely take place under the aegis of non-disclosure and non-compete agreements so that all involved can speak and act openly without fear of future disadvantage. In an important ruling, the Supreme Court helped to dispel long-standing concerns that, for all their benefits, such agreements may be in unlawful restraint of trade and thus unenforceable.

The case concerned a group action, involving more than 50,000 claimants, against a motor manufacturer whose vehicles were alleged to have been fitted with devices that manipulated emissions tests. A law firm (LF1) issued a claim form against the manufacturer and intended to apply for a group litigation order (GLO).

LF1 approached another law firm (LF2) that had greater experience in undertaking group actions, with a view to them collaborating in the litigation. At LF1’s behest, LF2 signed up to a non-disclosure agreement that included a non-compete clause. LF2 agreed that, for a period of six years, it would not accept instructions for or act on behalf of any other group of claimants in the proposed group action.

Although no formal agreement was ever reached between them, the firms embarked on a process of informal collaboration. During that process, LF2 recruited claimants for its own group action and proceeded to issue its own claim form and its own application for a GLO. LF2 ultimately agreed with another law firm to work together on the litigation. LF1 responded by launching proceedings, alleging that LF2 had breached the non-compete clause.

The High Court found that the non-compete clause was enforceable and granted LF1 an injunction requiring LF2 to cease involvement in the group action for six years. That decision was, however, subsequently reversed by the Court of Appeal.

In unanimously upholding LF1’s challenge to that outcome, the Supreme Court found that the protection afforded to it by the non-compete clause extended to the period of informal collaboration. It was agreed that the non-compete clause was in restraint of trade, but the extent of that restraint was reasonable as between the law firms and was not contrary to the public interest in the promotion of free commerce.

The non-compete clause was reasonably necessary to protect LF1’s legitimate interest in protecting its own proposed group claim against LF2 setting up a rival group claim. It was logical and necessary that the restriction should last for six years as that period roughly equated to the limitation period that applied to the group litigation.

2 August 2021
Last Updated
22 August 2021