TUPE and Restrictive Covenants
In the interesting High Court case of P14 Medical Ltd v Mahon  EWHC 1823 the question was whether a new, transferee, employer could enforce a restrictive covenant in a transferring employee’s employment contract when he left the transferee to join a competitor. Had there been a TUPE transfer? Or (additionally) was the employee’s employment contract (and the covenant within it) novated by agreement to the transferee? Finally, if so, did it look as though the covenant was enforceable, and that the transferee employer would succeed at trial, and did the balance of convenience favour an injunction? These fascinating questions were addressed by Cavanagh J, one of our newest High Court judges, and previously a leading employment law silk.
In this case, a TUPE transfer occurred. Mr Mahon was a transferring employee. After the transfer, Mr Mahon resigned from the transferee, P14 Medical, to join a competitor of the business. But Mr Mahon’s transferred employment contract had restrictions which forbade that. Could P14 Medical sue to enforce those restrictions? In principle, yes, said Cavanagh J. As the effect of TUPE is that the contracts of employment of all employees in the part transferred are automatically transferred, by operation of law, from the transferor to the transferee, and the terms and conditions remain the same, this operates so as to transfer restrictive covenants, as it does to all other terms and conditions.
P14 Medical carries on business as the supplier of pain-management devices for the relief of chronic pain, implants for pain management, and on the use of radiation protection garments. Its customers are primarily NHS Trusts and private hospitals.
Mr Mahon was the Sales Director. He had previously been employed by a company called Platform 14 Medical Limited. P14 Medical took over its business in 2017. Mr Mahon transferred with it. Until 24 May 2020, P14 Medical had an exclusive distribution agreement for the UK and Ireland with Avanos for its radiofrequency products for the relief of chronic pain. On 23 April 2020, Avanos gave written notice of its intention to terminate the distributor agreement with effect from 24 May 2020. Avanos subsequently sold and supplied products in the UK and Ireland directly to end-users, in direct competition with P14 Medical.
On the same day that Avanos gave notice to terminate the distribution agreement, Mr Mahon was approached by Avanos to join them. He did so, as Business Development Manager in the UK and Ireland. His role would involve selling essentially the same products in the same territory as he had previously done for P14 Medical.
Mr Mahon, however, denied he was now in breach of any express restrictive covenants in his contract of employment with P14 Medical. He accepted there were restrictive covenants in his contract of employment with Platform P14 Medical. But he claimed that the covenants were not now in his present contract and in the alternative, if they were, they are unenforceable as being unlawfully in restraint of trade.
Were the covenants in Mr Mahon’s contract with P14 Medical?
Cavanagh had no doubt they were, because there had been a TUPE transfer in 2017, which transferred Mr Mahon’s contract, and the covenants within it.
If it had been necessary to consider the matter, in the absence of a TUPE transfer, Cavanagh J would have taken the view that Mr Mahon had personally agreed to be bound by a contract of employment with the Claimant in the same terms as his contract with Platform 14.
Although this finding was unnecessary in view of the finding there had been a TUPE transfer, this is a rare example of novation of an employment contract by mutual consent on a business takeover (though for another recent example see Quantum Advisory Ltd v Quantum Actuarial LLP  EWHC 1072 (Comm),  5 WLUK 15).
The outcome of P14 Medical Ltd v Mahon was that the learned judge having found that relevant restrictive covenants in the transferring employee’s employment contract survived the TUPE transfer, the balance of convenience favoured the grant of an injunction to the transferee, P14 Medical, both in relation to those express restrictive covenants and in relation to the implied obligation not to use or disclose trade secrets.
The most important, but not the only, consideration for Cavanagh J relevant to the balance of convenience was his assessment that P14 Medical was likely to be successful if the matter went to a full trial. The express restrictive covenants were part of Mr Mahon’s contract of employment taken over by P14 Medical. They were not unlawfully in restraint of trade; and Mr Mahon, Cavanagh J found, was, unless restrained, likely to act in breach of those restrictions, which had been entered into for the benefit of the business transferred. Similarly, he considered that, on the facts, P14 Medical was likely to be successful in establishing that the proposed activities of Mr Mahon on behalf of his new, competitor employer would be in breach of his implied contractual obligation not to use or disclose trade secrets of the transferred business, after the termination of his employment