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Restrictive covenants in igaming

| By iGB Editorial Team
The current wave of industry consolidation has heightened the risks of key staff leaving and taking valuable confidential and strategic information with them, potentially to a competitor. James Anderson of Doyle Clayton looks at how iGaming businesses can help protect themselves through the use of restrictive covenants.

Gaming organisations commit a lot of effort to ensuring they spot those seeking to exploit inside information, and understandably so, when you then imagine the proprietary intelligence an executive can accumulate and how valuable this intimate knowledge would be to a competitor.

Such risks have been compounded by the growing number of large-scale consolidations within the gaming sector, and while a merger can legitimately acquire proprietary knowledge, it also will see key staff leaving and taking your confidential and strategic information with them, potentially to a competitor.

So, if a senior manager wants to leave a business to join a competitor, can an employer stop him taking this and other strategic information with him? Similarly, if the sales manager wants to leave, can he be prevented from approaching customers and poaching members of the sales team? The answers will of course depend on what steps have been taken to protect a business. There are a number of tools available to do this, which have to be within a contract of employment. They can include:

1. A confidentiality clause specifying what information the employee must keep confidential and for how long.
2. An Intellectual Property clause specifying what patents, trade-marks, copyright, design rights and rights in confidential information you have and preventing the employee from taking or using these when he leaves your employment. This can protect your company property including your data base of customers and your right to a particular design or trademark.
3. A restrictive covenant preventing the employee after the termination of his employment from:
a. Soliciting customers;
b. Poaching employees;
c. Interfering with suppliers;
d. Dealing with customers; and
e. Joining a competitor.

There is a myth sometimes peddled that restrictive covenants are not enforceable but this is not true. You are not allowed to restrict an employee just to stifle competition but you can restrict an employee to protect what are sometimes called “legitimate business interests”. In short these are:

• Your trade secrets and confidential information;
• Your client connections and goodwill; and
• The stability of your workforce.

Clearly these apply to any business, but not least the gaming sector where competition is fierce and customers fought over. The most effective way to restrict an employee is to use a combination of the tools available. Firstly, you should consider putting the employee on garden leave. Ideally the contract of employment should have a clause which allows you to do this. The advantage of putting an individual on garden leave is that he remains your employee and so cannot join a competitor or contact customers. He also continues to be bound by the other terms of his contract of employment with you and by various implied terms, most importantly the duty of good faith and fidelity which can include:

* A duty not to disrupt your business;
* A duty not to compete;
* A duty not to solicit your customers;
* A duty not to entice employees away from your business;
* A duty to disclose wrongdoing;
* A duty of confidentiality; and
* A duty not to misuse your property.

The main disadvantage of garden leave, however, is that you are paying the employee not to work!

If you wish to restrict the employee after his employment has ended, you can use restrictive covenants (sometimes called post-termination restrictions). However, to be enforceable, restrictive covenants must be carefully drafted. They must be no wider than is reasonably necessary to protect the legitimate business interest you wish to protect. What you, the employee and a judge consider to be reasonable may well be three very different things.

To draft enforceable restrictions, you should firstly consider what it is that you are trying to protect and choose the type of restrictions you need to do this. For example, a clause preventing an employee dealing with a competitor is much more restrictive than a clause preventing an employee soliciting your clients. This is because a non-solicitation clause does not prevent an ex-employee doing business with a customer who approaches him within the restricted period, but a non-dealing clause does. However, you might require a non-dealing clause where, for example, you risk being exposed to a significant loss of business due to a close personal connection between the employee and customers, resulting in customers naturally gravitating towards him if he moves employers.

When you have decided which types of restrictions you need, you then need to limit their scope. Your immediate reaction might be, for example, to make the restriction for as long as possible, say 12 months. However, that approach is counterproductive as it may result in a restriction which is wider than is reasonably necessary and which is therefore unenforceable. Areas where restrictions can be limited include:

1. The length of time for which the employee’s activities are restricted;
2. The geographical area where the employee’s activities are restricted;
3. Limiting the restriction to clients the employee has dealt with recently;
4. Only stopping the employee poaching fellow employees who are reasonably senior and who worked in the same team as the employee.

What can be done if a former employee with carefully drafted restrictive covenants joins a competitor and starts soliciting clients or breaching other restrictions?

At this stage you will need the help of a solicitor, who will often write two letters on your behalf:

1. One to the employee setting out his breach of contract and requiring him to refrain from any further breaches, failing which you reserve the right to bring legal proceedings which could include an injunction to prevent him acting in breach of the restrictions; and
2. A letter to the new employer alleging that it has procured the employee’s breach of contract (i.e. knowingly encouraged or allowed the employee to break the restrictive covenants in his contract with you) and reserving the right to bring a claim against them for procuring the employee’s breach.

In the letters your solicitor would ask your former employee and the new employer to disclose the extent of the employee’s breach of contract and undertake not to commit/procure any further breaches. A very short deadline would be given for compliance.

If there were further breaches, or a continuing breach or if undertakings were not received, you would then have to decide what further action to take. The options available include:

1. Doing nothing (if, for example, the evidence supporting the breaches is weak);
2. Claiming any financial loss caused by the breach of contract;
3. Making a claim for breach of contract and applying for an injunction to ensure that the terms of employment are complied with.

However, often litigation does not follow for a number of reasons including:

1. All litigation is a gamble. There is a risk that you will lose even if you have a strong case. The fact that reasonableness is part of the test makes the outcome more uncertain;
2. Injunctions are very expensive in legal fees which may very well run into six figures;
3. If you win, you are likely to recover a proportion of your legal costs but not all of them;
4. If you lose you will be responsible for a proportion of the employee’s and other employer’s legal costs. If you were to win your claim, the Court could make an order:

1. Requiring the employee to comply with the terms of his contract;
2. Awarding you damages to cover any losses; and
3. Requiring the employee to pay a proportion of your legal costs.

So you have to carefully consider whether the damage the employee could do to your business by joining a competitor in breach of a restrictive covenant is worth the risk and cost of pursuing a claim through the Courts. After all, just because a firm promotes gambling, it may not want to gamble with its business interests.

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