Disputes over confidential information often arise as a result of business sales and non-compete agreements. In a 23 February 2024 decision, the English Court of Appeal granted an interim injunction restraining use of confidential information, and thereby overturning a lower ruling.
The dispute arose after Dr Zack Ally, an aesthetics practitioner, and his wife Dr Sanah Qasemzahi, sold their business Derma Med to Peal Athena Ltd in March 2022. The sale agreement provided that they would not compete with Derma Med for two years and would keep relevant information confidential. However, Dr Ally could continue to work for Derma Med during this time.
Use of confidential information and competition
When Peal Athena suspected that Dr Ally was dishonestly diverting business to himself, using confidential information, he was suspended from his role. The company sought, and was granted, an injunction to enforce the non-compete and confidentiality obligations.
However, in October 2023, Mr Justice Bourne discharged the injunction on the ground that there had been significant failures of full and frank disclosure by the claimants. He also refused to grant a fresh injunction, saying damages would be an adequate remedy.
Court of Appeal judgment
Overturning the first instance decision, the Court of Appeal said the judge’s decision could not be supported.
In particular, it found that the judge’s conclusions that there were significant and culpable failures of disclosure in two respects (failure to disclose that there was no good reason for applying without notice for the non-competition and confidential information orders and failure to disclose a suspension letter) were not reasonably open to him.
However, the judge was entitled to find that the claimants failed to some extent in their duty of full and frank disclosure in that the definition of confidential information was too wide and they failed to disclose non-payment of the first instalment of Dr Ally’s first earn-out payment.
Based on this, the Court of Appeal found that the interim injunction should not have been set aside. It highlighted three points in particular:
There was a strong prima facie case that Dr Ally had committed significant breaches under the agreement and had taken steps to conceal his wrongdoing.
The granting of the injunction was not wrong in principle. The failure regarding the scope of confidential information was easily rectified by a tighter definition and the failure of disclosure did not cast doubt on the appropriateness of an injunction.
The failures of disclosure were not deliberate and were relatively substantial in the context of the case.
The Court also decided that an injunction, rather than damages, was appropriate going forward, as there was strong evidence of Dr Ally’s dishonesty and there was a very real risk that (unless restrained) that he would seek to compete with Derma Med. Lord Justice Males said:
“what an employer, or in the present case the purchaser of a business, has bargained for is not an uncertain and evidentially difficult remedy in damages, but the opportunity to develop its business free of competition from the defendant during the currency of the non-compete obligation. That factor has all the greater weight when a significant element of the value of the business is attributable to the reputation of the vendor himself, here Dr Ally.”
What does this mean?
This judgment makes it clear that an injunction is likely to be the most appropriate (or only) effective remedy in cases where breach of non-compete agreements and use of confidential information is threatened – pending a full trial of all the issues.
The Court’s judgment in this case should therefore be useful to any business seeking to enforce non-compete agreements, and any individuals who may be bound by them. If you would like to discuss how this ruling might be relevant to your circumstances, please contact us.
To find out more about the issues raised in this blog contact Rosie Burbidge, Intellectual Property Partner at Gunnercooke LLP in London - rosie.burbidge@gunnercooke.com