FASHIONING A RESTRICTIVE COVENANT CLAUSE

Recent litigation involving a high street clothing chain has illustrated the importance of carefully drafting non-compete clauses in a share sale agreement, according to a corporate lawyer.

“It is common for share purchase agreements to seek to impose on the seller various restrictions against using intellectual property, such as trademarks, or continuing to use a similar trading name in a competing business, following completion of the sale.  A recent High Court case has highlighted the difficulties which may arise if the parties do not fully consider the implications of the language used”.

Mr Round continues, “the case of Millen vs Karen Millen Fashions Ltd and Anor concerned an application by the former owner of the clothing business for declarations to the effect that the use of her name in certain overseas enterprises, would not infringe restrictive covenants in the agreement for the sale of the company entered into in 2004.  This required the High Court to consider whether the intellectual property covered by the restrictions was the intellectual property as at the date of the agreement or the date of the potential breaches, whether the seller’s application for certain overseas trademarks constituted “use” of the intellectual property in question and – in determining the likelihood of confusion resulting from the use of certain trading names – whether the Court should look at the goodwill of the business generated at the time of the potential breach”.

According to Mr Round, the Court found that, that due to the language used, the intellectual property protected by the clause was limited to that in existence as at the date of the sale agreement. “Furthermore, the Court held that in applying for certain trademarks in overseas territories, albeit that such marks incorporated trading names already registered by the purchaser in the UK, the seller was not “using” intellectual property held by the business. This is because the overseas intellectual property did not exist at the time of the original sale. By contrast, however, in determining whether the use of certain names would confuse the public, the Court was required to consider the goodwill generated since the sale, as the business had increased its presence overseas and it was likely that the use of such names would therefore confuse the public in the relevant territory”.

Mr Round concludes, “the Court’s finding as to the effect of the various clauses demonstrates the significance of the specific language used. For example, it may be preferable in certain contexts to refer to the infringement, rather than the use, of intellectual property. Also, if trademarks and other intellectual property are key to the value of the business, a purchaser should consider very carefully how such intellectual property is defined”.