Dear Employer, A Non-Disclosure Agreement May Not Save You: Lessons from iROKOtv.com Ltd V Michael Ugwu

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By Mofoluwawo Oluwapelumi Mojolaoluwa

One can safely say that the power which an employer wields over its employees, is as wide as the blue skies, as is necessary for protecting its business interests and as can be agreed to by the employee. However, while an employer may milk its powerful stance over the employee to any lengths via agreements such as employment offer, non-disclosure, non-compete etc., the real power lies not in the execution but the enforceability of these contracts. This was again demonstrated in the protracted legal battle of iRokotv.com Ltd against its ex executive, Michael Ugwu. Judgment in this case was delivered by Justice J.D Peters of the National Industrial Court, Ibadan Judicial Division in November, 2020.

 

Facts of the Case

In October 2011, iRokotv employed Mr Michael Ugwu in the United Kingdom(UK) with a mandate to work in its Nigerian office as a senior manager. This employment was backed by an employment letter dated 10th October, 2011. Mr Ugwu moved back to Nigeria from the UK and had worked with pay for two months, when the claimant required and had him execute an employee Non-Disclosure Agreement (NDA) dated 1st December, 2011. By the NDA, it was agreed by the parties that the defendant would not set-up competing businesses while still in employment, misuse the claimant’s confidential information, documentation and junior staff in a manner detrimental to the interest of the claimant, inter alia. According to the defendant, he worked for the claimant until 17th October, 2013 when the claimant terminated his appointment by overt acts of preventing him from carrying out his duties or having access to his office, and the nonpayment of his October salary. This, contrary to the provisions of the employment letter for one month’s written notice of termination or a month’s salary in lieu. The claimant alleged that the defendant breached their NDA Agreement, particularly clauses 3 (e) and 7 while still in its employment by incorporating Africagent Limited and Freemedigital, companies similar to its own, and actively dealing with clients in this capacity, clients he had come to know by virtue of his employment with the claimant. Clauses 3 (e) and 7 state as follows:

3 (e) ‘The Employee shall not take up job with any of the Employer’s clients, vendors and partners without the written permission of the Management of the Employer’.

  1. ‘The Employee agrees that if his employment with the Employer terminates for any reason, the Employee shall not for a period of two years from the date of termination, have any business dealings whatsoever, either directly or indirectly or through corporate entities or associates with any customer or Client of the Employer or its subsidiaries; or any person or firm which has contacted or been contacted by the Employer, a potential customer or client of the Employer, and the Employer shall keep in strictest confidence both during the period of employment or thereafter not disclose or divulge to any person, firm or corporation or use directly or indirectly for my own benefit (sic) of others, any information which in good faith and good conscience ought to be treated as confidential information including without limitation information relating to the software developed by the Employer, information as to sources of and arrangements for the Employer, dealings with movie producers, actors, actresses, artists, etc customer or contact lists or any other confidential information’.

 

Claimant also contended that the defendant was dismissed according to clause 10 of the letter of employment and therefore not entitled to any notice nor payment in lieu, having contravened the letters of the NDA per 3(e) and 7. It therefore sought the following reliefs:

  1. A declaration that the act of the defendant, in organizing the businesses known as africagent ltd. and freemedigital, to conduct the business of digital music distribution and rendering other entertainment promotional services, constitutes a breach of the non-compete and confidentiality obligations of the Defendant as set out in the employee non-disclosure agreement dated 1 December 2011.
  2. A declaration that the act of the defendant in openly soliciting the clients of the claimant (whom defendant got to know of by virtue of his position in claimant company) constitutes a breach of their employee non-disclosure agreement.
  3. An order restraining the defendant (whether acting directly, or through other persons, be they natural or corporate) from further breaches of the non-compete and confidentiality obligations set out in the employee non-disclosure agreement dated 1 December 2011 for the duration of two (2) years from the date of the termination of the defendant’s contract of employment with the claimant.
  4. An order restraining the defendant from further contacting the clients of the claimant (whom defendant got to know of by virtue of his position in claimant (company) or the duration of one (1 year from the date of the termination of the defendant’s contract of employment with the claimant
  5. An order directing the defendant to render a true and complete account of all the profits made by the defendant from his breach of the non-compete and confidentiality obligations set out in the employee non- disclosure agreement dated 1 December 2011.
  6. Damages in the sum disclosed by the defendant as profits made from the defendant’s breach of the employee non-disclosure agreement dated 1 December 2011, which has resulted in unquantifiable financial loss to the claimant.
  7. Cost of the action in the sum of =N=2,000,000.00 (Two Million Naira) only.

 


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The defendant on the other hand contended that the NDA is invalid and unenforceable and counterclaimed for some rights and entitlements resulting from the termination of his employment by the claimant as follows:

  1. The sum of N628,404 (Six Hundred and Twenty-Eight Thousand, Four Hundred and Four Naira) only as his unpaid salary for the month of October 2013.
  2. The sum N628,404(Six Hundred and Twenty-Eight Thousand, Four Hundred and Four Naira) only as salary in lieu of notice of termination of his employment.
  3. Interests on the unpaid salary for the month of October 2013 and salary in lieu of notice at the rate of 21% (Twenty One percent) per annum until same is finally paid.
  4. The sum of N5,000,000 (Five Million Naira) only as damages for wrongful termination of employment.
  5. The costs of this action.

On the Enforceability or Otherwise of Clauses 3(e) and 7 of the NDA

These clauses are in a class of covenants referred to as covenant in restraint of trade. While parties, especially employers are at liberty to determine how they would conduct their business as well as the terms and conditions of employment under which their employees would work; it is fine if both parties (employer and employee) agree to such terms and conditions and carry it out accordingly. Where there is a breach however, the court will not give force of law to clauses as in 3(e) and 7 except the claimant shows that it has an interest which is capable of being protected; that the restraint on the defendant is reasonable and that it is not contrary to public policy or interest.

Per the court’s dictum:

“They are covenants in which a covenantor agrees with another party to restrict his liberty in the future to carry on trade, business, profession or calling with other persons not parties to the contract in such a manner as he chooses. It is simply some kind of agreed provision that is designed to restrain another’s trade…Restraint of trade is a common law doctrine relating to enforceability of contractual restrictions on freedom to conduct business. It is said to be a precursor of modern competition law. Generally speaking, such a restraint is unenforceable as being contrary to the public policy of promoting trade and business unless the restraint of trade is reasonable to protect the interest of the purchaser of a business and hence void ab initio. If both parties to it agree to and did perform same, that is the end of it. But the Court will not assist either party to provide a platform for its enforcement.”

Let us take these three conditions one after the other.

 

Legitimate Interest Capable of Being Protected

The main interest the claimant sought to protect via this NDA was the protection of its confidential information which had come into the possession of the defendant by virtue of his position as a senior executive considering the nature of its business. As a director (by promotion), the defendant had unrestricted access to the trade secrets, confidential documentation and customer connection of the claimant’s business and its clients. The claimant as well contended that this was sufficient consideration in support of its restrictive covenants with the defendant. The court held that the claimant had failed to prove that there were indeed secrets it sought to protect as its pleadings did not reveal any written policy, procedures or regulation for its employees communicated to the defendant at any point in time. Indeed there was no such thing in place at the time the defendant joined the claimant and the defendant had assisted in putting the Claimant in shape. Thus, the court found no legitimate interest capable of being protected.

 

Public Policy

As to the timing of the NDA as contended by the defendant, the court found that requiring the defendant to execute an NDA two months after he had altered his position in relocating to Nigeria from his base in the United Kingdom along with his family put him in a difficult position and amounted to changing the rule in the middle of the game, an unfair labour practice. More so because at this point, he had little or no choice in the matter having altered his financial and geographical position based on an earlier agreement. This is contrary to public policy and good conscience. As such, the court declared the NDA in its entirety and the manner of its execution contrary to public policy and amounting to an unfair labour practice.

 

The Test of Reasonableness

The balance of reasonableness in cases like this weighs the interests of the parties against the interest of the public. Having found that the claimant disclosed no legitimate interest to be protected, the court decided that the interest of the defendant is to continue to be employable and able to put his skill to full use. The court equated his right to continue to earn a living, to right to life and such found that it is not only unreasonable but also against public interest for a citizen to be deprived of his means of livelihood due to a restrictive clause or covenant.

 

Having failed the three tests therefore, clauses 3 (e) and 7 were declared illegal and unenforceable. Consequently, all of the claimant’s reliefs failed. The defendants counterclaims 1-3 however succeeded as he was able to rely on the contract of employment to claim his unpaid October salary in the sum of N628,404 (Six Hundred and Twenty-Eight Thousand, Four Hundred and Four Naira). Although the claimant argued that the defendant had not shown up for work as required hence the nonpayment, the court found that there was no official query before it as evidence of such misconduct. Claimant was also ordered to pay the defendant one month’s salary in lieu of notice in the sum of N628,404 (Six Hundred and Twenty-Eight Thousand, Four Hundred and Four Naira) and accrued interest on all the sum awarded at the rate of 10% per annum. Cost of the suit to the tune of N200, 000 was also awarded against the claimant and judgment ordered to be complied with within 30 days. Thus resulting in another case of initiator of the suit not only losing out but incurring further costs.

To sum things up, it is important for employers to understand that executing a string of restrictive covenants with employees will not automatically protect their interests at the end of the day if such covenants do not protect a clearly defined legitimate business interest, if consideration is not furnished in support of the restraint, and if the restraint is inimical to public interest and good reason. Most importantly, the rule has not changed; he who asserts must prove. It would appear that in a string of similar cases, some of which I have as well reviewed, the failure to discharge the burden of proof is the greatest undoing of parties, especially employers/claimants.

 

Written by Mofoluwawo Oluwapelumi Mojolaoluwa. Houseoflivingstones@gmail.com . SUIT NO: NICN/LA/169/2015

 

 

 


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