Drafting enforceable covenants, which protect an employer’s interests to the fullest extent possible, is a balancing act. Where part of a restrictive covenant is unreasonable, and that part cannot be severed, its inclusion will render the covenant, or even the entire contract, unenforceable.
The Court of Appeal’s recent decision in Tillman v Egon Zehnder Ltd [2017] EWCA Civ 1054 will not be welcomed by employers and demands the attention of in-house and commercial lawyers alike.
Summary
In what is a clear warning to both employers and lawyers, the judgment has clarified the extent to which “theoretically” unreasonable restrictive covenants can be severed from what would otherwise be reasonable and enforceable post-exit restrictions in employment contracts.
Employers who adopt “standard” restrictive covenants will not welcome the decision, which is likely to have far-reaching consequences for companies that fail to revise loosely drafted restrictive covenants.
The case confirms that a post-termination non-compete clause that could theoretically restrain a former employee from becoming a minority shareholder in a competing business may be unenforceable in its entirety. Dependent on the drafting of the clause, this judgment means that a former employee could be immediately free to take up employment with a competitor, if the offending phrase cannot be readily severed from other non-compete obligations in a contract.
Facts
Mrs Tillman commenced work with Egon Zehnder Ltd (“EZ Ltd”) (the UK subsidiary of a worldwide group ("the EZ group") providing global senior executive headhunting and advisory services) as a consultant on 5 January 2004.
Prior to joining EZ Ltd, Mrs Tillman had enjoyed a prestigious career in financial services. From the outset of her appointment at EZ Ltd, there was an expectation that she would rise through the ranks of EZ Ltd’s financial services sector provision quickly. Her starting salary reflected this and during the course of Mrs Tillman’s 13 years’ at EZ Ltd, she was promoted at the earliest opportunities, rising to a globally senior level.
Her original letter of appointment in 2003 set out the terms of her contract. The relevant clauses in Mrs Tillman’s contract are all too familiar and were as follows:
"13.2 You shall not without the prior written consent of the Company directly or indirectly, either alone or jointly with or on behalf of any third party and whether as principal, manager, employee, contractor, consultant, agent or otherwise howsoever at any time within the period of six months from the Termination Date:
…
13.2.3 directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of the Company or any Group Company which were carried on at the Termination Date or during such period." [Emphasis added]
Mrs Tillman did not sign any further contract with EZ Ltd.
On 23 January 2017, Mrs Tillman resigned. She hoped to start working for a firm carrying on a similar business to EZ Ltd in New York on 1 May 2017.
EZ Ltd issued proceedings and an application seeking injunctive relief on 10 April 2017, on the basis that, if Mrs Tillman commenced work for the competing New York firm, she would be in breach of a six-month non-compete clause in her contract.
High Court
Restrictive covenants are void as a restraint of trade if they go further than is reasonably necessary to protect the legitimate business interests of an employer. The question was whether EZ Ltd could rely on the non-compete clause to prevent Mrs Tillman from commencing work with her new firm during the six months after termination of her contract.
Amongst various other arguments, Mrs Tillman suggested that the non-compete clause was void in its entirety because the inclusion of the phrase “interested in” could, hypothetically, restrain her from buying a single share in a competing company. Whilst Mrs Tillman accepted that she did not intend to buy any such shares, she said that was irrelevant and the non-compete clause was void.
EZ Ltd argued that the clause would have expressly referred to shares if EZ Ltd had intended the clause to have that effect. It pointed to express restrictions within the contract about the purchase of shareholdings during employment in support of its argument.
The High Court favoured EZ Ltd’s arguments and allowed the injunction, preventing Mrs Tillman from commencing competing employment.
Court of Appeal
Mrs Tillman appealed. The sole ground of appeal was whether the High Court was wrong to hold that the non-compete clause “did not prohibit a shareholding in a competitor after termination”.
The Court of Appeal accepted that the clause could restrain theoretical shareholdings and, on that basis, was unenforceable. Given that the real argument was whether Mrs Tillman could work for a competitor within six months of termination of her employment with EZ Ltd, the Court of Appeal went on to assess whether the offending phrase could be severed from the other non-compete obligations within the clause in her contract.
EZ Ltd argued that the phase “or interested” could be severed so that the remainder of the non-compete clause would continue to be enforceable.
The Court of Appeal rejected this argument. It held that even if the phrase “or interested” was removed, the wording “indirectly… be concerned… in any [competing company]” might also prohibit a shareholding in a competing company.
The Court of Appeal then went further, holding that severance of any unenforceable covenant could “only be applied to separate covenants and not to parts of a single covenant”. In the present case the non-compete clause included a combination of different covenants within the same clause. As such EZ Ltd could not sever the offending phrase in any event.
On that basis, the fact that Mrs Tillman had no intention of actually obtaining shares in a competing company was held to be irrelevant. The entire clause was held to be void and Mrs Tillman was free to take up competing employment without delay.
Comment
The judgment itself acknowledges that it is likely to attract criticism based on the specific facts of the case, but is unapologetic to employers on the basis that – if the covenant had been drafted more carefully – Mrs Tillman could have been restrained from joining a competitor. Employers should be looking at this now. Action points include:
- drafting all covenants in such a way as to ensure that they are capable of being severed
- keeping covenants (and contracts) under regular review at each stage of an employee’s career
- consulting with external lawyers about the associated risks of senior hires and exits
Irwin Mitchell’s Commercial Litigation department has significant experience of advising corporates on managing the risks associated with these issues. If you need advice relating to any non-compete matter, or restrictive covenant, please contact Ailsa Anderson (+44 (0)161 838 3185; ailsa.anderson@irwinmitchell.com).
Published: 13 October 2017
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