Post Termination Restrictions
The Supreme Court has upheld a non-compete restriction in the first employment competition case to have reached the highest court in over a century.
In a historic decision, five Supreme Court justices unanimously concluded that an injunction should be restored, setting aside an order by the Court of Appeal.
The case is surprisingly simple in its facts.
In 2003, the appellant employer, Egon Zehnder Ltd (“Egon Zehnder”), an executive recruitment company, hired the respondent employee, Ms Tillman.
Her contract provided for five restraints upon her activities following the end of her employment, all limited to a period of six months from the termination date. The non-competition covenant was in issue in this appeal.
By this covenant, Ms Tillman agreed that she would not “directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of [Egon Zehnder]” within a twelve-month period prior to the termination date “and with which [she was] materially concerned during such period.”
In January 2017 Ms Tillman’s employment with Egon Zehnder came to an end. Shortly thereafter, she informed it that she intended to start work as an employee of a competitor firm. She made clear that she intended to comply with all her covenants in the agreement apart from the non-competition covenant clause. She conceded that it would prevent her proposed employment within the restricted six-month period but alleged that it was in unreasonable restraint of trade and thus void.
In April 2017 Egon Zehnder issued proceedings. It applied for an interim injunction to restrain Ms Tillman’s entry into the proposed employment which was granted. The Court of Appeal allowed Ms Tillman’s appeal and set aside the injunction.
Appeal to the Supreme Court
The Supreme Court has unanimously allowed the appeal by Egon Zehnder.
The injunction originally granted was formally restored although the contractual period of restraint has since expired.
Scope of application of the restraint of trade doctrine
The concept of restraint of trade is one of the earliest products of the common law, and reflects the central importance ascribed to the freedom to work.
In this case, it was agreed that the restrictive covenant did provide for a restraint of trade in substance as well as in form. The restraint on shareholding that was part of the restriction was part of the restraint on Ms Tillman’s ability to work after her employment with Egon Zehnder, so the doctrine applied.
Proper construction of the words “interested in”
A particular point of contention was the phrase ‘interested in’, which appeared in the non-compete clause.
Throughout the various hearings, the enforceability of the non-competition covenant turned on whether the words “interested in” unreasonably prevented even a minor shareholding by Ms Tillman in a competing business and, if so, whether the offending part of the covenant could be severed.
The first Judge agreed with the company that “interested in” did not preclude a minor shareholding. The Court of Appeal disagreed with the effect of the words “interested in” and considered that they did prohibit even a minor shareholding but refused to sever those words from the clause. The covenant was thus held to be void as an unreasonable restraint of trade.
The Supreme Court has judged that the natural construction of the word “interested” covers a shareholding.
This issue perhaps turned on the understanding of the premise that the parties to a contract will have intended it to be valid as they are the ones entering into it.
In the present case, the starting point is that the phrase “engaged or concerned or interested”, has long been included in standard precedents for the drafting of non-competition covenants and treated as including a shareholding prohibition. Further, Egon Zehnder was unable to advance a realistic alternative construction of the word “interested”.
Therefore, the natural meaning of the word, which includes a shareholding (large or small), applies. Subject to severance, this means the clause is thus void as an unreasonable restraint of trade.
Correct approach to severance in restraint of trade cases
On the specific facts of the case, the words “or interested” were considered to be capable of being removed from the covenant without the need to add to or modify the wording of the rest of the clause – the so called “blue pencil” test. Further, it was held that removal of the prohibition against her being “interested” would not generate any major change in the overall effect of the restraints.
Consequently, the injunction could be restored by removing these words.
This should be treated as a major victory for employers.
It should remind employers that restrictive covenants can be enforceable and that if you have a legitimate interest to protect, then they should be used. It should remind employees, that they should not ignore attempts to enforce the covenant and cannot simply assume a non-compete clause is not worth the paper it’s written on.
However, it must be remembered that cases regarding covenants are very fact specific and are therefore often of limited value for predicting the outcome of future cases and/or the direction of any legislative development of the law.
Therefore, employers must still ensure they consider the specific business interest they are trying to protect and consider carefully what restrictions are absolutely necessary for each specific employee, both at the time they start employment and throughout their employment.
Further, the Supreme Court has confirmed nothing except that courts will sometimes be prepared to come to the rescue of employers where they have drafted very broad restrictive covenants.
In addition, the doctrine of restraint of trade remains and has not been watered down by this decision. The fundamental principle remains that restricting employees from competing when they leave is incredibly difficult to do legally and in practice; and extremely expensive and disruptive for all parties to see through. For example, although the ex-employer has their injunction the contractual period of the covenants has now long expired and therefore it is perhaps an empty victory.
The judgment can be found here. You can also watch a video recording of the hearing itself.
Tillman (Respondent) v Egon Zehnder Ltd (Appellant)