New approach to post-termination restrictions meant non-compete clause enforceable

Tillman v Egon Zehnder Ltd [2019] UKSC 32

Why care?

The Supreme Court has unanimously allowed an employer's appeal to uphold a non-compete covenant, despite its wording being so wide as to prevent a former employee from holding even one share in a competing business. The Supreme Court held that it was possible to remove the words "interested in" from the rest of the clause, making what remained enforceable.

A post-termination restriction is void as a restraint of trade unless it can be shown to go no further than is reasonably necessary to protect the employer's legitimate business interests.

The case

Mary Tillman was employed in the UK by a global professional services and executive recruitment business for 13 years. Her contract of employment included a non-compete clause which prevented her from being engaged, concerned or “interested in” a competitor of the company for six months after the termination of her employment. She was also prevented during her employment from holding any outside business interests except up to 5% of shares in another company for investment purposes.

Her employment ended in January 2017, and several months later she informed her former employer that she wanted to work for a competitor before the end of the restricted period.

The Company obtained an interim injunction from the High Court to prevent her joining their competitor, but this was overturned by the Court of Appeal which held that “interested in” in the covenant prevented her from holding even one share, which was wider than necessary to protect her former employer's legitimate interests.

The Court of Appeal held that it could not "blue pencil" (or 'sever') the clause to remove the unenforceable words, leaving what remained (which would prevent Ms Tillman from working for a competitor. This was what she actually wanted to do.) Atwood v Lamont (1920) held that this was only possible where the covenant was effectively a combination of several different covenants.

Egon Zehnder Ltd appealed to the Supreme Court, which heard the case in January 2019 – about eighteen months after the disputed covenant had expired.

The restriction on holding shares was in an employment contract, and so the Supreme Court was satisfied that the clause did provide for a restraint of trade and Ms Tillman's ability to work after her employment had ended. The Supreme Court agreed with the Court of Appeal that "interested in" included holding a shareholding, and even one share would therefore be considered a breach. This was an unreasonable restraint of trade, and therefore void.

However, the Supreme Court disagreed with the Court of Appeal on the correct approach to be taken to severance. Overturning Atwood, it preferred the approach in the more recent case of Beckett Investment Management Group Ltd v Hall (2007). Under this, it is possible to remove part of a restriction as long as it makes sense without adding any additional words, and there is no major change to the meaning of the clause.

Once "interested in" was removed, the rest of the clause could stand, and Ms Tillman could be prevented from working for a competitor until the time limit expired.

What to take away

Although the restriction has since expired, the case is important not only to resolve whether the lack of a carve out for minor shareholdings made the covenant too wide to stand, but also the use of "blue-pencilling", or when a court can remove unenforceable wording from a contract to leave the remainder of the restrictions intact.

For employers, this is good news – there is a greater chance that post-termination restrictions will be valid if the courts have greater power to sever offending words and phrases. Having said that, there are a couple of issues to remember:

• It is still important to make sure that your restrictions go no further than is necessary to protect the employer's interests. It is dangerous drafting to rely on a court deciding it can use its powers to remove the invalid part, and much better (not to say cheaper) to have a clearly enforceable restriction from the start, and minimise the risk of litigation.
• Use the words "interested in" with caution, since this will include any shareholding, which may not be reasonable. If you do have a reason not to allow a certain shareholding, the employer will need to be able to show why that is necessary and goes no further than is reasonable.
• It is now good practice to include an exception in the restrictions to allow an employee to hold a small shareholding for investment purposes, and to check this against any clause allowing or preventing outside interests during employment.
• In this case, the court allowed the employer to rely on a contract which had been entered into when she started employment as a relatively junior employee (although one expected to receive early promotions). Generally, promotions are a good time to check the restrictions are still valid and cover the new employee's role. If necessary, employees should be asked to enter into a new contract.

The Supreme Court has strongly hinted in its judgment that there may be costs implications for the employer in this case, despite their final success. These cases are very expensive to pursue.