Employment Update: Restrictive Covenants | Part 2

In our article published 6 February, available here, we discussed restrictive covenants and the case of Tillman v Egon Zehnder Limited (‘EZL’).

On 3 July 2019, the Supreme Court handed down its judgment (available in full here) in what is the first employment competition case to have reached the highest court in the land in over 100 years. EZL were successful in their appeal.

Facts

Ms Tillman, a senior recruitment consultant, was employed by EZL pursuant to an employment agreement dated 10 December 2003, until 30 January 2017. 

Shortly after she informed EZL that she intended to start work with a competitor and would comply with all her restrictive covenants, bar that in clause 13.2.3, a non-competition clause. She conceded that this clause prevented her from entering the proposed new employment, but alleged that it was an unreasonable restraint of trade and therefore void.

EZL disagreed and applied to the court for an injunction to prevent Ms Tillman from starting her new job.

Relevant Clauses

Clause 13 of Ms Tillman’s contract contained five restraints on her activities following the end of her employment, all limited to a six-month period.

Clause 13.2.3 was a non-competition clause, whereby she agreed not to “directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of the Company…which were carried on at the Termination Date or during the period of 12 months prior to that date and with which [she was] materially concerned during such period.”

Clause 13.4 allowed for clauses to be severed to make them enforceable. Severance is a legal tool and often a clause in a contract that seeks to ensure an agreement will continue to be enforceable even if one of its terms is found to be illegal, invalid or unenforceable.

Claim Timeline

10 April 2017 – EZL applied for an injunction to stop Ms Tillman from taking up her new employment.

23 May 2017 – the High Court granted EZL its injunction agreeing that the words “interested in” did not preclude a minor shareholding in a competing company.

21 July 2017 – the Court of Appeal allowed Ms Tillman’s appeal, set aside the injunction and dismissed EZL’s claim. It held the words “interested in” prohibited even a minor shareholding in a competing company and rejected EZL’s position that the phrase could be severed to preserve the covenant.

Judgment of the Supreme Court – 3 July 2019

The Supreme Court held that:

  1. Any restraint on a shareholding is part of a restraint on an employee’s ability to work, and was covered by the restraint of trade doctrine.
  2. Clause 13.2.3 did, on construction, prohibit even a minor shareholding and was, as originally drafted, unreasonably restrictive.
  3. The words ‘interested in’ could be severed from clause 13.2.3 to make the remainder of the covenant effective.

The Court overruled the case of Attwood and issued modified guidance on severance provided in Beckett Investment Management Group Ltd v Hall, namely:

  1. The unenforceable provision must be capable of being removed without the necessity of adding to or modifying the wording of what remains(i.e. the ‘blue pencil’ test);
  2. The remaining terms need to be supported by adequate consideration (not usually in dispute post-termination); and,
  3. The removal of the provision should not generate any major change in the overall effect of all the post-employment restraints in the contract, which is for the employer to demonstrate.

The Supreme Court allowed EZL’s appeal and restored the injunction, subject only to the removal of the words “or interested”. The decision was somewhat academic, as the restriction period of six months had expired. There may be a ‘sting in the tail’ for EZL – they may be left to pay a hefty legal bill.

This case is a victory for employers in that, the courts will sometimes intervene allowing employers to uphold very broadly drafted restrictive covenants. Employers should still review their contracts as restricting employees from competing when they leave is both costly and difficult to enforce, legally and in practice.

We act for employers and employees, so if you have any questions about restrictive covenants, please get in touch with us today on 0203 146 3549 / e:mail: [email protected]

Disclaimer

All our articles are intended for informational purposes only and do not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information provided.

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