Supreme Court severs part of non-compete clause to leave an enforceable restriction
The Supreme Court has ruled in Egon Zehnder v Tillman that it could delete words from a broad and unenforceable non-compete covenant so as to leave an enforceable restriction. It gave important guidance on the circumstances in which it is possible to sever parts of a post-termination restriction and disagreed with leading case law authority on this point. It ruled it is possible to sever a part of a restriction if:
- the enforceable part can be removed without needing to add to or modify the rest of the clause; and
- removing the offending words does not generate a major change in the overall effect of all the post-termination restrictions in the contract.
When are post-termination restrictions enforceable?
Restrictions on what an employee can do after their employment terminates are enforceable if they are:
- designed to protect a legitimate business interest of the employer, such as their relationship with clients or their confidential information; and
- reasonable. This means that they must give no more protection than is necessary to protect the employer’s business interests.
What were Mrs Tillman’s restrictions?
Mrs Tillman was employed by head hunters Egon Zehnder (EZ) and looked after EZ’s clients in the financial services sector. She had a distinguished career in investment banking before joining EZ to focus on high level executive recruitment.
Having started in 2004 in a junior role as a consultant, she rose quickly through the ranks and achieved several promotions before becoming co-Global Head of Financial Services Practice Group in 2012.
Mrs Tillman’s employment contract prohibited her from working for a competitor for six months after her employment terminated. She agreed she would not “directly or indirectly engage or be concerned or interested in” any competing business with which she had been materially concerned in the 12 months before her employment terminated.
Mrs Tillman’s contract also stopped her from having more than a 5% interest in a competing company, but this only applied during her employment and not after termination.
What were Mrs Tillman’s next steps?
On 23 January 2017, Mrs Tillman handed in her notice. On 30 January 2017, EZ terminated her employment with immediate effect and paid her in lieu of the remainder of her three month notice period. However, she tried to start work with a competitor two months before the non-compete restriction ended. EZ sought to stop her and applied to the High Court for an injunction.
What was Mrs Tillman’s reaction to the restriction?
Mrs Tillman argued that the restriction was unreasonably wide and therefore unenforceable. She argued that the prohibition on her being "interested in” a competing business prevented her from having even a minority shareholding for investment purposes. It meant that she could not have one single share in a publicly listed company if it was a competitor of EZ. This was not necessary to protect EZ’s business and so was unenforceable.
What was the ruling of the High Court on Mrs Tillman’s case?
The High Court granted an injunction preventing Mrs Tillman from starting her new job until the six month restriction ended. It ruled that the restriction was not intended to and did not cover minority shareholdings – otherwise the restriction after her employment ended would have been wider than the restriction during employment.
How did the Court of Appeal find the injunction?
The Court of Appeal set aside the injunction. It ruled that the restriction on being “interested in” any competing business did include having an interest from a minority shareholding. The non-compete clause was therefore unreasonably wide and unenforceable. The fact that Mrs Tillman did not intend to become a shareholder and intended to become an employee of the competitor company was irrelevant. It was still unenforceable.
Where a court finds that parts of a contract are unenforceable but other parts are enforceable, it has a discretion to delete or “sever” the unenforceable parts to leave an enforceable provision. The Court of Appeal refused to delete the words “or interested in” to leave a valid restriction.
EZ applied to the Supreme Court.
What was the final ruling of the Supreme Court in this case?
The Supreme Court agreed with the Court of Appeal that the restriction on being “interested in” a competing business did restrict Mrs Tilman’s ability to have a shareholding. The restriction was therefore unreasonably wide.
However, it ruled that the words “interested in” could be severed to leave an enforceable restriction. It therefore restored the High Court decision granting the injunction, although the period of the restraint had already expired.
The Supreme Court ruled that severance is permissible if
- the unenforceable provision is capable of being removed without needing to add to or modify the wording of what remains; and
- removing the offending words does not generate a major change in the overall effect of all the post-employment restrictions in the contract.
It decided that the words “interested in” could be severed. They could be removed without needing to add to or modify the rest of the clause and their removal would not generate any major change in the overall effect of the restraints.
What are the implications on Employers and Employees?
The Supreme Court disagreed with previous case law indicating severance is only possible if a clause contains a number of separate and distinct restrictions or promises. The Court of Appeal relied on that case law when it decided that severance was not possible in this case.
The decision will make it more difficult for employees to argue that a restriction is too wide and therefore unenforceable. Employers will welcome the decision as going forwards, the courts are likely to be more willing to sever unenforceable parts of a restriction.
Nevertheless, not only should employers consider including a 5% shareholding carve out in their post-termination restrictions (so that employees may have minor interests in competing companies), it is also prudent to have restrictions as separate distinct provisions so that it is not necessary to rely on severance arguments.
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