When is a non-compete clause enforceable?
In Tillman v Egon Zehnder Limited the Court of Appeal held that a post-termination non-compete restrictive covenant in the employment contract of a senior executive was unenforceable. The clause was widely drafted and would have prevented the employee from holding even a minor shareholding in a competing business.
To rely on a restrictive covenant in a contract of employment an employer needs to be able to show that it is designed to protect a legitimate business interest (e.g. goodwill or confidential information); and goes no further than is reasonably necessary to protect that interest.
Usually a covenant will be limited in terms of what activities are restricted; how long it lasts for and its geographical scope.
Egon Zehnder (‘EZ’) is the UK subsidiary of a worldwide group which offers professional services, with a focus on executive search. Ms Tillman was an employee of EZ for 13 years, initially as a consultant and ultimately as a partner.
In January 2017 Ms Tillman resigned on notice to go to work for a competitor. Her contract required her for six months from the Termination Date 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 or any Group Company which were carried on at the Termination Date or during the period of 12 months prior to that date and with which you were materially concerned during such period“.
EZ issued proceedings, alleging that by working for a competitor, Ms Tillman would be in breach of her non-compete clause.
She argued that the covenant was void as it was wider than reasonably required for the protection of legitimate business interests. In particular, she claimed that being ‘interested in’ a competing business was too wide as it could prevent her from having a minor shareholding in a competitor.
EZ argued that the covenant could be amended by removing the words ‘or interested’, thereby allowing Ms Tillman to hold shares post-termination while leaving the rest of the restrictions in place.
The Court of Appeal found that the non-compete restriction was too wide. As a result, the entire clause was void.
• It was impossible to say that a shareholder in a company was not ‘interested in’ that company. There was no need for a former-employee to have an active participation in a company to be ‘interested in’ it.
• The court was not able to remove just two words from a covenant. The individual parts of a single covenant cannot be severed, although a court may delete a covenant from a clause where stands separately from the other restrictions.
• Ms Tillman wanted to work for a competitor. She had no intention of holding a minor shareholding in a competing business. This did not, however, prevent her arguing that the drafting was too wide i.e. she could still rely on an argument that the clause was too wide to stop her doing something she had no intention of doing.
• If a non-compete clause has general wording such as ‘interested in’ or ‘concerned with’ (often used in addition to ’employed or engaged in’) then there is a risk that this will be viewed as too wide, and so unenforceable. Include a carve-out, expressly allowing the individual to hold a minority shareholding in other companies, whether competitors or not.
• Individual restrictive covenants should be separate obligations so that, in the event that one is found to be unreasonable and so void, it can be severed while preserving the enforceability of the remaining restrictions.
• A “one size fits all” policy risks covenants being unenforceable. Tailor restrictive covenants for each individual, considering what the business wishes to protect itself against in each case.
• A covenant’s reasonableness will be determined as at the date the contract was entered into, taking into account what was in the parties’ contemplation at that time. Check whether covenants need updating from time to time, particularly after an employee is promoted.
Workbox users can read more on post-termination restrictions and compare their contracts against our template restrictive covenant clause. Please get in touch with your usual Brodies contact to find out more and discuss subscription options.