Is a non compete restriction worth the piece of paper it is written on?
This question is often raised by both employers and employees when looking at post termination restrictions at the beginning of the relationship.
It is well established that provisions that seek to restrict an employee’s activities following the termination of their employment are in restraint of trade and therefore unenforceable UNLESS they go no further than is reasonably necessary to protect an employer’s legitimate business interest. A legitimate business interest will include the need of an employer to protect confidential information, client/customer connections and the stability of its workforce.
In short, restrictive covenants can be a useful tool for an employer to protect its business from an ex employee seeking to have an unfair competitive advantage by, for example, misusing its confidential information. However, it is imperative to ensure that careful consideration is given to the scope and duration of post termination restrictions and that they are carefully drafted so as to afford an employer with the protection it needs.
The recent Court of Appeal case of M Tillman v Egon Zehnder Limited (July 2017) has highlighted the need to ensure that restrictions are tightly drafted in terms of scope. Further and more importantly the case has made it very clear that the Courts’ ability to exercise their right to “blue pencil” (delete/sever) wording included in a provision (which renders the covenant too wide but without which the restriction would be enforceable) is very limited.
By way of background, Ms Tillman joined Egon Zehnder as a consultant under a written contract of employment which contained various post termination restrictions, including a non competition clause. After many years with her employer, Ms Tillman decided to leave to take another job with a competing business. Egon Zehnder did not take too kindly to this and sought an injunction to stop her from doing so.
Ms Tillman argued at the hearing that the non compete restriction was too widely drafted because not only did it prevent her from being employed or engaged in a competing business it also stopped her from having any interest or being concerned in a competing business. Ms Tillman argued that this effectively meant having a shareholding in a competing business (irrespective of whether she had any involvement in the company) was prohibited by this clause and, as such, was an unreasonable restraint of trade going further than was reasonably necessary. Egon Zehnder agreed that it would be too wide in those circumstances. However, in support of its application for an injunction it argued that there was sufficient ambiguity in the meaning of “directly or indirectly interested in any business” to allow the High Court to determine what was really meant by those words. It was argued that given she was allowed to have a shareholding during her employment it made no sense for her to be prohibited from doing so after her employment ended and, what was in fact prevented by the drafting, was having a shareholding in circumstances when she also actively participated in the company. The High Court agreed with Egon Zehnder and granted the injunction on the basis that the restriction was not too wide, accepting the interpretation put forward on its behalf.
The decision was appealed and the question for the Court of Appeal was whether the High Court had been wrong to hold that the restriction did not prevent her from simply having a shareholding?
It was argued for Ms Tillman, amongst other points, that the wording of the restriction was not in fact ambiguous (the High Court had been wrong) and the natural meaning of “interested in any business” included a shareholding. In addition to maintaining that the High Court Judge had been correct it was submitted on behalf of Egon Zehnder that, in any event, the words in question should be construed as meaning “actively participate in”. If that was not the case, it was also argued on its behalf that the words “or interested” should be severed from the clause, leaving a restriction that would then be enforceable.
The Court of Appeal did not accept that the wording of the provision had been ambiguous, the words “concerned or interested” had to be interpreted in accordance with conventional usage and this included having a shareholding.
Turning to whether the offending words (which rendered the restriction too wide) could be severed to save the restriction, the Court of Appeal made it very clear that this is not possible, because parts of a single covenant (in this case the non compete clause) cannot be severed. The Court’s position was the blue pencil test only applies to separate covenants as set out in the 1920 case of Attwood.
It had been thought previously that Attwood was no longer generally applicable and the rules relating to severance were less stringent. This was following the Court of Appeal’s decision in Beckett Investment Management Group Ltd v Hall (2007) when it was effectively determined that severance could be possible if i) the words could be deleted without having to change (i.e. amend) the remaining provision ii) there was consideration and iii) the removal of the unenforceable provision would not change the “character of the contract” so that it becomes “not the sort of contract that the parties entered into”.
However the Court of appeal in Egon Zehnder did not agree that Attwood was no longer applicable and determined that Beckett was in fact consistent with it because the requirement that severance is only applicable to separate and not single covenants is reflected by the third test set out in Beckett i.e. that the deletion of the words would render the contract very different to that which the parties entered into at the beginning. It was made very clear that it was “no business of the Court to create a valid covenant in order to replace an impermissibly wide covenant which an employer has sought to impose”.
Accordingly the Court of Appeal found that the injunction should not have been granted as the covenant was too widely drafted and therefore unenforceable against Ms Tillman.
This case clearly demonstrates that the Courts have, in fact, a very limited right to fix a restriction that is too wide by deleting a few words, rather it is incumbent on the employer to ensure that, at the time the restrictions are entered into, they are appropriate to the role and sufficiently narrow in scope and duration. It is therefore vital that restrictions are reviewed on a regular basis so as to ensure that they are and remain fit for purpose so that they can be enforced when it counts most.
This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.