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Important Supreme Court ruling on Restrictive Covenants

  • United Kingdom
  • Employment law

03-07-2019

Contractual terms which aim to prevent an employee from joining a competitor immediately after leaving employment are, in principle, unenforceable unless they are necessary to protect a legitimate interest of the former employer and are reasonable with reference to the interests of the parties and of the public.

The Supreme Court (SC) has overturned a decision of the Court of Appeal (CA) today, finding that a contractual restriction purporting to limit a former employee from “engaging, being concerned or interested in” any competing business after leaving was an unreasonable restraint of trade because the restriction was too widely drafted. The words “interested in” would have prohibited the former employee from having any shareholding in a competing business, large or small, and went beyond the scope of reasonable protection. Importantly, however, the SC was prepared to remove the words “interested in” from the language of the restriction to leave behind an enforceable non-compete clause which the former employer could rely on.

The case removes some uncertainty for employers about the enforceability of non-compete clauses which contain standard language such as “interested or concerned in” without an express carve-out for minority shareholdings. But it is important to remember that whether a court is prepared to delete words from an otherwise unenforceable covenant to give the former employer the benefit of non-compete protection will depend on the individual case. The Supreme Court provided further guidance about the test to be applied in the these circumstances.

Background

Ms Tillman worked in a senior role in recruitment. Her written contract of employment restricted her shareholdings in any competing business to 5% during employment and also stated that, within 6 months of leaving the company, she could not “directly or indirectly engage or be concerned or interested in any business carried on in competition with” the businesses of the Company”.

When Ms Tillman resigned to take up employment with a competitor, the Company sought an injunction to enforce the restrictive covenant and to prevent her from doing so for 6 months in accordance with her contract terms. However, Ms Tillman challenged the enforceability of the contractual restriction, claiming that the scope was far too wide, since it prohibited her from having any “interest” in a competitor, post-employment. She alleged this would even prevent her from becoming a shareholder in a competing business after she left employment, a more draconian step than applied during her employment when her contract allowed her to legitimately hold some shares. The High Court rejected Ms Tillman’s claim, finding that the terms of the contract were ambiguous and that a reasonable interpretation would restrict her only from active participation in a business, as opposed to a passive interest in a mere business entity, such as through shares. It accordingly granted the injunction.

Over-turning that decision, the CA found no genuine ambiguity in the contract wording, merely potential for a plausible alternative interpretation or argument over comparative anomaly, neither of which justified enforcement proceedings. It concluded that the natural meaning of “concerned or interested in” is clear and also well-established in past cases and does not require qualification, such as whether it is passive or active. On that basis, the restrictive covenant here could extend to any interest, such as holding shares, and was accordingly much wider than protection of the employer’s business interest warranted and was therefore, unenforceable.

Today’s decision of the SC

While finding that the contractual terms in this case did operate as a restraint of trade (being void, if not reasonable) and that, on proper interpretation, the words “interested in” did prohibit the holding of any shares in any competing business, the SC considered it reasonable and appropriate in this case to remove the words ”interested in”, so preserving the remainder of the contractual restraints. This was a step which it was able to take without offending established principles concerning a court’s ability to effect such a “strike out”, since mere removal of those words required no modification of the contract and had no overall effect on the restraints as they were then left. In doing so, the SC overturned previous case law which had suggested that it is not possible to “blue pencil” (i.e. delete) words within a “single” covenant as opposed to outside it (e.g. in a definition). It also clarified that the employer must establish that the overall effect of the deletion is that it “would not generate any major change in the overall effect of all the post-employment restraints in the contract”. The focus, said the SC, is on the legal effect of the restraints, which will remain constant, not on their perhaps changing significance for the parties and in particular the employee.

Although not relevant to the court’s finding here, the SC confirmed that previous case law supports the view that the words “concerned in” denote working for a business or having some other active involvement in it, not to a mere passive holding of minority shares. On that basis those words did not need to be similarly removed from the contract.

Comment

Striking an appropriate balance between protecting business interests and not unduly restricting employment can be difficult.

As a plethora of case law demonstrates, employers need to ensure in every case that restrictive covenants are clear in meaning and intent and only go so far as is necessary to protect legitimate business interests, or risk having them struck down by the courts. While the SC’s judgment may mean that many employers do not need to amend their standard non-compete language in employment contracts, regular review and refresh is recommended. Inviting the court to delete language which is too wide and renders a post-termination restriction unenforceable restriction may not succeed on every occasion.

Tillman v Egon Zehnder Ltd