14 August 2019

Supreme Court supports employers’ post-termination restrictions

Employers who use restrictive covenants are used to being warned that, if the restriction is too wide, it will not be enforceable.

But the case of Tillman v Egon Zehnder Ltd [2019] UKSC 32 gives some comfort to employers that drafting errors may not be the end of the road, as the Court may be willing to delete unenforceable wording if it leaves an enforceable restriction without any re-writing.

However, relying on the Court to fix the restriction will always be a high risk strategy, and potentially a very expensive one. Employers should always think critically about what they actually need to restrict, and it is good practice to expressly exclude minor shareholdings in competitive businesses.

Employer’s interests v employee’s freedoms

Many employers include restrictive covenants in their employment contracts, to prevent senior employees joining a competitor for a period after leaving. The Courts have to balance the interests of the employer with the restraint of trade on the employee, so will only enforce restrictions that are as narrow as possible to protect those legitimate interests.

Courts will not re-write restrictions to make them narrower. If they are too wide, they will not be enforced. However, this case shows more willingness to delete wording which is too wide, provided that what is left is an enforceable restriction which does not require any re-writing.

The case is particularly important because it is the first case on restrictions to reach the Supreme Court for a century, so it will have a big impact on how the Courts approach these issues.

Non-compete clause cast the net too wide

Mary Tillman was employed by a global executive search business. Her contract of employment contained a non-compete clause which prevented her from being engaged, concerned or “interested in” a competitor company for six months after termination.

Ms Tillman left Egon Zehnder in January 2017, and later notified the company of her intention to join a competitor. The company obtained an injunction to prevent her from doing so. On appeal, the injunction was overturned because the Court said that “interested in” was too wide, as it potentially prevented Ms Tillman owning even a single share in a competitor business.

The Supreme Court agreed that the restriction against being “interested in” a competitor was too wide, but said it was possible to strike through that wording and leave an enforceable restriction not to be engaged or concerned in a competitor. They said that the clause did not need to be re-written to make sense if these words were deleted, and that the deletion did not materially change the meaning of the clause.

However, there was a sting in the tail for Egon Zehnder. The Court called the unreasonable parts of the restrictions “legal litter”, which employers unfairly expected others to clean up. It was clear that the Court did not want to encourage other companies to draft widely in the hope that Courts would pick the bits that could be enforced. There was a strong hint that the company may find itself paying significant costs of the action, despite the fact that they eventually won and the usual rule in these cases is that the loser pays. As the case ran for two years through three Courts, this could prove an expensive lesson in careful drafting.

If you need help drafting your restrictive covenants, or if you would like your restrictive covenants to be reviewed in light of this decision, please contact Rachel Roberts in our employment team.

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Rachel Roberts, Partner
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