A much-anticipated Supreme Court ruling about restrictive covenants was handed down earlier this month.
Tillman v Egon Zehnder Limited, the first restrictive covenant case to reach the Supreme Court in more than a century, concerned the enforceability of a non-compete (or anti-competition) clause.
The Supreme Court’s decision is good news for employers.
What was the case about?
From 2003, Ms Tillman was employed by Egon Zehnder Limited (EZL). Her employment, in a senior role, ended on 30 January 2017.
Ms Tillman’s employment contract included restrictive covenants. One of the restrictions was that she would not “directly or indirectly engage or be concerned or interested in” any business carried on in competition with EZL. The restriction lasted for six months.
Having left EZL, Ms Tillman sought employment with a competitor. Ms Tillman told EZL that she considered the restriction to be unreasonable, because it prevented her from holding even a minority shareholding in a competitor. She argued that this meant that the clause was too wide.
EZL disagreed. It sought an injunction to prevent Ms Tillman from being employed by the competitor.
What happened in court?
The High Court found in favour of EZL and granted the injunction. By contrast, the Court of Appeal agreed with Ms Tillman that the clause was too wide. It held that the clause was unenforceable. The Supreme Court clarified the law.
The Supreme Court also decided that the non-compete clause was too wide. However, it held that the words “or interested in” could be removed without the need to modify the remainder of the clause. With that phrase removed, the Supreme Court said that the clause was enforceable.
Amending a clause in the above manner is known as ‘severance’. In reaching its decision, the Supreme Court modified the previous test for severance, and was willing to re-write the employment contract.
Are my restrictive covenants enforceable?
The Supreme Court’s ruling should provide employers with some comfort. If a restrictive covenant is too broad, all is not lost. The court may modify the restrictive covenant, declaring the modified version enforceable.
Despite this ruling, employers should ensure that their restrictive covenants go no further than necessary to protect their legitimate interests. This avoids there being any doubt about enforceability.
Employers should also consider the structure of their restrictive covenants. A well-structured restriction is more likely to be found to be enforceable by the court, as it is more likely to pass the three-stage severance test.
The full judgment in Tillman v Egon Zehnder Limited can be found here.