I have dealt with many restrictive covenant cases in my time as an employment lawyer and, indeed, advised boards extensively on this matter. Strategically, this is an important boardroom issue, not least because restrictive covenants are a practical tool for business protection and continuation when key staff leave.
The recent landmark case of Tillman v Egon Zehnder in the Supreme Court (reported in July 2019) was therefore closely watched by employment lawyers up and down the country as it dealt with the enforceability of such contracts.
Restrictive covenants are frequently heralded by employees and recruiters as barely being worth the paper they are written on. The basis for this argument is that they unlawfully prohibit free trade, by placing restrictions on an employee for a period of time after their employment ceases that are too wide to be enforceable (often because of the length of suggested restriction or otherwise because those restrictions are too imprecise). This might mean, for example, that the employee cannot approach customers, or work in the same geographical area or business sector, for a set period of time. In order to be enforceable, a starting position for such a restriction post-termination is that it should go no further than protecting “the legitimate business interests” of the relevant employer.
Ms Tillman worked for recruitment firm Egon Zehnder. She had a number of restrictions written into her employment contract, which came into effect following the end of her employment and were stated to be effective for a period of time thereafter.
One of these clauses stated that Ms Tillman would not “directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of [Egon Zehnder] with any client of [Egon Zehnder] which were carried on at the Termination Date or during the period of 12 months prior to that date and with which [she was] materially concerned during such period.”
When Ms Tillman resigned to join a competitor, she argued that this non-compete clause was unreasonably wide and therefore unenforceable. The High Court disagreed and granted Egon Zehnder an injunction to prevent Ms Tillman from joining the competitor. Ms Tillman appealed.
The Court of Appeal allowed her appeal, ruling that the disputed clause represented an “unreasonable restraint of trade”.
The case went to the Supreme Court. Ms Tillman had argued that the clause was so restrictive that it would prevent her from even having a minor shareholding in a competing company. The Supreme Court therefore considered whether a covenant restricting a shareholding in another company was covered by the restraint of trade rule and found that in this case it was.
The Supreme Court agreed with the Court of Appeal that the non-compete clause essentially prevented Ms Tillman from having anything to do with a competitor, even a small shareholding, and was therefore unreasonably restrictive in its originally drafted form.
The Supreme Court dealt with this matter by adopting what is known as the “blue pencil” test. In other words, it considered whether the wording of the offending provision could be modified in such a way as to remove the offending element, whilst not changing the overall effect of the restraints.
In the event, the Supreme Court found that the words “interested in” could be removed from the clause and that the remaining wording would be enforceable. It ruled that the wording “concerned in” did not relate to a passive shareholding and therefore could remain in place.
In this particular case, the relevant clause under consideration was deemed to be too wide, because it prevented even a minor investment-type shareholding in a competing business. However, the removal of a particular phrase within the provision essentially rectified the situation and meant that the rest of the clause could survive and have the effect intended and thereby be enforceable.
Boards should make sure that their own restrictive covenants are reviewed periodically, particularly after a change of role of one of its key or senior employees. It is also worth noting that past cases have shown that the courts do not like having to redraft carelessly formulated employment contract clauses. They are likely to look far more favourably upon a company that has taken the time to consider what is reasonable when drafting a clause and has kept that clause and contract under review during the employee’s term of employment.