The Supreme Court's high-profile decision on non-compete clauses helps employers but that's only half the story…
The Supreme Court has today decided that a non-compete clause which would have had a far reaching and restrictive impact on a former employee should be considered enforceable, with minor strike outs which the courts themselves should have made.
This case concerned attempts by Egon Zehnder (a multinational recruitment consultancy - EZ) to restrict Ms Tillman, their highly successful former employee, from competing with it through her proposed employment by a competitor following her resignation.
Ms Tillman successfully argued in the Court of Appeal that the restrictive covenant seeking to prevent her from competing was not enforceable. In particular, the fact that it sought to prevent her from being "interested in" any competing business was too wide. The fact that it would in theory prevent her from holding a nominal shareholding in a competitor with shares traded on listed exchanges meant that it went further than was reasonable to protect EZ.
In what became the key issue at the Supreme Court, she also argued that the overly restrictive part of the covenant could not be "severed" or struck out by the court to allow the rest to be enforced.
The Supreme Court decision: the highlights
EZ appealed on a number of novel and interesting points. However, the really important parts of the Supreme Court's decision were:
- However, that phrase can be and should have been struck out by the use of the court's "blue pencil". Essentially that is a tool by which the court can remove the part of any covenant which makes it too broad to be enforceable as long as (per the Supreme Court's "refined" test developed in this judgment): (a) the words in question ("interested in" in this case) can be removed without the need to amend the rest of the clause; and (b) the removal would not generate any major change in the overall effect of the restraints.
- The phrase "interested in" includes a minor shareholding in a listed competitor. Any attempt to prevent an employee from holding such a minor shareholding amounts to a restraint on trade – and would have been unenforceable here (and in most cases).
- Following the strike out, the restriction was reasonable and therefore enforceable, preventing Ms Tillman from working for a competitor for the period in question – 6 months in this case.
What does this mean for employers?
The starting point is that the Supreme Court's clear guidance on when a court should be prepared to amend restrictions so that they are enforceable is helpful for employers.
However, it's important to remember that the fundamental principle when it comes to these covenants remains that they will be void unless they go no further than is necessary to protect the employer's highly confidential information, business connections and/or workplace stability. No amount of lead in the court's blue pencil will be enough to save a restriction that's obviously too broad – for example where it seeks to prevent an ex-employee from any involvement in any capacity in the employer's industry for an unreasonably long period.
This note of caution is reflected in the judgment itself: "The courts must continue to adopt a cautious approach to the severance of post-employment restraints". Interestingly, the Supreme Court also warned that employers should not necessarily expect to recover their costs (or all of them) where they win in these kinds of cases, but only because the court has removed parts of covenants which might have been more tailored in the first place. As they put it in relation to the issue of costs: "there may be a sting in the tail".
So, employers should consider carefully their reliance on restrictions, the extent to which they are tailored and, in particular, whether there is really a need to restrict anyone from having a minority shareholding in a business after their employment comes to an end.
Now is a good time to re-visit restrictive covenants before incurring the expense and upheaval of asking the courts to use their own blue pencil. That's particularly important as we now have the certainty of this decision and the benefit of the guidance within it. What's more, we are now in a period where businesses are increasing their efforts to recession-proof themselves by tying in key appointments.