Supreme Court edits non-compete clause to make it effective
Even though non-compete clauses often pop up in contracts of employment and directors’ service agreements, there has been little case law on them. An important new decision of the Supreme Court this July in Tillman v Egon Zehnder Ltd , has been welcomed by employers looking to enforce non-compete clauses.
In 2004, Ms. Tillman joined an international specialist executive recruitment company, Egon Zehnder. By 2012, she had risen to the position of joint global head of Egon Zehnder’s financial services practice area. A few years later, she secured a position with a competitor. When her employer Egon Zehnder found out it applied to the High Court for an injunction to stop her taking up her new role. The legal basis for doing this? Her contract included a non-compete clause that Egon Zehnder argued stopped her from working for a competitor.
Employers often try to protect their businesses by limiting what ex-employees can do through non-compete clauses which are a type of restrictive covenant. These are also aimed at preventing employees from poaching staff or dealing with their former employer’s customers. As they restrain trade, they can only be enforced if it is necessary to protect the employer’s legitimate business interests. Courts will not enforce a restrictive covenant that is too wide; for instance because it applies for 12 months, when six months would have been long enough to protect the business or the restriction covers the whole of the UK when just the West Midlands would have been sufficient.
In this case, the contractual clause in question said Ms. Tillman could not “engage or be concerned or interested” in a competitor. After two appeals, the Supreme Court heard the case and agreed with Egon Zehnder that it was reasonable for them to prevent Ms. Tillman from being engaged by a competitor for six months. However, stopping her from being ‘interested’ in a competitor prevented her from holding even a small shareholding in a competitor and that was a restraint of trade.
Previously, the inclusion of these words would have meant the whole clause was void and Ms. Tillman would have been free to work for the competitor. However, in this case the court decided that it could strike out the offending words “or interested” to leave a reasonable non-compete clause, which could be enforced against Ms. Tillman. The court also set out the conditions that need to be satisfied before it will edit a clause in the future.
In light of this case, employers are advised to review contracts of employment that include restrictive covenants to ensure that they are fit for purpose to protect your legitimate business interests.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.