Supreme Court competition clause decision: Experts react
Rachel Muller-Heyndyk, July 04, 2019
Employers looking to prevent employees going to competitors might welcome this ruling but restrictions must still be carefully defined
A century-old principle on a clause regarding whether employers can prevent employees from working with direct competitors has been overturned by the Supreme Court.
Supreme Court judges unanimously agreed to an appeal in the case of Egon Zehnder v Tillman, rendering the non-compete clause set by the recruitment company enforceable and setting out how employers should approach the drafting of non-compete clauses in employment contracts.
Mary-Caroline Tillman was hired by management consultancy and executive recruitment firm Egon Zehnder in 2004, and eventually became its head of global financial services. In 2017 she left after being offered a role at competitor Russell Reynolds Associates.
However, her employment contract included a number of post-termination restrictions including a non-compete clause that aimed to prevent her from working for a direct competitor for a period of six months.
One of the key clauses of her contract stated that she must not 'directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of the Company or any Group Company'.
Egon Zehnder applied to the High Court for an interim injunction to enforce this clause and was initially successful in preventing her move to Russell Reynolds.
In July 2018 Tillman appealed the decision at the Court of Appeal, which found in her favour.
In January this year, the case reached the Supreme Court, where the central issue was the Court of Appeal’s findings that the words 'interested in' included in the non-compete clause rendered the covenant too wide as it prevented her from holding shares in a competing business regardless of the size of her interest.
The latest ruling from the Supreme Court has now clarified that this was the case, in as much as restraint of trade was engaged by a prohibition on holding shares. But it held that the words 'interested in' in the context of Tillman’s contract could be severed and it would still be enforceable.
The decision overrules previous guidance on how certain parts of contracts can be severed, as set out in the case of Attwood v Lamont in 1920.
Stefan Martin, partner at Hogan Lovells, said that the ruling will be welcomed by those employers looking to prevent employees from working for competitors: "The case is good news for employers looking to enforce restrictive covenants. The Supreme Court has confirmed that the courts have the power to 'blue pencil' offending words from defective covenants, rendering the remaining restrictions enforceable.”
However, Michael Chattle, associate in the employment, pensions and mobility group at Taylor Wessing, said employers must be scrupulous when drafting restrictive covenants.
“This decision raises a number of questions for employers to grapple with and refocuses attention on the importance of ensuring that post-termination restrictions are precisely drafted and reviewed on a regular basis,” he said.
While the temptation to draft increasingly far-reaching restrictions may now be strong for employers, this would not be a positive development, he added: “On the basis of this decision, employers now may be encouraged to try to push for ever more wider and onerous restrictions with the expectation that a future court may apply a similar approach and cut it down to what it considers as reasonable."