Supreme Court restrictive covenants ruling: Is it now easier to enforce non-competes?
It was recently confirmed that it is possible to remove the part of a non-compete clause that is too wide without affecting the rest
Non-compete clauses are an effective way to ensure that departing employees do not immediately take their expertise to a competing business. However, aspects of the law surrounding the enforceability of these clauses have been uncertain. The Supreme Court has at last provided some clarification in the first case of its kind to reach the UK’s highest court in more than a century.
An employer may only enforce a non-compete clause against a departing employee if it is no wider than is reasonably necessary to protect a legitimate business interest. If part of the clause is found to be unreasonably wide then the traditional view has been that it is very difficult to remove that part while still enforcing the remainder.
However, the Supreme Court confirmed on 3 July that it is possible to remove (or 'sever') the part of a non-compete clause that is too wide without affecting the rest.
In the case of Tillman v Egon Zehnder Tillman agreed that after she left her employment at a head-hunting firm she would not 'directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the business of the company…'. Tillman argued that this was too wide because the words 'interested in any business' would prevent her from holding shares in a competing company.
The Supreme Court said that being 'interested in' a company does include owning shares. The restriction therefore prevented Tillman from owning any shares in a competitor, no matter how small or passive the shareholding was. The court said the restriction was unreasonable and therefore unenforceable.
However, it went on to say that the words 'interested in' could be removed from the provision and the rest of the clause would remain in force. This protected the employer because although 'interested in' was deleted, the clause still prevented Tillman from being 'concerned' or 'engaged' in a competitor.
The case should not be seen as a perfect solution; when considering whether unreasonable wording can be removed from a non-compete clause the courts will continue to adopt a cautious approach. Tillman was a senior executive, but in the case of a more junior employee with less bargaining power courts may take a more employee-friendly view and choose not to remove the unreasonable provision (and so not enforce the covenant at all).
As a general rule we can expect courts to be prepared to sever provisions in a contract where the unreasonable wording can be removed without needing to add to or modify the remaining words, and where the removal would not significantly change the overall legal effect of the clause.
This ruling should apply to all clauses that restrict an employee’s activities after they have left the company. Employers may want to review existing restrictive covenants in their standard employment contracts. If employees are prevented from being 'interested' in a competitor employers should check whether they are permitted to hold a small shareholding in any competitors (3% to 5% is normal, although the Supreme Court did not offer a view on whether this was an appropriate level).
Because severance will only work where you do not need to add additional wording to ensure the clause makes sense, employers should also review how their covenants are structured grammatically to see whether severance would be available, if required.
Employers may also wish to consider adding specific wording to new covenants to the effect that the parties agree that unenforceable provisions can be removed.
It is important to ensure that restrictive covenants are enforceable because these covenants protect the company from an ex-employee competing or soliciting current employees and clients. Careful review of these covenants could therefore prevent loss of valuable employees, clients and confidential business information.
David Mendel is a senior associate and Rufus Stirling is a trainee solicitor at Freshfields Bruckhaus Deringer