Restrictive Covenant: First Employee Competition Case Reaches the Supreme Court

Written by Hayley Titchner

A ‘restrictive covenant’ is a clause contained within a contract of employment. This typically takes the form of a ‘non-competition, non-solicitation and/or non-dealing clause’

This prevents an ex-employee from competing with their ex-employer or soliciting or dealing with customers to which the employee dealt with during their employment.

Legally, any post-termination restriction is void on the grounds of restraint of trade. Unless an employer can demonstrate such a clause is designed to protect the employer’s legitimate interests, and it does not go beyond what is reasonably necessary to protect those interests.

In this recent case the Supreme Court considered not only the reasonableness of a non-competition clause, but whether an element of the clause could indeed be severed to protect the enforceability of the entire clause.

The Facts

Ms Tilman was employed as partner for EZ Ltd.  Her contract of employment included (amongst other restrictive covenants) a ‘non-competition clause’. This stated that for 6 months after her employment came to an end 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 EZ Ltd. within a period of 12 months prior to the date on her employment coming to an end and with which she was materially concerned during such period”.

Mrs Tilman resigned on 23 January 2017 on notice.  She notified EZ Ltd. that she wished to start working for a new employer, carrying on a similar business, on 1st May 2017.

EZ Ltd. applied for an injunction preventing Mrs Tilman from joining the competing business, on the basis this would constitute a breach of the 6-month non-competition clause.

Ms Tilman argued that the entire clause was unreasonably wide and therefore unenforceable. In particular, she argued that the words being ‘interested in’ prevented her from having a minor shareholding in a competitor for investing purposes and was therefore void for restraint of trade.

The High Court

The High Court granted EZ Ltd an injunction. The court held the non-competition clause was enforceable, on the basis the words ‘interested in’ did not prevent Mrs Tilman holding a shareholding, and as a result was not void for being wider than reasonably necessary.

Court of Appeal

Mrs Tilman appealed to the Court of Appeal, who handed down their judgment 9 days before the restriction on Mrs Tilman joining a competitor was due to expire. The Court of Appeal disagreed with the High Court and held the covenant did prohibit shareholdings and was therefore a wide restraint of trade and would be unenforceable unless the offending parts could be severed.

The Court went on to conclude that the clause was a single covenant and therefore had to be read as a whole and could not be severed. 

The Supreme Court

EZ Ltd appealed to the Supreme Court. Although the non-competition clause had since expired, permission to appeal was granted on the basis the case raised points of importance.

The Supreme Court held:

The phrase ‘engaged or concerned or interested’  had long been included in standard precedents for the drafting of non-competition restrictive covenants and was treated as including a shareholding prohibition. Therefore, restraining Mrs Tilman’s ability to hold shares was part of the restraint on her ability to work in the immediate aftermath of her employment. The clause was therefore void as an unreasonable restraint of trade.

The Supreme Court then considered whether the words ‘or interested’ could be severed from the clause, in order to remove the unreasonable effect and to therefore render the remainder of the covenant enforceable.

The Supreme Court considered the following 2 factors to always be critical to questions of severance:

  1. There can only be removal of words if upon removal there would then be no need to add to or to modify what remains;
  2. Removal should not generate any major change in the overall effect of all the post-employment restraints in the contract.

The Supreme Court held the words ‘or interested’ were capable of being removed from the non-competition clause without the need to add or modify the wording of the remainder, and that furthermore the removal of the prohibition against Mrs Tilman being ‘interested’ would not generate a major change in the overall effect of the restraints.

As a result, the Supreme Court formally reinstated the injunction granted by the High Court, subject to the removal of the words ‘or interested’ from the covenant to be enforced, and in doing so reversed Court of Appeal Authority which had been applicable for nearly a century. 

Implications

The legal position still remains the same in that post termination restrictions will be void on the grounds of restraint of trade, unless they go no further than is necessary to protect an employer’s legitimate interests.

However, arguably the outcome of this case provides a life line to employers whose restrictive covenants may be viewed as being drafted too wide and contain an element of unreasonableness, because that element now has the potential to be removed rescuing the rest of the covenant and allowing it to remain enforceable.

However, employers should be cautious not to release such a large sigh of relief, as the Supreme Court were also clear to emphasis that severance of unreasonable parts of post-employment restrictions was akin to the clearing up of ‘legal litter’, which in turn adds an unfair burden on the employee and may therefore have cost consequences for the employer if it finds itself in litigation.

For further advice in respect of employment matters please contact Invicta Law’s Dispute Resolution and Employment team on 03000 411100 or email Justine.Soutter@invicta.law, or download the team leaflet.

Contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute professional or legal advice.  Invicta Law cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

 

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