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Positive News for Employers Wishing to Enforce Post-Termination Restrictions

In an eagerly awaited decision, the Supreme Court gave its judgment on the meaning of wording commonly used in non-compete post-termination restrictions and the possibility of severing such wording where it would otherwise render such a restriction unenforceable.

Background

Ms Tillman was the Joint Global Head of Financial Services of executive search and recruitment firm Egon Zehnder at the time she left its employment. Her employment contract included a noncompete post-termination restriction of six months’ duration. This noncompete post-termination restriction provided that Ms Tillman would not “directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses” of Egon Zehnder with which she had been materially concerned in the period of 12 months prior to her employment ending. This restriction became contentious and the subject of substantial litigation when Ms Tillman made known her intention to work for a competitor in apparent breach of the non-compete restriction.

Egon Zehnder brought proceedings to enforce the non-competition covenant and successfully obtained an injunction against Ms Tillman. Ms Tillman appealed this decision, arguing, among other things, that the covenant was void on the basis that it was too widely drafted. In particular, Ms Tillman argued that the use of the words “interested in” prevented her from holding even a minority shareholding in a competitor and the restriction was therefore void as an unenforceable restraint of trade. The Court of Appeal agreed and set aside the injunction. Egon Zehnder then appealed to the Supreme Court.

Two of the key issues before the Supreme Court for consideration were:

  1. How the phrase “interested in” ought to be interpreted. In particular, does it cover shareholdings? If it did, then the non-compete restriction would be wider than necessary to protect Egon Zehnder’s interests, rendering it unenforceable.
  2. Could the word “interested” be severed from the rest of the covenant? If so, could this save the covenant from being rendered unenforceable if “interested in” is wide enough to cover shareholdings?

With regard to the first issue, the Supreme Court found that there was long-standing authority confirming that the phrase “interested in” includes shareholdings. Accordingly, the clause as originally drafted was held to be too wide and represented an unreasonable restraint of trade on Ms Tillman.

In relation to the second issue, the Supreme Court decided to apply a more liberal approach than the Court of Appeal and found that the word “interested” could be severed. In doing so, the Supreme Court confirmed that the following rules are to apply when considering whether wording might be severable:

  1. The unenforceable provision must be capable of removal from the rest of the clause without the necessity of adding to or modifying the wording of what remains (the ‘blue pencil’ test);
  2. The remaining terms must continue to be supported by adequate consideration; and
  3. The removal of the unenforceable provision must not change the character of the contract so that it becomes “not the sort of contract that the parties entered into at all” or, as the Supreme Court otherwise suggested, must “not generate any major change in the overall effect of all the post-employment restraints in the contract”.

It is no doubt good news for employers that the Courts are prepared to apply a more liberal approach to severance which will have the effect of the Courts enforcing covenants with limited offending wording. However, there are still complexities and matters of judgement to be resolved around aspects 1 and 3 of the applicable rules, which mean that the availability of severance cannot be guaranteed in all circumstances.

Finally, employers should also note the Supreme Court’s comments on the issue of costs, which seem to sound a note of caution for those employers seeking to rely on the principle of severance. Here, the Supreme Court warned against “legal litter”, which casts an unfair burden on others (that is, the Courts) to clear up, and said that where unreasonable parts of post-termination restrictions are dealt with through severance “the employer should win … but there might be a sting in the tail”. We do not know yet what this means but employers who find themselves in this situation may need to prepare themselves for cost consequences.

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