We recently reported on the High Court decision in Egon Zehnder Ltd v Tillman where a 6-month non-compete restriction was upheld against an employee who rose from consultant to partner within a relatively short period of time. However, the Court of Appeal has overturned this decision on the basis that the covenant prohibited the employee from holding a minor shareholding in a competing business for investment purposes.This meant that the covenant was impermissibly wide and unenforceable.

Background Law

Clauses which aim to restrict an employee's freedom after the end of the employment are a common feature of employment contracts covering a wide-range of occupations. For reasons of public policy, concerned principally with the importance of freedom of trade and competition, the general rule is that such covenants are unenforceable unless the employer can show that they protect a legitimate interest and are reasonable in all the circumstances.

What may be considered to be a "reasonable" covenant will depend on the facts of each individual case. For example, the employee's seniority, the extent of his contact with clients or fellow employees and his access or exposure to confidential information, will all be relevant facts. Generally, the Courts are more likely to enforce covenants which are carefully drafted and specifically tailored to the particular employee's circumstances.

Non-compete covenants typically carve out the ability for the employee to hold minor shareholdings in other companies as an investment.

Facts

The Claimant employer, Egon Zehnder (EZ), provides a variety of professional services to clients, with a particular focus on executive search and advisory services. EZ was a UK subsidiary of a worldwide group operating in many jurisdictions. The business model involved considerable cross-group engagement between the various entities.

The employee, Mary Tillman (MT), was engaged by EZ in 2004 to work in its Financial Services Practice Group. This was a significant group within EZ's operation, generating 17.6% of its global revenue at the time of MT's recruitment. MT was initially employed by EZ at "consultant" level (although her employment status was that of employee). However, because she was a recognised individual within the sector, her remuneration package was higher than that usually offered to a newly-recruited consultant. Her contract of employment contained a 6-month non-compete restriction which prevented her from being "engaged, concerned or interested" in any business which competed with any of the businesses of the Company (or any Group Company) as at the termination date, or the 12 months prior to that date, and with which she was materially concerned.

By 2006, MT was promoted from consultant to "principal" and she also became the Global Head of Investment Banking. By 2009 she was promoted again to "partner", the most senior level within the business. In 2012 she was given the title of co-Global Head of the Financial Services Practice Group. MT did not sign a new version of her contract of employment at any of the promotion points within her career at EZ.

In January 2017, MT gave notice of her resignation. On 30 January 2017 EZ terminated MT's contract with immediate effect and paid her in lieu of notice. MT told EZ that she wished to work for a New York-based competitor as of 1 May 2017. EZ brought a claim, and sought an interim injunction, arguing that MT would be in breach of the 6-month non-compete restriction, which was due to expire on 30 July 2017.

MT argued that the restriction was wider than was necessary to protect EZ's legitimate business interests. On the construction of the covenant, MT argued that:

  • First, the global nature of the covenant meant it was unenforceable.
  • Second, the covenant prevented her from even being "interested" in a competing business, which would, on the face of it, prevent her from having a minority shareholding in a competing business. This also meant the covenant was too wide and unenforceable.

High Court decision

In June, the High Court upheld the non-compete restriction and granted the injunction. The Court found that EZ's legitimate business interests were its client and candidate connections and company and client confidential information. In the Court's view, the correct approach was to assess the reasonableness of the covenant by reference to MT's initial status as a consultant and what the parties believed that would entail. It was not appropriate to judge the covenant by reference to her more senior role as at termination, even though it was expected at the outset that she would rise to partnership status.

However, the Court did accept that a nuanced approach was required in this case. It was necessary to consider whether the view as to her future prospects resulted in an anticipated closer level of engagement with the protectable interests than would normally be expected from someone operating at that level. The Court went on to find that MT did have more client engagement and made a greater contribution to strategic matters than an "ordinary" consultant and the parties would have anticipated this from Day 1. Taking this into account, the Court concluded that a 6-month non-compete restriction was justified.

On the two construction points, the Court found in EZ's favour:

  • First, the global nature of the covenant was acceptable given that it had limited competition only in those areas within which MT had been "materially involved" in the 12 months prior to termination.
  • Second, on the prohibition on being "interested in" a competing business, the Court was prepared to construe the clause so that it did not prevent MT from holding a minor shareholding in a competitor business. The Court was persuaded to do so given the existence of other provisions of the contract which expressly permitted such shareholdings during the course of employment; it would have been anomalous to seek to impose a more onerous restriction post–termination. The Court noted that the normal principles of construction required them to favour a construction which would validate, rather than invalidate, the clause.

MT appealed on the basis that that the phrase "interested in" covered shareholdings and, therefore, prevented her from holding a minor shareholding in a competing business. EZ argued that the High Court had construed the clause correctly and, if not, the phrase "interested in" could be severed to preserve the restriction.

Court of Appeal decision

The Court upheld MT's appeal.

The Court found that a shareholder in a company could be described as being "interested in" that company. This was the approach taken in previous cases such as Scully UK Ltd v Lee (CA, 1998) and CEF Holdings v Mundey (HC, 2012). In the Mundey, the High Court had said that the words "interested in" would cover holding even one share in a publicly quoted company and a restraint including that phrase would, therefore, be too wide.

Turning to the question of severance, the Court held it was only able to sever separate covenants, which was not the case here. It was not prepared to rewrite the covenant to make it work. In any event, even if the words "interested in" could be severed, the remainder of the phrase "engage or be concerned" would still be too wide on the grounds that a minor shareholder can be said to be "concerned in" the company.

Comment

This decision reminds us that careful drafting is of the utmost importance when it comes to restrictive covenants. Employers should check their restrictive covenant wording to ensure it is tailored to the individual concerned and not impermissibly wide.

The language used should be carefully thought through, as broad terms such as "interested in" will be interpreted widely and mean the covenant may fail. Non-compete covenants should also include an appropriately worded carve out permitting minimal shareholding in other companies. A failure to do so risks the non-compete being found to be void and releasing the employee to work for a competitor.