The High Court has upheld a 6-month non-compete restriction against an employee who rose from consultant to partner within a relatively short period of time. Whilst it is established law that the reasonableness of a covenant should be assessed at the time the contract is entered into, this case highlights that this includes a consideration of the parties' initial intentions as to promotion and the degree of engagement with the employer's protectable interests (Egon Zehnder Ltd v Tillman).
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. The employer's concern to protect itself from competition from its former employee is not, by itself, a sufficient reason for a covenant to be reasonable and enforceable.
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 and it follows, therefore, that "standard form" covenants can be difficult to enforce. The Courts will usually apply the following general principles:
- The reasonableness of a clause will be determined by reference to the date the contract was entered into, rather than at the date when the employer is seeking to enforce it.
- Words will be given their ordinary meaning in order to reflect the intentions of the parties at the time they entered into the contract.
- Where a covenant is void at the time it was entered into (for example due to the employee holding a junior position) it will continue to remain void even if a change in circumstances (such as the employees promotion to a senior role) would make it valid at the time the employer seeks to enforce it, unless this is the contractual intention of the employer and employee. The Court will look at what was in the contemplation of the parties at the time the contract was entered into.
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 pointed to the global nature of the covenant and the fact that it 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.
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. Further, because employees worked with group companies in other jurisdictions, there was a case for including group companies within the scope of the restriction.
The next question was: what degree of protection of these legitimate interests was required at the time MT was recruited as a consultant? 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. The Court explained this nuanced approach in the following way:
"One does not assume a promotion and the level of engagement that would accompany a promotion. One looks at the assumptions of the parties and the level of engagement that occurred as a matter of fact in anticipation of the promotion and (in any event) at the exploitation of the attributes that the claimant (and, I would assume the defendant) thought she had. I think that those expectations produce an anticipated higher level of engagement with those protectable matters"
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.
This case will be helpful where an employee is recruited with a plan towards promotion to a more senior level and where the contract of employment is not updated as the employee rises through the ranks. In this scenario, the employer may succeed in justifying an initial covenant that might otherwise have been considered unreasonably wide.
Where employers are recruiting employees with a view to rapid promotion it would be sensible to record the parties' expectations as to the timeline of promotion and what the initial role will involve over and above the standard expectations. This should help the employer evidence an expected higher degree of engagement with its protectable business interests.
However, it's worth remembering that this case won't come to the rescue of a covenant which was simply not reasonable at the time it was entered into – even where a junior employee has ascended the career ladder and such a covenant would now be appropriate for them. Therefore, the safest course of action for employers is to ensure that covenants are specifically tailored to the employee's role and revised at suitable junctures within the employment relationship.