The Court of Appeal has overturned an injunction granted by the High Court to enforce a six-month non-compete restriction for a senior executive, ruling that the scope of the restriction was too wide and ambiguous.
Restrictive covenants play a pivotal role in protecting a business from potential threats to its confidential information, customer base or workforce stability arising from the post-termination activities of former employees. Employers often include clauses in contracts of employment to prohibit a former employee from soliciting or dealing with current or prospective customers/clients for a period of time, or even from joining a competitor altogether.
The starting point is that such restrictive covenants are void and they will only be enforceable where they go no further than is reasonably necessary to protect the employer’s legitimate business interests. This is assessed on a case-by-case basis, but properly drafted covenants remain a valuable weapon for employers, particularly when well-connected or senior employees leave the business.
The validity of a covenant is assessed by reference to the relevant circumstances at the time it is entered into, rather than at the time the employer wishes to enforce it. As a general rule, it is difficult to argue that wording which makes a covenant impermissibly wide can be deleted or “severed” from the rest of the clause, so as to make it enforceable.
Failure to include well-drafted confidentiality provisions or restrictive covenants in employment contracts can leave employers exposed. However, even existing, well-drafted provisions may not always be fit for purpose.
In Egon Zehnder Ltd v Tillman, Ms Tillman was employed by Egon Zehnder in January 2004. Initially, she held a junior role but she was seen to be a “considerable prize”. Her starting salary and guaranteed bonuses were higher than employees of the same, junior level would usually earn. Both parties believed that she would be swiftly promoted.
This is indeed what happened and Ms Tillman rose to a very senior position within the business. However, despite a number of internal promotions, she had not signed up to new restrictive covenants since she was first hired for a more junior role – a common situation for many employers.
Ms Tillman resigned from her senior position in January 2017 and sought to join a competitor. Her 2004 employment contract contained a non-compete clause that required her, for a period of six months after termination, not to “directly or indirectly engage or be concerned or interested in any business carried on in competition”. She argued that the covenant prohibited her from holding even a minor shareholding in a competitor and was therefore void, as it was wider than reasonably required for the protection of legitimate business interests.
Egon Zehnder Ltd sought an injunction to prevent Ms Tillman from joining a competitor in New York.
In June 2017 the High Court upheld the non-compete covenant and granted an injunction restraining the breach. The restriction was not appropriate for the junior role that Ms Tillman initially took on. However, the restriction reflected the expectation of both parties that Ms Tilman would be promoted and have a significant level of client engagement and involvement with strategic matters.
Furthermore, the High Court held that the non-compete covenant did not prohibit Ms Tillman from holding a minor shareholding in a competitor for investment purposes. Ms Tillman appealed to the Court of Appeal.
Court of Appeal decision
The appeal was concerned mainly with the specific wording of the non-compete clause and whether it was too wide. Ms Tillman argued that the phrase “interested in” precluded her from owning any shares whatsoever in a competitor and was therefore too wide to be enforceable.
The Court of Appeal found that the covenant did not contain an express limitation allowing Ms Tillman to hold a minor shareholding in a competing business. It compared the wording of the covenant to another clause in the contract, which did allow her to hold up to a 5% shareholding of a competitor for investment purposes, whilst she was employed.
Egon Zehnder argued that even if this was correct, the words “or interested” should be severed from the covenant, leaving a valid enforceable covenant. The Court rejected this argument. It would still restrict Ms Tillman from being “concerned in” a competing business which, again, could prevent her from being a minor shareholder. The Court emphasised that “it is no business of the courts to create a valid covenant in order to replace an impermissibly wide covenant which an employer has sought to impose on the employee”.
When assessing the reasonableness of a non-compete clause, a court will consider the original terms of any contract but can also take into account the parties’ expectations of future promotions.
An employer might be able to rely on restrictive covenants contained in an employee’s original terms and conditions of employment if that employee leaves following promotion.
However, in order to reduce the risk of arguments about enforceability, it remains best practice to update (or consider introducing) restrictive covenants on promotion, if appropriate. Such new covenants should be properly tailored to reflect the seniority of the new position.
Furthermore, it is always important to give careful thought to the specific phrasing of restrictive covenants to ensure that they are no wider than necessary. Restrictions that place limitations on an employee being “interested in” or “concerned in” another business once they have left employment can be interpreted widely by the courts and give rise to questions of enforceability.
Finally, any non-compete restrictive covenants should explicitly state that minor shareholdings are permitted. In this case, Ms Tillman was able to rely on ambiguous wording and the theoretical position that she could not acquire a minimal shareholding (even though she had no intention of doing so), to argue successfully that the entire non-compete clause was void.