The UK Supreme Court has today published its long-awaited judgment in Egon Zehnder Ltd v Tillman. It held that a six month post-termination non-compete covenant was enforceable against a departing employee even though it prevented the employee from holding shareholdings in competing companies, however small those shareholdings might be. That aspect of the covenant could be “severed,” leaving the remainder of the non-compete covenant enforceable. The decision nonetheless reminds employers of the need to take care in drafting restrictive covenants and to keep them under review.
Restrictive covenants are only enforceable if the employer can show that it has a legitimate business interest that it is appropriate to protect and that the protection sought is no more than is reasonable to protect that interest. The detailed drafting of restrictive covenants can cause difficulties for their enforcement. In this case, the question arose of whether a non-compete was unenforceable because it extended beyond preventing the individual employee from becoming employed or engaged by a competitor to the prohibition of the individual holding shareholdings, however small, in competitors.
Mrs Tillman was employed by Egon Zehnder Limited (“EZ”), which is an international executive search company providing “headhunter” services to its clients, as its co-Global Head of the Financial Services Practice Group. Her contract of employment contained various post-termination restrictions, including a six month post-termination non-competition covenant. The non-compete provided (emphasis added) that Mrs Tillman was not permitted, without the prior written consent of EZ, to “directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses” of EZ or the EZ group which was carried on during the 12 month period prior to the termination of her employment “with which [Mrs Tillman] was materially concerned.”
Mrs Tillman resigned to take up a new role with one of EZ’s competitors, Russell Reynolds Associates (“RRA”), based in New York and beginning in May 2017. EZ sought an injunction to enforce the non-compete and prevent Mrs Tillman from joining RRA. Mrs Tillman accepted that RRA was a competitor of EZ. However, she argued that the non-compete was unenforceable and that she was entitled to join RRA immediately.
The Court of Appeal
The Court of Appeal overturned a High Court decision enforcing the non-compete and held that the non-compete covenant was too widely drawn to be enforceable. The basis for this conclusion was the fact that the covenant prohibited Mrs Tillman from being “interested in” a business carried on in competition with the EZ group’s business. This formulation, properly construed, would cover a minority shareholding, regardless of how small it might be. That the non-compete covenant could in principle extend to minority shareholdings rendered the covenant impermissibly wide and therefore unenforceable. This was the case even though Mrs Tillman did not contravene the aspect of the covenant which was unreasonably wide – the holding of a shareholding. Her breach of the covenant was becoming employed by a competitor.
The Court of Appeal considered whether the offending aspect of the non-compete – the words “or interested” – could be “severed” (i.e. in effect excised) from the covenant to make it enforceable. It held that those words could not be severed in the context of a single covenant. The Court of Appeal considered that it was “not the business of the courts to create a valid covenant in order to replace an impermissibly wide covenant which the employer has sought to impose on the employee.”
The Supreme Court
The Supreme Court agreed that the words “interested in” would, in terms of their natural meaning, include a shareholding, however small, and that the non-compete was therefore in principle too widely drawn to be enforceable and an unreasonable and unenforceable restraint of trade.
However, the Supreme Court disagreed with the Court of Appeal on the question of whether the offending words “or interested” could be severed from the covenant to leave the rest of the clause enforceable. It was held that those words could be severed from the covenant as they were capable of being removed without the need to add to or modify the wording of the remainder of the wording of the covenant.
More generally, in relation to the circumstances where severance can be permitted, the Supreme Court held that the unenforceable aspect of a provision must be capable of being removed without the necessity of adding to or modifying the wording of what remains and that the removal of the provision must not generate any major change in the overall effect of the post-employment restraints in the contract.
Even though the application of the severance principle saved the day for the employer in this case, this decision does not alter the importance of care in the drafting of post-termination restrictive covenants. It is clearly preferable to have in place a covenant that is enforceable without the need to resort to arguments about severance. This is especially the case since the Supreme Court made clear that it is for the employer to show that the requirements for severance are met.
Even though in this case the non-compete was found to be enforceable once the offending aspect had in effect been excised, this judgment does clarify that for a non-compete covenant to prevent the employee from holding any shareholding in a competing business will likely constitute an unreasonable restraint of trade. A prudent approach will be to include in a non-compete an appropriate carve-out allowing the employee to hold minority, passive or investment shareholdings. That said, the nature of the business in question and the detailed drafting of the covenant will remain crucial in seeking to maximise the prospect of a non-compete being enforceable. The Egon Zehnder decision serves as a good reminder to employers that regular reviews of restrictive covenants are worthwhile to ensure that covenants keep pace with case law developments and indeed the evolution of the employer’s business.