The High Court has held that the reasonableness of a six month non-compete clause should be assessed as at the date of the contract by reference to the employee's status at that time, and what was contemplated by the parties in relation to that status.
Mrs Tillman was recruited at consultant level by Egon Zehnder Ltd (the Company), the UK subsidiary of a worldwide group which, among other professional services, provided clients with executive search services. Mrs Tillman had already had a successful career in investment banking, and was treated as a "considerable prize" when she was recruited, being paid more than other consultants, and with high hopes for her future. Mrs Tillman was quickly promoted from consultant to principal, and again rapidly promoted to partner. Within eight years, she was co-Global Head of the Financial Services Practice Group.
Mrs Tillman resigned in January 2017, and told her employer that she wished to start working for a New York based firm, carrying on similar business, from 1 May 2017. The Company issued proceedings, seeking an injunction, saying that this would breach the six month non-compete clause contained in her employment contract which (if enforceable) would expire on 30 July 2017.
The non-compete covenant stated that:
"You shall not…at any time within the period of six months from the Termination Date…directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of the Company or any Group Company which were carried on at the Termination Date or during the period of twelve months prior to that date and with which you were materially concerned during such period."
Mrs Tillman's contract also included a clause restricting her from holding shares in any company whose business competed with the Company or any group company except for investing in shares of a publicly quoted company of up to a maximum of 5 per cent of the total equity of that company.
Mrs Tillman argued that the non-compete clause was void for being wider than reasonably required for the protection of legitimate business interests.
The High Court upheld the restrictive covenant and granted an injunction.
The High Court's judgment, while not creating any new law, is a very useful summary of tests under existing case law. The starting position with restrictive covenants is that they are unenforceable unless they are reasonable with reference to the interests of the parties and the public. In assessing reasonableness, courts should undertake a three stage process:
What does the covenant mean when properly construed?
Has the employer shown that it has legitimate business interests requiring protection?
If so, the covenant must be no wider than is reasonably necessary for the protection of those interests. This "reasonable necessity" should be assessed at the date of the contract and be assessed from the perspective of reasonable persons in the position of the parties at the date of the contract.
Here, the legitimate business interests were client and candidate connections, as well as Company and group company confidential information.
In terms of assessing reasonableness the High Court notes that Mrs Tillman was recruited as a consultant but, by the time her employment ended, was in a much more senior position. The question to answer was, at the date of the contract, what level of interaction with client and candidate connections and confidential information was it considered she would have? In considering this, her partnership status at the end of her employment should not be taken into account, as they would not have known at the beginning of her employment that she would be promoted. However, there had been high hopes that she would be successful, and she was not recruited as a "normal" consultant, but as someone a "bit special". Given her previous experience and the high hopes for her future, she had more client engagement than would normally have been expected of a consultant, and made a greater contribution to strategic matters, and this was likely to have been anticipated at the outset.
Mrs Tillman argued that the non-compete clause did not include any geographical limitation, and was therefore too wide to be reasonable. However, the High Court agreed with the Company that the non-compete clause did not have a global reach. It only prevented Mrs Tillman from competing in geographical areas in which she had been materially involved in the Company's business. There was therefore an in-built limitation. The lack of express geographical limitation did not therefore make the clause unreasonably wide.
Mrs Tillman also argued that the restriction on being "interested" in a competing business was too wide as it could prevent her from having a minor shareholding in a competitor for investment purposes. However, the High Court held that, while the words "interested in" were ambiguous, the inclusion of a clause specifying what shares could be held made it clear that a minor shareholding was not prohibited, and the covenant was not, on this basis, too wide.
What does this mean for employers?
This case does not introduce any new tests or principles, but is a useful example of a court's consideration of existing tests and principles. Employers should remember that tailored covenants are more likely to be enforceable than "one size fits all" standard covenants. Where covenants are likely to be particularly important, employers should consider keeping a record of what they were contemplating at the time of the contract – particularly where they are grooming employees for promotion and wish the covenants to bite once promoted. Employers should also review existing restrictive covenants from time to time, particularly after promotions, to ensure that the covenants are still appropriate for that particular employee.