Tillman v. Egon Zehnder Limited

We considered the case of Tillman in our last edition of the newsletter but it's back again. Ms Tillman has successfully appealed to the Court of Appeal, which has made a finding that her non-compete restriction was impermissibly wide, and therefore void.

The case of Tillman is a cautionary tale and a reminder of the importance of the construction and drafting of post-termination restrictions.

Facts

Ms Tillman was hired by Egon Zehnder in January 2004. She was hired into a relatively junior post but with a view that she would quickly progress and work her way up the ranks in the business. Ms Tillman's contract included a six-month non-compete post-termination restriction in the following terms:

"13.2.3 [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."

As anticipated, Ms Tillman was quickly promoted a number of times, ultimately becoming co-Global Head of the Financial Services Practice Group in 2012. Ms Tillman was not required to sign a new employment contract upon any of her promotions.

Ms Tillman left Egon Zehnder in January 2017 and notified the company that she wished to start work for a competitor in New York on 1 May 2017. Egon Zehnder successfully sought to enforce Tillman's non-compete. The High Court upheld the non-compete restriction and granted the company an injunction restraining the breach.

As set out in our last newsletter, the focus of the High Court decision was on whether or not the post- termination restrictions were reasonable at the time the contract was entered into. The High Court held that in deciding whether a restriction was reasonable, the court had to consider what was in the contemplation of both parties, and that could have included an expectation of promotion in the future. On the facts, the High Court found that the protection sought by Egon Zehnder was no more than was reasonable.

The High Court did, however, also consider two points of construction. Ms Tillman argued that the lack of territorial limitation made the restriction unenforceable, and that being "interested" in a competing business was too wide as it could prevent her from holding a minor shareholding in a competitor for investment purposes.

On the second point, counsel for Egon Zehnder noted that the restrictions during employment contained in Ms Tillman's employment contract included an express provision allowing a 5 per cent shareholding in publicly quoted companies. He said that "it would be commercially anomalous if the non-compete covenant restricted all shareholdings…because then the post-termination restrictive covenant would be wider than the obligations during employment". He therefore submitted that the words "interested in any business" should be construed so as not to capture a minor shareholding. The High Court agreed with this analysis and found that the clause was not void for being wider than reasonably necessary.

Decision

The Court of Appeal disagreed and has upheld Ms Tillman's appeal.

The Court found that it was impossible to say that a shareholder in a company was not "interested in" that company in accordance with conventional usage. The Court referred to the case of CEF Holdings Ltd v. Mundey [2012] IRLR 912, in which the High Court held that the words "interested in" cover holding one share in a publicly quoted company, and that a restraint including that phrase was therefore impermissibly wide.

The Court of Appeal held that the principle that a court should prefer the construction of a clause that would be enforceable (if legitimate) only applies where there is genuine ambiguity. On the wording of the clause in this case, the Court found that there was no such ambiguity.

Counsel for Egon Zehnder sought to argue that the words "or interested in" could be severed from clause 13.2.3, leaving a valid restriction. This argument was swiftly dismissed by the Court for two reasons. First, even if the words "or interested in" were removed, the restriction would still be too wide, since being a shareholder in a competitor is likely to involve "being concerned in" that business, at least indirectly. And second, it is settled law that the constituent parts of a single covenant cannot be severed.

Practical impact

This case highlights the importance of including de minimis provisions (which allow the holding of minor shareholdings as an investment) in the drafting of both restrictions during employment and postemployment, and ensuring that those provisions are consistent.