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Unreasonably broad non-compete clause could be rescued by severance of the offending part
Tillman v Egon Zehnder Ltd
While at first blush a post-termination restriction was too broad and therefore unenforceable, the offending words in the clause could be removed to render the remainder of the clause enforceable.
The ‘restraint of trade’ doctrine means that restrictive covenants will be valid only if they go no further than reasonably necessary to protect the business interests of the employer. However, although a court will not rescue a restrictive covenant by rewriting it, where a covenant contains an unenforceable provision a court may sever the offending clause(s) and leave the rest standing. This lawyers refer to as the ‘blue pencil’ test (because blue was the traditional colour denoting amendments to legal documents). Whether or not such severance can take place is a question of law and will depend on the court’s construction of the contract. Two basic principles govern severance: the severance must be carried out without adding to or altering the remaining wording (this can be traced to the 1920 case of Attwood v Lamont) and the removal of the severed part must not affect the meaning of the part remaining.
This case is the first Supreme Court decision in almost 100 years to consider restrictive covenants and sees a shift in the accepted interpretation of the above severance principles – and in so doing overrules the Attwood decision.
Ms Tillman worked for Egon Zehnder (EZ), a search and recruitment company, and by 2012 was joint global practice head. Clause 13 of her employment contract provided for five restraints upon her activities following the end of her employment, all limited to a period of six months from the termination date. Clause 13.2.3 (the non-compete covenant) stated that Ms Tillman would not ‘directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of [Egon Zehnder]’ within a twelve-month period prior to the termination date ‘and with which [she was] materially concerned during such period’.
Ms Tillman resigned to join a competitor. She told EZ that she’d abide by all the covenants in her contract apart from the non-compete covenant in clause 13.2.3. EZ sought an injunction to stop her joining its competitor. In response Ms Tillman argued that the non-compete clause was so unreasonably wide that it was unenforceable. Crucially, she maintained that the clause was so widely drafted that she would be in breach of it even if she had a nominal shareholding in a competitor - and so the clause went further than necessary.
The High Court granted EZ the injunction and Ms Tillman appealed. The Court of Appeal allowed her appeal – the words ‘interested in’ prohibited even a minor shareholding. It refused to sever those words from the clause, applying the Attwood decision which limited severance to situations where the covenant is in effect a combination of different covenants. Therefore clause 13.2.3 was void as an unreasonable restraint of trade. EZ appealed.
Supreme Court decision
The appeal was unanimously allowed.
The Supreme Court began by considering a new argument that a covenant restricting a shareholding in another company was not covered by the restraint of trade doctrine. As this was contained in an employment contract and as it had been accepted that the other clauses were a restraint on trade, on the facts of this case the restriction on a shareholding was covered by the restraint of trade doctrine. Any restraint on a shareholding is part and parcel of a restraint on an employee’s ability to work.
Turning to the construction of clause 13.2.3, the Supreme Court agreed with the Court of Appeal that being ‘interested’ in a competing business includes being a shareholder of that business, whether large or small. The non-compete clause was essentially a bar on Ms Tillman having anything whatsoever to do with a competitor - even holding a small shareholding as a passive investor. So, the non-compete clause as originally drafted was unreasonably restrictive.
The Supreme Court then turned to the issue of severance. It held that the words ‘interested in’ could be removed from clause 13.2.3 to remove the unreasonable effect and render enforceable the remainder of the covenant. In so doing, the Supreme Court overruled the Court of Appeal decision in Attwood from nearly a century ago. The Supreme Court preferred the approach adopted by the Court of Appeal in a 2007 case – Beckett Investment Management Group Ltd v Hall – where three criteria were identified:
- Is the unenforceable provision capable of being removed without the necessity of adding to or modifying the wording of what remains (i.e. the ‘blue pencil’ test)?
- Are the remaining terms supported by adequate consideration? This will not usually be in dispute post-termination.
- Does the removal of the unenforceable provision so change the character of the contract that it becomes not the sort of contract which the parties entered into?
As regards 3., the Supreme Court preferred to express it thus: does the removal of the unenforceable provision generate any major change in the overall effect of the post-termination contractual restraints? Importantly, the Supreme Court added that it was for the employer to establish this.
Applying this, the words ‘interested in’ could be removed from clause 13.2.3 leaving the remainder enforceable – the restriction on Ms Tillman being engaged or concerned in a competing business. Finally, the phrase ‘concerned in’ a business did not include holding a passive shareholding in that business and so did not require deletion.
EZ was entitled to its injunction – although with the passage of time, this is rather academic as the restriction period of six months has expired.
Link to judgment: https://www.bailii.org/uk/cases/UKSC/2019/32.html
Where does this leave us? The starting point remains that such covenants will be void unless they go no further than is necessary to protect the employer’s legitimate business interests (e.g. confidential information or business connections).
Many well drafted covenants would have had a clause in them specifically stating that the restriction did not prevent the employee from holding a shareholding in another company, to get around the suggestion that the clause was too wide.
That said, this decision is an ‘employer-friendly’ one in that employers may be able still to enforce reasonable restrictions even where there may be an element of unreasonability. However, employers would be wise not to get too excited – the Supreme Court stated that ‘the courts must continue to adopt a cautious approach to the severance of post-employment restraints’ and warned that if the restrictions should have been more tailored in the first place, an employer’s ability to recover some or all of its costs will be limited.