Irwin Mitchell | Employment Law Update | Do your non-compete clauses need re-writing?

The Court of Appeal in Tillman vs Egon Zehnder Ltd struck out a non-compete clause in a senior executive’s contract of employment because it prevented her from having “any interest” in any competing business. It found that this included any minority shareholdings that she could in theory hold. This made the restrictive covenant wider than necessary to protect the business’ legitimate interests, and therefore unenforceable, and meant that the executive was free to start working for a direct competitor.

Facts

Egon was part of a group of companies operating in many jurisdictions. It established itself as a “trusted advisor” and recruiter to some of the world’s largest financial institutions including 13/20 of the largest investment banks.

Ms Tillman, a former successful investment banker, started working for Egon in 2004 as a consultant. She entered into a contract which included a number of post-termination restrictions including a non-compete clause limiting her ability to work for a competitor for six months post-termination. At the time she entered into the contract, both parties expected Ms Tillman to progress quickly and during her 13 year career, she was promoted on a number of occasions. At the time of her resignation she was Global Head of Investment Banking.

Ms Tillman gave the three months’ notice required under her contract and was given a payment in lieu of notice to terminate her employment with immediate effect. She planned to move to New York to work for a competing business. Her former employers said that she would be in breach of her original restrictive covenants and sought an injunction to prevent her from starting work before the end of her six month non-compete restriction.

Terms of the disputed restrictive covenant

The non-compete clause was written in fairly standard terms and provided that she was not allowed for a period of six months “directly or indirectly to engage or be concerned or interested in any business carried on in competition with any of the business of the Company or Group Companies which are carried out at the termination date or during the period of 12 months prior to that date and with which you were materially concerned during such period.”

The law

When assessing whether a restrictive covenant can be enforced, the courts will go through the following process:

Decide what the clause means. Is it clear or does it have more than one meaning?
Examine if the employers have shown that they have legitimate interests to protect.
Examine the covenant to determine if it is no wider than is reasonably necessary to protect those interests.

Even if an employer clears those hurdles, it will only be granted an injunction if it is reasonable to do so.

First instance decision

At first blush it might appear that the employer would be in some difficulty in trying to enforce a restriction that Ms Tillman entered into 13 years beforehand and certainly before she was promoted. This is because the reasonableness of the covenant is judged at the time the contract was agreed and not when the employer is looking to enforce it. However, the court found that Ms Tillman was “something special” and was expected to quickly rise through the ranks and progress. The covenant therefore survived this challenge since it was appropriate for the responsibilities Ms Tillman was expected to have.

The more difficult argument for the employer was that the clause stopped Ms Tillman from even having a minority shareholding in a rival company and that, she claimed, made it too wide. The High Court disagreed. It found that the clause itself was ambiguous and was persuaded that it was not intended to deal with shareholdings at all. It said it was entitled to interpret the clause in this way because the parties were deemed to have intended their bargain to be lawful. They determined the restriction was otherwise reasonable – the business was seeking to protect its clients, candidate and connections and was therefore enforceable. They held that the other covenants Ms Tillman had entered into (non-solicitation; non dealing and confidentiality) did not offer sufficient protection for the company and therefore a non-compete clause was necessary and enforceable.

Ms Tillman disagreed. She appealed to the Court of Appeal.

Court of Appeal

The Court of Appeal reversed the decision and struck out the covenant because it was too wide. It said that preventing her from being “interested in” a rival business clearly included holding shares.

It accepted that this effectively gave Ms Tillman a ‘get out of jail free’ card. It didn’t matter that Ms Tillman’s motivation was to work for a rival rather than simply acquire shares. Public policy took precedence over the merits of individual cases.

Drafting tips

Employers must expressly limit post-termination non-compete clauses to make it clear that ex-employees can, for investment purposes, hold shares or securities in a publicly quoted company up to a maximum of (say) 5%. Clauses without this are likely to be unenforceable. It is therefore sensible to review the restrictions of any key employees and make changes as soon as possible if they do not include these words.

We can help

Our IM Protect service provides you with all the tools employers need to protect its business and confidential information at fixed rates. It also gives you effective processes and procedures to avoid the pitfalls associated with recruiting individuals/teams and damage to your business interests on their exit. If you require further information on this matter, please contact Glenn Hayes: glenn.hayes@irwinmitchell.com or 0113 2186484.

Published: 11 September 2017

Employment Law Update - September 2017

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Do your non-compete clauses need re-writing?

Facts

Terms of the disputed restrictive covenant

The law

First instance decision

Court of Appeal

Drafting tips

We can help

For general enquiries

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Do your non-compete clauses need re-writing?

Facts

Terms of the disputed restrictive covenant

The law

First instance decision

Court of Appeal

Drafting tips

We can help

For general enquiries

About Irwin Mitchell

Contact Us

Get a call back