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Do Your Non-Compete Clauses Need Re-Writing?

Minimising Potential Damage To Your Business

27.02.2018

Karen Roberts, Press Officer | 0207 400 8714

The workforce in the property sector is highly mobile and there is a lot of competition to recruit and retain the most talented individuals that can influence and drive business forward. But what happens when your brilliant sales negotiator decides to set up in competition or work for one of your direct competitors? Will you be able to enforce the restrictive covenants you agreed a few years ago to minimise the potential damage to your business?

The starting point is to consider whether the business had and has a legitimate interest to protect. Most property companies will be able to point to business contacts and price sensitive information about deals for example. Once that hurdle is cleared, the courts will then consider whether the covenant goes “no further than is necessary” to protect those business interests.

Whilst this principle is relatively straightforward, the Court of Appeal in Tillman v Egon Zehnder Ltd has recently thrown a “spanner” in the works. Worryingly, it has potentially given some employees a “get out of jail free card” which may entitle them to ignore a previously agreed covenant and compete freely with their former employers.

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.

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 restrictions to apply after her employment, including a non-compete clause preventing her from working for a competitor for 6 months immediately after her employment ended.

At the time she entered into the contract, she and Egon 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 3 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 employer said that she would be in breach of her original restrictive covenants and sought an injunction from the court to prevent her from starting work before the end of her 6-month period of non-competition.

Terms of the disputed restrictive covenant

The non-competition clause was written in fairly standard terms. It provided that she was not allowed for a period of 6 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.”

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 restriction 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 UK High Court disagreed and found that the clause was not intended to deal with shareholdings at all and was otherwise reasonable and enforceable.

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

Court of Appeal

The Court of Appeal reversed the decision and held that Ms Tillman was free to immediately start working for the competing business. It decided the covenant was wider than was necessary to protect the business’s interest and refused to hold Ms Tillman to it because preventing her from being “interested in” a rival business clearly (and unreasonably) precluded her from being a shareholder.

The Court of Appeal accepted that this effectively gave Ms Tillman a “get out of jail free” card. It didn’t matter that her motivation was to work for a rival rather than simply acquire shares. The Court of Appeal wasn’t prepared to hold Ms Tillman to a re-drafted clause either. Their view was that these types of restrictions have to be limited and reasonable or the employer will be unable to rely on them. It is a matter of public policy to find unreasonable restrictions, void. Public policy took precedence over the merits of individual cases.

Drafting tips

Employers should urgently check whether the non-competition clauses of their employees allow them, for investment purposes, to hold shares or securities in a publically quoted company up to a maximum of (say) 5%. Clauses without this are likely to be unenforceable. We recommend taking the following steps:

  1. Promptly review the restrictions of any key employees and identify any clauses that do not exclude holding shares or securities in this way and take action to remedy this risk.
  2. Review the restrictions of other employees and consider whether they are still appropriate and valid. Has the individual been promoted or obtained additional responsibility? If so, you should redraft the restrictions.
  3. Obtain the employee’s consent to the changes you make to their contract terms. You may need to offer a financial incentive to induce them to enter into new covenants.
  4. Make sure that your employee signs the new restrictions to avoid arguments about enforceability further down the line.

This appeared in Estates Gazette on 20th Jan 2018