The Supreme Court has ruled that restrictive covenants preventing an employee from being “concerned or interested” in a competitor for six months after they leave were not too wide to be enforceable – a decision experts say will come as a relief to employers.
This morning, judges overturned a previous Court of Appeal decision and formally reinstated an injunction against a former employee of recruitment firm Egon Zehnder, Mary-Caroline Tillman, which would have prevented her from taking up employment with a competitor had the contractual period of restraint not since expired.
The case sets the precedent that restrictive covenants can be broadly enforceable even if there are elements of the contract a court might deem to have gone “too far”, and that offending words can be removed from a contract if it does not substantially change the overall effect of the restraint.
Andrew Taggart, partner and head of Herbert Smith Freehills' EMEA employment practice, said employers would be relieved, adding that had the result gone the other way, many restrictive covenants – frequently used by businesses to prevent senior employees or key sales or marketing staff from taking knowledge and contacts to a competitor – could well have been unenforceable.
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“Instead, the judgment reaffirms that if the court thinks the covenant is basically OK, it will allow some latitude to strike out parts where it feels that it went too far,” he said.
Taggart added: “This doesn’t give carte blanche to lawyers to draft what they like, but it provides a useful safety net and reassurance that odd words here and there can be ignored."
However, Raoul Parekh, partner at GQ Littler, warned employers had “dodged a bullet” with the ruling.
“Egon Zehnder was still forced to go all the way to the Supreme Court to fight its case. No one will want to repeat that,” he said. “This case should act as a wake-up call for employers: now is the time to go through restrictive covenants to make sure that your covenants are enforceable.
“Fixing issues before an employee leaves might cost a few hundred pounds. Fixing them afterwards might cost tens of thousands or be entirely impossible.”
The enforceability of the non-competition covenant turned on whether the words “interested in” unreasonably prevented Tillman from taking even a minor shareholding position in a competing business, and if so, whether the offending part of the covenant could be removed.
Tillman first began working at Egon Zehnder in 2004 and was promoted to global head of financial services in 2012. As part of her contract, she agreed that she 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]” for six months after leaving the business.
In 2017, Tillman announced she was leaving to join a direct competitor, Russell Reynolds Associates. She argued the non-compete clause was an unreasonable restraint of trade and was therefore void.
Egon Zehnder was initially granted an injunction preventing Tillman from starting her new role, however the Court of Appeal set aside the injunction. It ruled the words “interested in” made the clause an unreasonable restraint of trade and refused to remove them from the contract as it would change the meaning of the clause.
However, the Supreme Court overturned the Court of Appeal's ruling, deciding the words were capable of being removed without the need to add to or modify the wording of the rest of the clause, and that doing so would not generate any major change in the overall effect of the restraints.
Stefan Martin, partner at Hogan Lovells, said the ruling confirmed that courts have the ability to remove offending words from badly written covenants in a way that makes the rest of the restriction enforceable.
"Essentially, where removing the offending words from the covenant will not result in any major change in the overall effect of the restriction, the restriction will be upheld rather than failing,” he said.
Martin added: “The decision will allow employers significant scope to argue that elements of a restriction should be observed even if the restriction in its full form is too widely drafted to be enforceable."
Nick Hurley, partner at Charles Russell Speechlys, agreed, saying the ruling showed courts were able to remove words or phrases from a contract so long as the clause still made sense without adding to or modifying the remaining words, and that they did not make major changes to the overall effect of the post-employment restrictions.
“Going forward, this will clearly give employers more leeway to correct poor drafting and enforce restrictions where words can simply be removed without losing the sense of the clause. The courts cannot rewrite the clause to make it work, but can sever words where appropriate,” Hurley said.
David Parry, partner in Hill Dickinson’s commercial employment team, said many employers were “breathing a large sigh of relief” at the Supreme Court ruling, adding that the previous Court of Appeal ruling had threatened to render the wording of thousands of non-compete restrictive covenants unenforceable.