We have received the long-awaited judgment of the Supreme Court in Tillman v Egon Zehnder which is the first case on employee competition to reach the UK’s highest court since 1913.
The case effectively confirms the right of employers to agree and incorporate non-compete clauses in certain key employees’ contracts and clarifies whether:
- the prohibition of a shareholding in a competitor constitutes a restraint of trade;
- the words ''interested in'' extends to any, even a small minority, shareholding; and
- if so, those words can be severed by the Court to save the non-compete covenant.
Tillman was a senior recruitment consultant employed by Egon Zehnder. She announced she was joining a competitor. Her contract of employment contained a 6 month non-compete that prevented her from ''being directly or indirectly engaged…concerned or interested in'' a competitor. On the face of it this appeared to extend to minority shareholdings in competing businesses for investment purposes only.
The Supreme Court held that:
- the prohibition of shareholdings by former employees falls within the doctrine of restraint of trade;
- the phrase ''interested in'' includes all shareholdings, large or small; and
- the unenforceable words,''interested in'', could be severed because their removal by the Court would not add to or modify the clause or generate any major change in the overall effect of the non-compete.
What are the implications for employers?
Restrictive covenants in contracts of employment can be effective weapons in the armoury of an employer seeking to prevent former employees from competing by exploiting confidential information, client, customer and supplier connections, and/or by poaching staff. All such restrictions are restraints of trade which the Courts will only enforce if: they are required to protect the employer’s legitimate business interest; and they extend no further in terms of such things as duration and geographical ambit as is necessary to protect that interest.
Blanket non-competes such as that in this case, as distinct from restrictions designed to prevent the solicitation of or dealing with customers, will generally only be enforced if they are necessary to protect confidential information with sufficient shelf-life after the employee leaves.
Although employers may draw comfort from the relatively robust approach the Court has taken by cutting out the bad bit of, and thereby reducing, the restriction, it reminded employers and lawyers that “the courts must continue to adopt a cautious approach to the severance of post termination restraints”.
It is very important that restrictions in contracts of employment are regularly reviewed and drafted with care if they are to have the desired deterrent effect of preventing unfair competition. Litigation of the sort required to enforce restrictions can be expensive and uncertain, at least in terms of costs. As Lord Wilson warned Egon Zehnder; “In my view the company should win…..but there might be a sting in the tail”.
By David Ludlow