Supreme Court Case Sparks Changes to Competition Clauses

30/07/2019

The Supreme Court has recently overturned century-old guidance on employee competition clauses when an employee’s appeal was reversed after she initially argued that a clause’s broad phrasing made the restrictions unenforceable. The case has sparked reviews of restrictive covenants within companies across the UK. What does this mean for employers? Are your post-termination restrictions watertights?A Supreme Court decision this month brought welcome clarity to employee competition clauses, overturning century-old guidance for employers.0 Advanced issues found▲ 0 Advanced issues found▲ 0 Advanced issues found▲1

What happened?

Mary-Caroline Tillman left executive recruitment firm Egon Zehnder in 2017, having been offered a position at competing company Russell Reynolds Associates. This move was, on the face of it, in breach of her employment contract. The post-termination restrictions included a non-compete clause stating that Tillman could not, …directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of the Company or any Group Company”.

Egon Zehnder tried to enforce this clause by applying for an interim injunction from the High Court. This worked as intended.

However, in July 2018, Tillman appealed the High Court’s decision in the Court of Appeal, who found in Tillman’s favour. They highlighted, in particular, the phrasing interested in any business…” ​and held that this made the agreement too wide and therefore unenforceable.

In January 2019, the case came before the Supreme Court. The Court agreed that the phrasing did make the covenant too wide – but, vitally, that the words “interested in” could be severed, while the rest of the contract remained enforceable.

This decision overturns the 1920 Attwood v Lamont guidance, which held that the covenant in question was not ‘severable’ – it couldn’t have bits cut out to bring it within an acceptable scope. 

What does this news mean for employers?

Basically, the Supreme Court has confirmed that courts can sever wording that makes a competition clause too wide in scope, as long as what is left would then not need modifying or adding to. This ‘blue pencilling’ also can’t markedly change the meaning of the restrictions. The rest of the restrictions would then be enforceable.

For employers, this can be looked at from two angles:

  • Welcome news: Employers will be able to argue that parts of a non-compete clause should be enforceable even if the whole was too widely worded
  • Challenging: Employers may be emboldened to be less careful with their post-termination restrictions in the hope that the courts will cut their clause down to an acceptable scope. This would be unwise and risky

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What is a non-compete clause?

Non-compete clauses (part of the larger term ‘restrictive covenants’ appear in employment contracts. The employee agrees that, for a certain time period after they leave this position, they will not start working for a competing firm, or start one up themselves. This is to protect the employer from ex-employees giving their competition an advantage by sharing confidential information, business practices or upcoming plans.

Making it enforceable

The key to an enforceable non-compete clause is that it must be reasonable – i.e. no more restrictive than it needs to be for the employer’s protection. It must also be realistically enforceable.

Consider these points:

  • Are you effectively stymying your employee’s ability to continue work in your industry? If so, the clause is too broad.
  • What your clause protecting? A court will need to know the legitimate business interest that is being protected. You can’t stop an employee competing just because you want to.
  • Is the clause appropriate for the seniority of the employee? An entry-level employee can’t be given manager-level restrictions because they might “grow into” the need for them. 

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An effective non-complete clause

This is an excellent chance to review (and possibly rewrite) your restrictive covenants to make them watertight. The job might be a tricky one, as there is no ‘one size fits all’ non-compete clause within even a small firm.

Pinney Talfourd is one of the leading employment law firms in Essex and London. We understand that it is difficult and time consuming to keep up with the latest changes in employment law and would be happy to meet with you to help.This article was written by Alex Pearce, Senior Associate in the Employment Law Team at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of July 2019.

30/07/2019

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