Supreme Court Clarifies Non-Compete Clauses and Contract Severance Guidelines

By September 10, 2019Employment Law

Tillman v Egon Zehnder Ltd is the first employee competition case to be heard by the Supreme Court in over 100 years, establishing clear guidelines for the application of the severance principle in employment contracts and bringing the issue of restrictive covenants in modern business to the forefront.

The case’s background

Ms Tillman’s contract of employment with executive recruitment firm Egon Zehnder (EZ UK) included a non-compete clause which stipulated that she would not “engage or be concerned or interested in” any business competing with EZ UK.

EZ UK was granted an injunction to enforce the non-compete clause after Ms Tillman made clear her intentions to start working for a competitor.  However, the Court of Appeal later considered that the words “interested in” would prohibit a minor shareholding, which they found unreasonable, so held the covenant to be void. 

The Supreme Court’s Involvement

EZ UK appealed to the Supreme Court raising three issues, namely:

  1. whether a prohibition on holding shares falls outside of the restraint of trade doctrine;
  2. whether the words ‘interested in’ prohibited minority shareholding if properly construed; and
  3. whether the doctrine of severance was applied correctly.

The court concluded that:

  1. falls within the doctrine (but only on the facts of this case due to Ms Tillman’s employment as a top executive);
  2. Upon the application of the validity principle, the court determined that the Appellant was unable to provide a realistic alternative construction and on that basis considered the word “interested” to be an unreasonable restraint of trade; and
  3. Despite agreeing with the Court of Appeal’s decision to set aside the injunction, the Supreme Court considered the principle of severance in relation to the words “interested in” and held it would be possible to apply it appropriately in this situation. 

Judgment

The case generated a review of what is known as the ‘Blue Pencil Rule’.  The Court clarified that the removal of wording or a provision within a clause must not generate any major change in the overall impact.  It further ruled that it was the employer’s responsibility to establish this. The Court subsequently determined that the words “or interested in” could be removed from the clause without disrupting its general restraints.

 

Impact

The case is significant in revising the severance principle and establishing the criteria for its future application. This will likely prove valuable in enforcing future post-termination restrictions.  It also gives clear guidance to employers as to how they should draft non-compete clauses in contracts. The Court further considered the historical significance of the restraint of trade doctrine as one of the earliest products of common law, but it also affirmed the wider principle of allowing severance when it does not generate major change in the overall effect of the restraints.  However, the Supreme Court declined to decide on “the outer boundaries of the doctrine” suggesting this may be an area for further development in future cases.

For now, employers are likely to feel reassured by the principles set out in Tillman v Egon Zehnder – although as always, great care should be taken when drafting such clauses.

For advice on how best to protect your business interests, please contact our Head of Employment, Ilinca Mardarescu on 01753 486 777.