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Enforcement of post termination non-compete restrictions

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By Patrick Stewart

The Supreme Court heard the appeal in Tillman v Egon Zehnder Limited at the end of January. The judgment has recently been handed down and has significant implications for the law of non-compete clauses in employment cases.

Non-compete clauses

In an employment context, a non-compete clause is a restriction prohibiting an individual from competing with their former employer’s business. Although such a restriction will be implied by law during employment, issues can arise if an employer aims to restrict an individual after their employment has ended. This is because such restrictions often prevent individuals from working in their chosen occupation. Therefore, to prevent inappropriate restraint of trade, non-compete clauses and other similar restrictions are subject to strict limitations. If these limitations are not adhered to, the clause can be rendered unenforceable. These are as follows:

  1. the restriction must seek to protect a ‘legitimate interest’ of the employer, for example, their goodwill, confidential information or client connections; and

  2. the restriction must go no further than is reasonably necessary to protect that legitimate interest.

Non-compete clauses are common in other circumstances, such as in business acquisitions, where they are used to prevent sellers’ from setting up in competition with their former business. Non-compete clauses are also used to restrict partners after they retire from a partnership. However, because employers are seen to have greater bargaining power over employees, non-compete clauses are generally harder to enforce against employees than against business sellers or retired partners.

Space and time

A non-compete clause may be held to go further than necessary if it is not limited to a reasonable geographical area. For instance, in Office Angels Ltd v Rainer-Thomas, a non-compete clause had the effect of prohibiting Ms Rainer-Thomas from setting up a competing business in almost the entire City of London. The court considered that to prohibit such activity in this ‘particularly fertile area’ for employment agencies would go further than was reasonably necessary to protect Office Angels interests. It should be remembered, however, that restrictive covenant cases are factdependent. A territory considered too wide in one case might be deemed reasonable in another. In fact, there have been cases where worldwide restrictions have been upheld.

Similarly, a non-compete clause needs to be reasonably limited in duration. They are typically limited to a period of months after employment ends. When considering whether the period is reasonable, the courts will evaluate what the restriction is seeking to protect and whether the period of restriction reflects this. For example, if the legitimate interest being protected involves client connections, it may be relevant to the duration of any restriction that clients contract with the employer on an annual basis.

Defective drafting

If a non-compete restriction goes further than is reasonably necessary to protect an employer’s legitimate interest, it will be unenforceable. In Tillman v Egon Zehnder Limited, The Court of Appeal decided that restricting the employee from being “or interested in” a competing business after termination rendered the entire non-compete clause, of which it was a part, unenforceable. The Court decided that the words “interested in” could include, for example, owning a minority shareholding in a competing company on an investment basis. The Court held that the clause therefore went further than was reasonably necessary to protect Egon Zehnder’s legitimate interests.

The appeal in the Tillman case raised a question as to whether the offending words ‘or interested in’ could be deemed removed or ‘severed’ from the clause and thereby make it enforceable. The Court held that severance would be allowed if the following tests were complied with:

  1. that if the offending words were removed it would not require amending other wording within the clause. In Tillman, the words ‘or interested in” could be removed without requiring any modification to the remainder of the clause.

  2. that following severance, the clause continues to be supported by consideration. This would not be an issue where the employer is seeking severance but has been the case where an employee is seeking severance. The employee needs to show that following the severance of the offending term, he still provides some service for the contract he entered into.

  3. That the removal of the offending term would not generate any major change in the overall effect of all the postemployment restraints in the contract. Again, in Tillman, the removal ‘or interested in’ did not generate any major change in the restriction concerning non-compete nor the other post-termination restrictions in the contract. On that basis, were a Court to be looking at a contract which contained post-termination restrictions similar to those in the Tillman case, severance would be allowed and the restrictions enforceable.

Restrictive covenants in employment contracts is a complex area and one where the implications of getting it wrong can be severe. Care must be taken to strike a balance between adequately protecting the employer’s business interests without being more restrictive than necessary.

Our Employment Law team is experienced in advising employees and employers about restrictive covenants and representing them in disputes. Please contact us if you require advice.

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