It is well established that imposing restrictions on employees after they leave employment can be a restraint of trade. The law allows employers to enforce those restrictions provided they are designed to protect a legitimate interest (confidentiality, stability of the workforce and trade connections) but only if the restrictions go no further than reasonably necessary. The main question the Supreme Court had to address in this case was what happens when part of a restriction is too wide – can the employer simply remove that part and enforce what is left? The Court of Appeal's decision in this case was one of several which suggested that it was often very difficult to do so.
Egon Zehnder is an executive search company which recruited Ms Tillman in 2004 from JP Morgan to work in its financial services business. She signed a contract in December 2003, which was never replaced or updated, and she eventually became joint global head of their financial services business. Her employment ended in January 2017 after which she remained subject to a number of restrictions, including a non-compete clause, which were due to last 6 months. Having found a new job she then wrote to Egon Zehnder and told them that she was going to work for a competitor and she would comply with all of her restrictions apart from the non-compete clause. She alleged that it was an unlawful restraint of trade and unenforceable.
Egon Zehnder applied for and were granted an injunction by the High Court in May 2017, which prevented her from working for the competitor until the expiry of her non-compete restriction at the end of July 2017.
Ms Tillman then successfully appealed to the Court of Appeal. They found that the non-compete clause was too widely drawn as the inclusion of the words "interested in" meant that she was prevented from holding shares in a competitor. It also declined to sever the offending words from that clause, holding that the court cannot sever part of a single restriction as that would cause it to become "not the sort of contract that the parties entered into at all".
Egon Zehnder appealed that decision.
The Supreme Court has now unanimously overruled the Court of Appeal by holding that the words "interested in" could be severed and in doing so also overturned a long-standing Court of Appeal authority which suggested that severing a single covenant was not normally possible.
There were two other issues decided, but severability was described as the "most difficult and important". The Supreme Court confirmed the three stage test for severability:
- You must be able to remove the unenforceable provision without needing to change or add to the remaining wording. This is often referred to as the "blue-pencil" test.
- There must be valid consideration for the remaining restriction. It would be very unusual for this limb not to be satisfied.
- The removal of the provision should not cause a major change in the overall (legal) effect of the restrictions. The onus is on the employer to prove this.
Hearing a restrictive covenant case for the first time in many years, the Supreme Court has certainly provided some comfort for employers and clarity around severability. It is now settled law that wording which causes a restriction to be too wide can be severed even if it forms part of a single restriction. However, the new wording must not cause a "major change" in the restriction's legal effect and there is no guidance as to what a major change may or may not be, although in this case removing the prohibition on holding shares in a competitor did not have that effect on an otherwise standard non-compete clause.
This decision will not rescue every drafting error in a restriction (although that is exactly what it did in this case!) and it is still just as vital as ever to ensure that post termination restrictions are regularly reviewed and updated, particularly when employees change jobs or are promoted. They must also be carefully targeted to do no more than protect your information, your clients and your workforce.