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Court of Appeal decides non-competition clause is unlawful

Court of Appeal decides non-competition clause is unlawful

Adrian Marlowe

Adrian Marlowe

In a recent decision, Tillman (T) v Egon Zehnder Ltd (EZ), the Court of Appeal refused to enforce a ‘non-compete’ clause in an ex-employee’s contract, on the grounds that the clause was too wide and therefore amounted to an unlawful restraint of trade.

This kind of issue is always important for recruitment businesses concerned about protecting their business base, so it’s worth considering the potential impact of this slightly unusual case, which highlights some important points about the enforceability of restrictive covenants.

The case involved a very senior employee (T) of an executive search company (EZ), which has a global presence. T worked in the UK for EZ in 2004, but in January 2017 resigned and sought to take up employment with a competitor business, based in New York. There was a 6 month non-compete clause in her contract of employment, that she could not, without consent, directly or indirectly engage or be “concerned  or interested in any business carried on in competition with any of the businesses of the Company”.

T started employment in New York within three months of the termination of her employment. EZ immediately obtained an injunction to prevent T from taking up her new employment, but T appealed to the Court of Appeal. T argued, and the Court accepted, that the covenant was not enforceable as it was too wide in scope. This was because the phrase ‘interested in’ would mean that she could not invest in any company that was a competitor of EZ, regardless of whether she worked for it, even if the shareholding was very small (and thus did not confer any control over the company).  Such a restriction could not be reasonably required to protect EZ’s business.

Importantly, the point was purely academic in that there was no question of T taking shares with the competitor; she was merely taking up employment with it. However it restricted the taking up of shares in any competitor business, and this should be contrasted with a restriction on employment on its own, which may have been enforceable.

In summary, EZ lost because the clause was not drafted appropriately. The restriction amounted to a restraint of trade and there was no clause that allowed the court to cut out the offending section. The Court made it clear that it was not the role of the courts to come to the rescue of employers who had drafted restrictive covenants too widely.

Incidentally, it did not help EZ that it had allowed T to invest in other competitors whilst she was employed by EZ!

This case serves as a reminder to employers to be careful when drafting restrictive covenants. This is particularly relevant to recruitment businesses which suffer from high staff churn. If correctly set up, restrictions can protect against a plethora of risks including acting in competition, soliciting staff and business contacts, using business information and so on. However the moral of the story is that if they are too restrictive (even in part) they may offer no protection at all.

For more information and help with restrictive covenants, or for advice on your contracts of employment, call Lawspeed on 01273 236236 or email [email protected] with “Employment contract enquiry” in the subject line and we’ll call you back.

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