Supreme Court Decision on Post Termination Restrictive Covenants

In Tillman v Egon Zehnder Ltd, the Supreme Court, in the first such case for 100 years, has overturned the Court of Appeal decision that a restrictive covenant under which a senior employee agreed not to ‘directly or indirectly engage or be concerned or interested in’ any competing business for 6 months after termination was unenforceable as a restraint of trade.

On 30 January 2017 Mary-Caroline Tillman resigned as global head of financial services for Egon Zehnder. Shortly afterwards, she informed it that she intended to start work as an employee of a competitor firm, Russell Reynolds Associates. She told her employer she did not consider herself bound by the post termination restriction, the “non-competition clause”. Under it, she had agreed that she would not ‘directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of’ EZ Ltd within a twelve-month period prior to the termination date ‘and with which [she was] materially concerned during such period’. She said it was an unreasonable restraint of trade and thus void. Central to her argument were the words ‘interested in’, which she contended prevented her from holding even a minor shareholding in a competing business.

The Supreme Court said the Court of Appeal had been correct to hold that the words ‘interested in’ were unreasonably wide, as they prevented even a minor shareholding in a competing business. However, it had been wrong to conclude that the offending words could not be severed from the remaining, reasonable parts of the covenant.

The Supreme Court reinstated the injunction granted by the High Court (the first court that heard the case), even though the period of restraint had long since expired.

What lessons can be learned from this case?

1 This will have been a costly process – prohibitively so for most people. Lots of tasty legal fees, (expensive) QC’s piling in. No wonder these cases come along only once every 100 years.

2  Where non compete clauses are too wide, they can be reduced (by the Court) to what is reasonable and enforceable.

3 The question of what is “reasonable” in a restrictive covenant clause remains at the heart of whether such a clause is enforceable or not. That is unfortunate, particularly when coupled to the fact the employee is not getting any money for the period of restraint post termination.

4 In my experience, hardly any employee bothers to spend much time reading the “long”, “tedious” post termination restrictions of an employment contract when about to join a new employer. Far more important are the salary and benefits and notice period. And even less frequent are the times an employee will get legal advice before signing up to these clauses.

5 The English legal system would be better off changing to the system they have in Italy and France where on termination, if an employer wants to enforce post termination restrictions against a departing employee, they must elect to say this and must at the same time pay a lump sum to the employee eg 30% of salary, for the period of restriction. In my experience, hardly any employer chooses to do this.

Tom Redfern