Supreme Court Decision on Post Termination Restrictions
15th January, 2020
A key case for 2019 was the Supreme Court’s decision in Zehnder v Tillman, the first case about restrictive covenants to reach the nation’s top court in over 100 years.
The Supreme Court decided that a non-compete covenant could be saved by “severing” some offending words which, had they remained, would have made the restriction unreasonably wide and unenforceable.
Ms Tillman joined Egon Zehnder (“Zehnder”), who are a management consultancy and executive recruitment business, in 2004. After several promotions, she became the company’s Head of Global Financial Services.
In 2017 she decided to leave Zehnder to take up a new role with an industry competitor, Russell Reynolds Associates, in May 2017. Her employment contract included various post termination restrictions, including one which prevented her from working for a market competitor for six months after her employment ended.
Another significant restriction was that she could not: “…directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of the Company or any Group Company which were carried on at the Termination Date or during the period of 12 months prior to that date and with which you were materially concerned during such period.”
Ms Tillman accepted that other clauses which restricted her from poaching Zehnder clients and employees were reasonable. However, she believed that the restriction which stopped her from work for another competing company was too wide and unreasonable to be enforceable.
Zehnder sought an interim injunction against Ms Tillman in April 2017 to enforce the non-compete clause and prevent her from working for Russell Reynolds Associates. This was initially granted by the High Court but the decision was overturned by the Court of Appeal in July 2017 and went to the Supreme Court in 2019.
The Supreme Court focused on the part of the clause in dispute which was the reference to “or interested in…” and how it should be applied. Ms Tillman’s argument was that the wording in the clause was unreasonable as it stopped her from having any shares in a market competitor, which the Court of Appeal agreed with. Zehnder argued that the phrase did not prevent this but even if it did, then the wording “or interested in” could be disregarded or removed and the clause would still be enforceable.
The Supreme Court ruled in favour of Zehnder and overturned the Court of Appeal ruling. The Supreme Court found that the phrase “or interested in…” in Ms Tillman’s contract could be removed without having to modify or change the wording of the remainder of the clause and therefore the non-compete clause would still be enforceable.
Whilst this ruling sends an important message to the lower courts that they should not decline to enforce restrictive covenants where they are in substance reasonable, the Supreme Court did state that ‘the courts must continue to adopt a cautious approach to the severance of post-employment restraints’.
Employers should give careful consideration to the drafting of post-termination restrictions where they are seeking to protect their business make sure that non-compete and other post termination restrictions in contracts of employment are regularly reviewed and tailored to suit the role and individual. The position still remains that post termination restrictions should go no further than what is necessary to protect an employer’s legitimate interests (i.e. confidential information, trade secrets and business relationships). Whilst the employer succeeded in the end to enforce a widely drafted clause, this case proved very expensive.
- Employers should review their post termination restrictions and consider taking legal advice on their enforceability
- Consider whether restrictions need changing as employees progress through the organisation
- Consider drafting and revising restricting based on their role, risk to the business and seniority
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