2020-02-17
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Restrictive covenants – what can an ex-employer do to stop you working for a competitor?

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Posted by Susan Hopcraft on 22 January 2019

Susan Hopcraft Partner

The starting point is that no person can be restrained from earning a living.  This is a long-standing principle of English law that the courts are generally careful to uphold.

The exception is for those who have signed a restrictive covenant when joining an employer, agreeing to post-employment restrictions that are strictly no wider than absolutely necessary to protect that employer’s legitimate business interests.  Employment contracts often contain these types of clause, particularly for more senior staff and in professional services. 

The question then becomes: are they enforceable?

What types of restriction might there be?

The usual types of restrictions are those that try to stop you from working for a competitor, working for clients that you dealt with at the previous employer, and/or from even trying to contact those clients you worked for.  The restrictive covenant can include all three: a ‘non-compete’, a ‘non-deal’ and a ‘non-solicit’.  The employer tends to want all three but if, by doing that, the covenant becomes too wide the employer is liable to lose all protection, because the clause could be deemed unreasonably wide and therefore unenforceable.

The restriction can last for any length of time but, the shorter it is, the more likely a court will consider it to be reasonable. 12 months is at the dubious end of the scale, although for a very senior employee that might be upheld.

The justification is that the ex-employer will consider they have invested in developing the employee’s skills and the client base and want to protect the return on that investment.  The professional employee often considers the client base belongs to them, particularly when the clients were brought to the ex-employee with them, which is a real issue in the IFA world for example.

But if you are prevented from even working at a competitor, and your entire career has been in a specific role that means any new job is bound to be at a competitor, that sort of restriction can leave an employee without a salary at all for a period.  The court has to balance the unfairness of that with the business’s wish to protect its interests.

Non-compete clauses – a real example

A recent case considered the width of a non-compete clause in the world of recruitment consultancy.  It has been a long running case and one which has ended with a significant revision to the law on covenants because it is now permissible to amend covenants that are too wide: and thereby make them enforceable.

Tillman case

In January 2004 Ms Tillman joined EZ as a Consultant with an employment contract containing post-termination restrictive covenants. In 2006 she was promoted to Principal and in 2009 to Partner. In 2012 she was appointed as co-Global Head of the Financial Services Practice Group. In January 2017 she gave notice, was put on garden leave and then on 30th January 2017 her employment was terminated with immediate effect.

She was very senior at the point of her departure but was relatively valuable and senior at the point of arrival too, which is the time when the reasonableness of the covenant is assessed.

Ms Tillman wanted to move to another recruitment consultant but EZ wanted to enforce the six month non-compete covenant. 

It was in fairly standard words and stated:

“13.2 You shall not without the prior written consent of the Company directly or indirectly, either alone or jointly with or on behalf of any third party and whether as principal, manager, employee, contractor, consultant, agent or otherwise howsoever at any time within the period of six months from the Termination Date:

13.2.3 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 such period."

Ms Tillman argued that the clause was wider than reasonably required for the protection of EZ’s interests, as it prevented her from engaging in activities anywhere in the world. She also argued that "interested in any business carried out in competition" included having a minor shareholding in a competitor, which was a restriction that was wider than reasonably necessary. She did not necessarily want to become a shareholder but that was the ‘hook’ that she used to try and have the covenant declared invalid. 

First judgment

The first judge decided in May 2017 that the covenant did not prevent her from becoming a shareholder in a competitor. He relied on another clause in the contract that explicitly prevented shareholdings of more than 5% in competitors during employment.  He used that to infer that, because the covenant did not explicitly refer to shareholdings, an ‘interest’ should not be read as including shareholdings.  Had it been intended to prevent shareholdings, he reasoned, it would have dealt with that expressly.

The covenant was not, therefore, in unreasonable restraint of trade and was enforceable. The judge granted an injunction restraining Ms Tillman from working for the new company for the six month period in the covenant. 

Appeal decision

The case went to appeal and the appeal decision was published in July 2017, at a point when the six months was almost up, although the outcome is no doubt important in relation to legal costs and damages payable by EZ for having wrongfully prevented Ms Tillman from working. 

The appeal judges considered the more natural meaning of “interested in” and decided that clause 13.2.3 did prohibit shareholdings and was impermissibly wide and in restraint of trade.  Since the offending words could not easily be severed from the rest of the covenant the whole clause was unenforceable.

Supreme Court

The case went to the highest court.  In July 2019 the outcome was a significant departure from long-standing law that a contract cannot be re-written.

The Supreme Court agreed with the appeal judges that “interested in’ meant no shareholdings were allowed, but they went on to allow the company to strike out those words in the covenant and enforce it.

The Court considered that, if the words could be taken out without affecting the overall contract, then the words could come out to allow the covenant to be valid and enforceable.

The costs of these legal proceedings are an open issue and there may yet be more litigation over who pays for each stage of the arguments along the way.

Summary

Employers will be encouraged by this outcome.  They can potentially now enforce more covenants than before, without being hindered by unnecessary additional words in a covenant that probably add little, but could have prevented enforcement. 

Nonetheless the essential guidance still needs to be that if you want to rely on a covenant, make sure it is as narrow as possible.   

We have expertise in restrictive covenants and can advise on enforceability.  We acted for the five ex-Affinity IFAs and successfully defended the claim for £10m brought against them in 2016 for alleged breach of 12 month covenants.  The claim was withdrawn part way through trial and we recovered indemnity costs for our clients.

[Further reading: Tillman v Egon Zehnder Limited [2019] UKSC 32]

About the author

Susan is a disputes and professional negligence lawyer, mainly in the financial services sector.

Susan Hopcraft

Susan is a disputes and professional negligence lawyer, mainly in the financial services sector.

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