“Interested in” protecting your business? How an overly wide restrictive covenant can result in no protection at all – and how to avoid a similar fate

“Interested in” protecting your business?  How an overly wide restrictive covenant can result in no protection at all – and how to avoid a similar fate

What should multi-national employers with employees in the UK consider when drafting and reviewing post-termination restrictive covenants? In the recent case of Tillman v Egon Zehnder Limited the Court of Appeal held that a restriction prohibiting a former employee from having any size of shareholding in a competitor was wider than necessary and could not be upheld.  The Court was also asked to sever that part of the restriction, which it refused to do, therefore rendering the entire provision unenforceable.

Mrs Tillman was hired by Egon Zehnder Ltd as an employed consultant in 2004, at which point she signed a contract containing a 6 month non-compete restrictive covenant. Mrs Tillman was seen to be a “considerable prize” and there were “high hopes” of her future progress. She was promoted in 2006, 2009 and 2012.

In January 2017, she resigned her position as Co-Global Head of the Financial Services Practice Group and notified Egon Zehnder that she would be working for a competitor from 1 May 2017. Egon Zehnder sought an injunction against Mrs Tillman on the basis that she was in breach of the terms of her non-compete clause which sought to prevent her from being “directly or indirectly engage[d] or…concerned or interested in” a competing business until 30 July 2017.

Restriction too wide?

In order for a restrictive covenant to be upheld:

1. it must seek to protect the employer’s legitimate business interest; and
2. it must go no further than is reasonably necessary to protect that interest.

Mrs Tillman argued that the restrictive covenant went further than was reasonably necessary to protect the business interests of the company.  Mrs Tillman argued that, as the covenant sought to prevent her from being “interested in” a competing business, it was too wide as it could prevent her from being a minority shareholder in a competing business, for investment purposes. The fact that in reality Mrs Tillman was not proposing to become a shareholder in a competitor but was proposing to work for competitor was irrelevant.

Mrs Tillman’s argument, while rejected by the Court at first instance, was accepted by the Court of Appeal.

Egon Zehnder argued that where a clause is ambiguous, the Court should uphold the interpretation which validated the clause, rather than one which would invalidate the clause.  The Court considered that, whilst there can be circumstances in which a clause is genuinely ambiguous such as to justify reliance on this principle, the mere fact that there was a potential alternative legitimate interpretation was not sufficient. Moreover, the Court made it clear that it is not a permissible exercise of construction to construe well understood words or phrases in a manner contrary to their normal meaning.

The judge then had to consider what the words “interested in” meant and whether these words prohibited Mrs Tillman from acquiring even a minority shareholding in a company which competed with Egon Zehnder.  It was common ground between the parties that if it did, the clause would be an unenforceable restraint of trade as it would go further than necessary to protect the company’s business interests. Referring to earlier cases which supported the argument that “interested in” did include acquiring or holding shares, the judge held that the restriction did prohibit Mrs Tillman from having a shareholding of any size in a competitor and was therefore too wide and, as a consequence, unenforceable.

Egon Zehnder’s alternative argument was that, if “interested in” prohibited the holding of shares in a competitor and rendered the clause too wide and unenforceable, the Court should “sever” (remove) the words from the clause, to make the clause enforceable.

The Court confirmed the position that parts of a single covenant cannot be “severed” – “severance” can sometimes take place only where there are distinct covenants.  The Court held that in this case, the covenant had to be read as a whole and could not be severed.  The words “interested in” could not be deleted to save the restriction and the Court of Appeal set aside the injunction, finding in favour of Mrs Tillman.

What does this mean for employers when drafting restrictive covenants for employees?
This case is a reminder to employers that caution and careful thought is required when drafting restrictive covenants.  In particular, if seeking to prohibit a shareholding or other interest in a competitor consideration should be given to excluding a minority or passive interest.  Despite a general trend over the years to supporting the enforceability of restrictive covenants, the Court cannot be relied on to a) remove parts of a restriction which make it unenforceable, and b) uphold an alternative interpretation of the clause.  Courts will not normally help employers who have drafted restrictions poorly.

Employers should review their contracts of employment in light of this judgment and consider updating their restrictions.

Those drafting or reviewing covenants should consider the following practical tips (this list is not exhaustive):

1. when drafting, consider carefully what you are seeking to achieve with any particular restriction and the relevant category of employee to which it applies, and tailor the wording accordingly;
2. be aware of the language used and any possibility it will lead to a wider interpretation beyond what is intended, as this could render the otherwise reasonable restrictions unenforceable.
3. ensure restrictive covenants are carefully drafted to reflect the employee’s role and activities at the time they are engaged;
4. review and consider amending an employee’s restrictive covenants where they are promoted or where there has been a substantial change to their duties and responsibilities including where their level of client or customer contact has changed, or their influence over internal and external relationships has increased;
5. if amending restrictive covenants following a promotion, thought should be given to whether additional consideration (for example, by way of financial payment) is required to seek to make them binding;
6. only seek to prohibit activity which would be likely to have an adverse effect on the business interests of the employer;
7. consider breaking down your restrictions into distinct restrictions so that, in the event one is held to be unenforceable, that provision can hopefully be removed, resulting in the remaining restrictions being enforceable; and
8. stress test your restrictions against particular exit and competition scenarios relating to key staff to identify any weaknesses.

Restrictive covenants are very important for any business in seeking to protect its workforce, client and customer connections and confidential information.  Poor drafting, or failing to carry out a regular review of restrictions, both in terms of the roles of the employees to which they apply, and any changes in the law, may not only result in costly litigation but, may also result in loss of clients, customers, employees and trade secrets.  The impact of such a loss can be huge for any business, affecting its reputation, client relationships, team morale, profitability and its ability to achieve its strategic goals, so, the importance of careful consideration, drafting and review of restrictions should not be underestimated.

Sarah Chilton is a Partner at CM Murray LLP and Wonu Sanda is a Trainee Solicitor at CM Murray LLP advising multi-national employers and LLPs on issues relating to protection of confidential information and restrictive covenants

Follow Sarah on Twitter @sarahjchilton

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