Supreme Court rules for the employer

The Supreme Court decision in Tillman means that employers can now have far greater confidence in non-compete clauses as being an effective way to protect their interests.

 A recent UK Supreme Court judgment has greatly strengthened employers’ ability to enforce contractual clauses restricting employees from leaving to work with competitors. Such restrictive covenants are often referred to as non-compete clauses. These can be vital to prevent key staff from damaging a business after they leave

It is widely believed amongst employers that non-compete clauses are not worth the paper they are written on. However, the Supreme Court’s ruling in Tillman v Egon Zehnder Limited [2019] UKSC 32, confirms that non-complete clauses will generally be upheld, if there is genuine business interest to protect, and they are drafted reasonably, and not too broadly.

In Ms Tillman’s case, the contested non-compete clause stated that she must 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”.  Ms Tillman’s employment ended in January 2017. She then told her former employer that she would start work with a competitor. Ms Tillman said that she would not comply with the non-compete clause, as she regarded it as void, as an unreasonable restraint of trade.

Ms Tillman’s employer then applied for an interim injunction to restrain Ms Tillman’s from working with her new employer. The initial decision to grant the injunction was overruled by the Court of Appeal and the case was ultimately appealed to the Supreme Court. In Tillman, the Supreme Court found that the words “interested in” made the non-compete clause too broad. However, instead of striking down the entire clause, the court ultimately held that the offending words could be severed, without rendering the entire non-compete clause void.

 

Lord Wilson’s judgment in Tillman set out the relevant case law in some detail, and noted that, “considerations of public policy drove the evolution of the doctrine under common law that post-employment restraints of trade were, unless reasonable, void”. The judgment went on to say that, “Early in the last century, however, a much more restrictive view was suddenly taken of the availability of severance in post-employment covenants. The reasons of public policy which drove a conclusion that, unless reasonable, they were void were adopted and expanded to suggest a further conclusion that, where parts of them were unreasonable, not even the reasonable parts should usually be enforced.”

Disagreeing with this approach, the Supreme Court in Tillman overruled the leading 1920 case of Attwood v Lamont, calling its approach to the severance of such contractual clauses, “instantly controversial and ultimately unsatisfactory”. The court in Tillman then found that the “Application of the severance principle to Ms Tillman’s restraint covenants now becomes straightforward. First, the words ‘or interested’ are capable of being removed from the non-competition covenant without the need to add to or modify the wording of the remainder. And, second, removal of the prohibition against her being ‘interested; would not generate any major change in the overall effect of the restraints. So those words should be severed and removed.”

The court cited with approval the words of Lord Justice Younger in British Reinforced Concrete Engineering Co Ltd v Schelff [1921] 2 Ch 563, 573, where he said that “the effect of severing by striking out with a blue pencil the obnoxious part of a covenant is not to alter or affect the construction of what is left. That must be construed as if the portion struck out still remained”.

The Tillman judgment echoes the Court of Appeal’s 2016 decision in the case of Dyson Technology Limited v Pierre Pellerey [2016] EWCA Civ 87. That case concerned a Dyson employee, Dr Pellerey, who was working on a secret electric car project. Dr Pellerey then accepted a position working on electric cars for Tesla. Dyson sought an injunction to enforce Dr Pellerey’s 12-month non-compete clause, which Dr Pellerey resisted.

 

The Court of Appeal in Pellerey held that parties should be held to their contractual bargain as regards non-compete clauses, saying that “the starting point” is that “the ordinary remedy is an injunction”. However, it also held that courts should not attempt to “prescribe with any sort of particularity” when to refuse an injunction, saying that “every case will turn on its own facts”.

 

The court in Pellerey also reaffirmed the judicial discretion to refuse injunctions where hardship would be caused to the employee by enforcing a non-compete clause, but little damage would be caused to the employer if it were not enforced. The new employers can also be dragged into such disputes and can even find themselves accused of inducement to breach the employment contract and, occasionally, even conspiracy.

 

These judgments make it clear that courts will generally uphold well-drafted non-compete clauses, even if each case turns on its own facts. If a non-compete clause is well-drafted and an employer can demonstrate that financial loss has or could result from its breach, an employer stands a good chance of success. Employees will now know that, even if one aspect of the non-complete clause is found to be too broad or unreasonable, the court may well leave the remainder stand.

In such cases, when faced with a plausible threat of injunctive proceedings, an employee may be best advised to abide by the non-compete restrictions. The Tillman judgment is welcome news for employers, as it provides greater certainty and strengthens their position in such negotiations.

The judgment also suggests that courts be mindful of the varying ability of different employees to negotiate and challenge non-compete clauses.

Lord Wilson’s judgment in Tillman noted that, “High-ranking employees can do particular damage to the legitimate interests of their employers following termination of their employment; and it may be that, when they enter into their post-employment covenants, they are able to negotiate with their employers on nearly an equal footing. As Denning LJ said in M & S Drapers v Reynolds [1957] 1 WLR 9, 19, ‘A managing director can look after himself’; and so, arguably, could Ms Tillman. But then he added: ‘A traveller [Mr Reynolds was a travelling salesman] is not so well placed to do so. The law must protect him’. It is clearly common practice for an employer to present a prospective employee with a substantial written contract, many terms of which, including those imposing post-employment restraints, are derived from books of precedent. It is as valid in 2019 as it was in 1913 to infer that most prospective employees will not be able, even if minded, to decline to accept such terms, still less, following the end of their employment, to defend a claim that they are in breach of them. The courts must continue to adopt a cautious approach to the severance of post-employment restraints.” Courts are likely therefore to be less sympathetic to “high-ranking employees” when it comes to the enforcement of non-compete clauses.

In order to help ensure the enforceability of non-complete clauses, employers should ensure they are well drafted and properly executed by the employee. Such clauses should also be regularly reviewed and updated to reflect the particular risks posed by the departure of an individual employee, as their role changes.

The Supreme Court decision in Tillman means that employers can now have far greater confidence in non-compete clauses as being an effective way to protect their interests.

Karen Coleman is a specialist employment lawyer at Excello Law

www.excellolaw.co.uk

 

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