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The Court of Appeal had to decide in Tillman v Egon Zehnder Ltd [2017] EWCA Civ 1054 whether a non-compete restrictive covenant that did not contain a provision permitting the employee to hold a minor shareholding in a competing business after termination was valid.

Facts

Mary-Caroline Tillman was a highly successful executive search agent, rising swiftly through the ranks at Egon Zehnder Ltd (EZ) following her move into recruitment from her early career in investment banking. First hired in 2004 as a consultant, she was promoted to principal then partner by 2009 (although she was legally an employee throughout), becoming Co-Global Head of the Financial Services Group in 2012.

Ms Tillman was hired with the expectation that she would be promoted quickly and would have a high level of client engagement. Her post-termination restrictions were drafted accordingly, and forbade her for six months post-termination from being "engaged, concerned with or interested in" a competing business, of the type with which she had been materially concerned for the 12 months preceding her termination. While the restriction was not geographically limited (EZ had a global reach, as did Ms Tillman's practice), the scope of the restriction was naturally limited by its link to those parts of the business she had been materially concerned with prior to termination, as well as being limited in time to six months.

Ms Tillman resigned on 23 January 2017 and her employment was terminated one week later (sooner than the expiry of her notice) by EZ's use of the payment in lieu of notice clause in her contract. She informed EZ that she intended to start work for a New York-based executive search agency on 1 May 2017, less than four months after her termination date, ostensibly in breach of her non-compete restriction. EZ sought an injunction to stop her.

High Court decision

In arguing that the non-compete clause was void and should not apply, lawyers for Ms Tillman stated that the wide wording of the type of involvement she was forbidden from having with a competing business ("engaged, concerned with or interested in") stopped her from having, for example, a minimal shareholding in such business solely for the purposes of investment. Such a shareholding of up to 5% had been permitted, as is the norm, during her employment but no corresponding permission was included as an exception to her post-termination restrictions. Accordingly, her lawyers argued, EZ's restriction on what Ms Tillman could do was beyond what was reasonable to protect its legitimate business interests, as it would even stop her holding an investment at a minimum level, and was thus an illegal restraint of trade. They also argued that the lack of a geographic restriction rendered the clause unenforceable on the same basis.

The matter was heard in May 2017 by the High Court for the purposes of the injunction sought by EZ, which was granted.

The High Court found that EZ had done no more than was reasonable to protect its legitimate business interests. Looking at what was in the contemplation of the parties when the contract was originally signed, the High Court felt the restriction was reasonably drafted and fairly limited, and would not be deemed to prohibit Ms Tillman from holding a minimal shareholding in a competing company.

Ms Tillman appealed on the second aspect of the High Court's decision, namely the breadth of the type of interest her non-compete restriction stopped her from having, arguing again that this was so wide as to be void for unfair restraint of trade. EZ asked the court to sever ("blue pencil") the offending wording from the restriction if they found in favour of Ms Tillman on this point, to allow the remaining wording to give the protection it was clearly intended to provide.

Court of Appeal decision

The Court of Appeal found in favour of Ms Tillman on 21 July 2017 and lifted the injunction, which had only days to run in any event.

The Court of Appeal held that the "theoretical width" of the coverage of the non-compete clause made it impermissibly wide, thus invalidating the entire clause. EZ failed to achieve a blue-pencilling (severance) of the offending wording, as the Court clarified that it could not redraft clauses so they become legally sound, and even if it had removed the words "interested in", the wording "concerned with" would still be excessively wide. The Court further confirmed that it cannot legally remove wording from a single covenant to perfect it; it is only possible for a court in this situation to sever a whole covenant, provided the effect of that severance leaves the meaning and effect of the remaining covenants unaffected, which was not the case here. The drafting was simply deficient, and the exception of minority shareholdings from the restriction (which would have brought an acceptable limit to the interests being restricted) was fatally absent.

Comment

It would now appear to be vital that all non-compete restrictions using broad wording to describe the type of involvement in competing businesses that the individual is restricted from having after termination should make it explicitly clear that minimal shareholdings are permitted, and will be excepted from such post-termination restrictions (not just permitted during employment). Otherwise, this case seems to have created something of a "get out of jail free" card for those employees whose restrictions do not have this minor shareholding exception in place during the post-termination period, even when those restrictions are otherwise reasonable, as the employee can argue that the employer is seeking to apply an unlawful restraint of trade stopping them from activities that would have no effect at all on the employer's legitimate business interests, thus invalidating the non-compete clause entirely.

Ms Tillman's practical concern was not, of course, whether or not she could hold such an investment; she wished to work in competition with EZ, which would be in clear breach of the relevant non-compete clause were it enforceable. She used the argument around the fettering of her ability to hold minimal shareholdings to secure the voiding of the entire clause by the Court.