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Non-compete clauses in the Supreme Court

7/16/2019 12:00:00 AM

This month's Supreme Court decision in Tillman v Egon Zehnder Ltd offers some comfort to employers –  as well as a sting in the tail.

Egon Zehnder, a high-profile recruitment business, was seeking to enforce a non-compete restriction against a former senior employee who had joined a competitor.  The clause required the ex-employee not to 'directly or indirectly engage or be concerned or interested in' a competing business.  The first question was what the clause meant and whether it was enforceable.  Unsurprisingly, the Court ruled that the correct interpretation of the words 'interested in' was that the ex-employee couldn't be a shareholder in a competing business (even a minority shareholder or passive investor), and that it was therefore unreasonably wide and unenforceable.

However, the Court then went on to rule that the words 'interested in' could be deleted, even though they were in the body of the clause rather than in a separate sub-clause. As a result, Egon Zehnder could still enforce the prohibitions on working for or playing an active role in a competitor. The Court ruled that, when you consider whether part of a post-termination  restriction can be deleted, the issue is whether deleting the words would change the meaning of what's left, and whether deleting them would cause a major change in the effect of the post-termination restrictions.  This is a more liberal approach to such deletion (or severance) than courts have previously taken in these cases.   

This case will change the dynamics of disputes over enforcing post-termination restrictions, as it makes it harder for employees to argue that a whole clause falls away because of a few words which make the clause unreasonably wide.   It will no doubt encourage some employers to impose wide post-termination restrictions (with easily severed parts) on senior staff.  Those employers may assume that many staff will comply with even an unreasonably wide restriction rather than litigate, and if litigation does ensue the courts will delete the unreasonable parts of the clause and enforce the rest. However, this strategy entails considerable risks.  The employer may successfully enforce a (watered-down) clause due to the court severing unreasonable wording, but they are likely to pay a substantial proportion of the costs of the case as a result (as the Supreme Court has hinted that Egon Zehnder will need to do).    Tailored, well-drafted clauses which are carefully designed to be enforceable will remain the best option for most businesses.

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