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    How easy is it for your team to get out of their non-competes on a technicality?

    There is nothing more satisfying for a certain type of lawyer than to help their clients find a loophole to get out of their obligations.

    Tillman v Egon Zehnder Limited (2017) is such a case.  It concerned a 6 month non-compete obligation imposed on a senior employee of an international head-hunter.  The relevant clause in the employment contract prevented the employee from being:

    directly or indirectly engaged or be concerned or interested in any business carried on in competition with any business of the Company…” (emphasis added)

    The contract also contained a similar clause preventing the employee from holding outside interests during the term of employment.  As is usual this clause contained a saving for small personal investments (up to 5% of the shares of any publicly quoted company).  A similar saving should have applied to the post termination non-compete but, to the likely embarrassment of those concerned, this was missing.

    The employee left to join a competitor and the employer sought an injunction.  The Court of Appeal upheld her argument that the post termination non-compete was void.  This was on the basis that the restriction preventing her from being “interested in” a competitor meant that she could not hold shares in a competitor - however minor that holding might be.   It was held that this was an unreasonable restraint of trade because the restriction in a competitor was wider than reasonably necessary to protect the employer’s legitimate business interests.   It did not matter that the employee did not, in fact, hold any shares or want to hold any shares – it was enough that it was theoretically possible.

    Severance

    That was not the only surprising aspect of the judgment.  The court also refused to exercise its discretion to sever the offensive words “or interested in”.

    This was on the basis that the court only has the power to sever separate covenants and not parts of a single covenant – i.e. rejecting the notion that the court can simply apply a blue pencil to cross out the offensive parts of a covenant.

    Other courts have reached differing views on apparently similar wording and so we are in the unsatisfactory position where if your covenants are overly broad the eventual outcome will depend upon the attitude of the judge who hears your case.

    Take Aways

    Over the years, the courts have taken different approaches to claimants who seek to identify technical deficiencies with the drafting of their restrictions as a way to defeat the restrictions.  This decision is perhaps a relatively extreme example of the success of that tactic but decisions of this kind encourage employees (and clever lawyers) to look for loopholes.  It also acts as an important reminder to employers that a huge amount of care is required in drafting restrictions of this nature.

    Employers should:

    • critically assess the scope of their restrictions and take particular care with “boilerplate” provisions that are not appropriately tailored;
    • ensure that non-competes always include saving provisions that allow for the holding of shares and similar personal investments;
    • ensure that post termination restrictions are accompanied by carefully considered severability clauses which seek to give a sympathetic judge as much ammunition as possible to exercise the power to sever offensive aspects of the restrictions;
    • require employees to re-execute fresh restrictions each time they are promoted (the reasonableness of the restrictions is judged when they are entered into and the more senior the employee the more likely they are to be reasonable); and
    • be alert to internal restructuring or other transactions that might give rise to employees transferring between employing entities under the TUPE regulations.  In these circumstances employees have the right to object and walk free of their restrictions as demonstrated by Management Services Limited v Berry & BGC (2017) earlier in the summer (albeit unsuccessfully on the facts – see our newsletter here).