IP Insight – Restrictive Covenants: Major Victory for Employers in Supreme Court
IP Insight is a series from Virtuoso Legal, the intellectual property specialists. Tillman v Egon Zehnder Ltd  UKSC 32 (3 July 2019) in relation to restrictive covenants.
On 3 July 2019, the Supreme Court of the UK issued its judgment in the case of Tillman v Egon Zehnder Ltd  UKSC 32, concerning restrictive covenants. A copy of the judgment can be found here. It is notable in that it is the first time in over 100 years that the Supreme Court has decided upon the issue of employment competition.
Ms Carolyne Tillman was employed by Egon Zehnder Ltd from January 2004 to January 2017. Her employment contract contained several post-termination restrictive covenants. Clause 13.2 was the central issue in the appeal. According to 13.2.3 of the employment contract:
“…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 which were carried on at the Termination Date or during the period of 12 months prior to that date and with which you were materially concerned during such period.”
Ms Tillman wanted to start working for one of Egon Zehnder’s competitors as of 1 May 2017. EZ brought proceedings against Ms Tillman arguing asking for an injunction preventing Ms Tillman from working for a competitor.
On 23 May 2017, Mr Justice Mann agreed with the claimant and stated that an injunction should be granted in order to restrain the breach of the contract.
The Court of Appeal disagreed with Mr Justice Mann and decided that the clause was unreasonably wide. When dealing with the point of whether Ms Tillman could even hold shares in a competitor, the Court stated that “clause 13.2.3 does prohibit shareholdings and is impermissibly wide and in restraint of trade unless it can be severed in some way.”
The Court stated further that “severance can only be applied to separate covenants and not to parts of a single covenant.”
The Court of Appeal’s decision would have rendered thousands of clauses in employment contracts unenforceable.
The Supreme Court decision
The Supreme Court agreed with the Court of Appeal in relation to the minority shareholding. The Court stated:
"the word “interested” in the non-competition covenant in the present case, therefore, covers a shareholding, whether large or small and on that basis is, as is conceded, in unreasonable restraint of trade; and that, unless it can be severed and removed from the rest of the clause, the Court of Appeal was right to set aside the injunction granted against Ms Tillman.” – Lord Wilson
The Court then went to discuss whether the unreasonable restraint of trade can be removed from the contract and keep the rest of the non-competition clause enforceable. It was held that:
"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.” – Lord Wilson
The Freshasia v Jing Lu case
The Supreme Court referred in its decision to the case of Freshasia v Jing Lu. Virtuoso Legal’ IP Protect team, led by our director Philip Partington, successfully defended an interim injunction application brought by FreshAsia Foods Limited (“FreshAsia”) seeking to (amongst other things) force our client to terminate his employment with his new employer. For more information about the Freshasia case, read here.
Although in the case of Freshasia, Arnold J found that the employer failed to establish legitimate interests that needed to be protected by the way of the covenant and did not have to go into detail in the law of severance, the Supreme Court mentioned the importance of Mr Daniel Alexander QC’s comments in the injunction hearing. Mr Daniel Alexander QC held that
"…three aspects of the covenant were unreasonably wide but that, following severance, they should be removed from the remainder.” - Mr. Daniel Alexander QC
The judge, therefore, observed the change of the law moving from cases such as Atwood in allowing a wider approach when it comes to severability.
While the UK courts still protect the rights of employees when it comes to an unreasonable restraint of trade, it is important to note that the Supreme Court now allows such provisions to be severed from a clause which remains enforceable.