On Eve of US Independence Day, UK High Court Gives Insight on Employee Independence in Noncompetition Agreement Case

Tillman v Egon Zehnder Ltd., the first employment competition case to reach the UK’s highest court in over a century was decided on July 3, 2019, changing the landscape for noncompetition agreements in the UK.

Under English law, for a restrictive covenant to be upheld, it must (1) seek to protect the employer’s legitimate business interest, and (2) go no further than is reasonably necessary to protect that interest. Here, the English Supreme Court found that the words “interested in” were overly broad, and presumptively invalid, because they prevented the former employee from becoming a minority shareholder of a competitor’s business, even if she just wanted to do so for investing purposes unconnected to employment.  Although, in reality, the former employee did work for a competitor.

The Court analyzed whether the words “interested in” could be severed while saving the remainder of the restrictive covenant.  The Court departed from an approach established in a 1920s case and instead affirmed an approach established in a 2007 case, Beckett Investment Management Group Ltd. v. Hall (2007) EWCA Civ. 613, ICR 1539.  The earlier precedent would have precluded enforcement of the noncompetition agreement entirely due to the presence of an unenforceable provision, but under Beckett the court has discretion to strike unenforceable provisions from the noncompetition agreement and permit the remainder to be enforced.  Beckett set forth three criteria to sever an unenforceable provision in a noncompetition agreement; the unenforceable provision (a) must be capable of being removed without needing to add or modify the language that remains, (b) the remaining terms must be supported by adequate consideration, and (c) the removal of the provision must not generate any major change to the overall effect of restraint in the contract.  Applying this standard here, the Court held that the unreasonably restrictive “interested in” language could be severed while the remainder of the noncompetition agreement could be enforced.

One potential consequence of this ruling is that employers may be tempted to draft noncompetition clauses more broadly and without fear of such language rendering the agreement unenforceable.  However, employers should be careful not to fall into this trap – if the unenforceable language is too intertwined with the remainder of the noncompetition clause or other portions of the agreement, severance still may not be available.  Employers should continue to draft relatively narrow and independent noncompetition clauses to ensure their contracts remain enforceable.