The Supreme Court in the UK, the highest court in the country, last week ruled on a restrictive covenant case for the first time in 100 years [Tillman v Egon Zehnder Ltd  UKSC 32 (3 July 2019)]. It has clarified important points on interpretation, the key takeaway being it will now be easier for employers to enforce covenants against departing employees.
Covenants Must Be Necessary to Protect Employer’s Interests
It has long been established in the UK, that restrictive covenants are an unlawful restraint of trade unless they go no further than is necessary to protect the employer’s legitimate proprietary interests. The Supreme Court recognized as such in quoting the colorful language of a court decision from the 15th century criticizing a plaintiff employer looking to enforce a covenant:
“By God, if the plaintiff was here, he would go to prison until he paid a fine to the King.”
Court decisions have evolved in the years since, but the fact remains that an employer cannot seek to simply place restrictions on a departing employee; there must be an actual interest that the covenant is needed to protect, and the scope of the restriction cannot go further than reasonably necessary to protect that interest.
UK Courts Will Not Rewrite a Covenant to Make It Work
It is also an accepted principle that a UK court will not rewrite an employer’s covenant. This means that a UK court would not reduce the length or geographical scope of a restriction to make it reasonable or fix defective drafting. The principle is that employers should not be able draft clauses widely as a deterrent, knowing the courts would then write them down to still be enforceable.
The problem is that this narrow approach can also lead to unsatisfactory results, with employers being deprived of important protections when employees opportunistically seek to benefit from loopholes or drafting errors.
The present case being one such example—the employee arguing that the inclusion of the words “or interested in…any business” (in an otherwise reasonable non-compete clause) having the effect that she was then unreasonably prevented from holding a passive or minority shareholding in a competitor—i.e. which was not necessary to protect the employer’s interests as it could not create a genuine threat of competition. It was a hypothetical concern as this was not relevant on the facts—she had joined the competitor as an employee. Without the reference to the shareholding, the covenant would have been valid and she would not have been able to work for the competitor, but by including this wording, even though it was not relied on or relevant to the facts in dispute, did it then make the non-compete clause as a whole too wide and therefore all of the restriction unenforceable?
The “Blue Pencil” Test
The so-called “blue pencil” test is intended to find the right balance in these types of cases—allowing for the strike through (or “severance”) of offending words to make a covenant enforceable. But this is only possible where the removal:
- is possible without having to add to or modify the wording that remains; and
- does not change the character of the contract so that it becomes “not the sort of contract that the parties entered into at all”.
However, this second criteria has caused difficulties and led to two different lines of interpretation developing in the courts over the years:
- The more restrictive approach: following a decision taken by the Courts around 100 years ago, the more restrictive approach limits the ability to delete offending words to where the contract contains several standalone covenants, and one covenant can be deleted in its entirety. This is on an analysis that severance of parts of a single covenant would normally change the character of the contract.
- The more liberal approach: does not apply as much significance to whether the severance applied to a single covenant or a combination of distinct covenants.
The problem with the restrictive approach is that it is not always clear what will constitute a standalone covenant. As the Supreme Court pointed out in this judgment, it will “largely be dependent on the eye of the beholder” and it referenced the unacceptable variance in outcomes reached in the courts as a result.
Supreme Court Decision
The Supreme Court therefore favored the more liberal approach, and with it effectively overturned 100 years of court precedent, removing the need to consider whether severance was being applied to a standalone covenant. In the Supreme Court’s opinion, the relevant question was whether removal of the offending provision could be achieved without a major change in the overall effect of all the post-employment restraints.
This decision is without doubt a good result for employers, who can now argue that certain provisions in a covenant which are too broad or are irrelevant can be deleted, to “save” a covenant that would otherwise be unenforceable.
However, the decision does not serve as a carte blanche for employers to start drafting overly wide covenants, safe in the knowledge that the Courts will save the underlying covenant. Three key caveats still apply, dampening employers’ celebrations:
- First, the court acknowledged the importance of the law in protecting vulnerable employees. Whilst the employee in this case was a “top executive” and deemed able to “look after” herself this would not always be the case and the courts must continue to adopt a cautious approach to the severance of post-employment restraints;
- Secondly, the onus will be on the employer to show that the conditions for severance apply – in particular that the wording can be removed with no major change to the remainder of the restrictions; and
- The last, in the Court’s words “sting in the tail”: employers that seek to rely on severance to clear up their own unreasonable covenants may have to foot the bill of bringing the court proceedings – which are usually substantial. In the Zehnder case litigation had been ongoing for well over two years.
While the current case is good news for employers looking to rely on covenants that have been drafted too widely, there are other reasons covenants may be void or ineffective. For example: due to defective drafting; because they were introduced without consideration (in particular where they are introduced after employment has commenced); or because the employee’s role/ seniority did not warrant a restriction (or the length of the restriction) at the time the contract was signed—it is important to note that reasonableness is judged at this point rather than the employee’s position at the time of termination, i.e. after they may have been promoted.
The case does not therefore offer complete protection to employers. The best advice still remains that it will always be preferable for employers to spend the time getting covenants right in the first place, rather than go through the time, expense and uncertain outcome of court proceedings to try and rectify.