Strategy & Operations » Legal » Supreme Court boost for employers re non-compete clauses

Supreme Court boost for employers re non-compete clauses

Employers may now have greater confidence in the use of non-compete clauses as a way to protect their business, says Karen Coleman, an employment solicitor at Excello Law.

UK employers may now have greater confidence in the effectiveness of contractual clauses that restrict their employees from leaving to work for competitors. A recent UK Supreme Court decision provides significant comfort for employers seeking to enforce such contractual clauses, which are often known as non-compete clauses. However, employers must nonetheless be careful to ensure that non-compete clauses are carefully drafted so as not to be unreasonable or unduly broad.

This latest ruling will be welcomed by employers, since non-compete clauses are an important way to prevent key staff from damaging a business after they leave – for example, by immediately bringing a company’s key clients over to a competitor. These clauses can also discourage competitors from poaching staff. Non-compete clauses are usually time-limited, typically preventing staff from working for competitors for periods of 6 or 12 months.

It is widely believed amongst employers that non-compete clauses are hardly worth the paper they were written on. However, the Supreme Court’s ruling in Tillman v Egon Zehnder Limited [2019] UKSC 32, confirms that, where there is genuine business interest to protect, and the relevant clauses are drafted reasonably, non-compete restrictions will be upheld by the courts.

In this case, Ms Tillman had been employed in a senior role with a global management consultancy and recruitment firm. Her employment ended in January 2017 and she informed her employer that she wished to work for a competitor firm before expiry of the six-month restricted period specified by the non-compete clause in her employment contract. Her former employer initially obtained an interim injunction preventing her from working during the restricted period, but this was overturned by the Court of Appeal, before the case was appealed to the Supreme Court by her employer.

The non-compete clause in Ms Tillman’s employment contract stated that she must not “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”. The Supreme Court found that the words “interested in” made the clause too broad. However, instead of striking down the entire clause, the court instead held that the words “interested in” could be severed from the clause, but that the remainder of the cause would stand.

This decision surprised many observers as it overturned longstanding judicial guidance as to how parts of a contract may be severed, as set out in the leading 1920 case of Attwood v Lamont. The Tillman judgment has now freed the courts to take a more flexible approach in such cases. Judges may now let certain parts of a non-compete clause stand, even when striking down aspects of it as unenforceable.

The Tillman judgment found that the key question is whether removing the offending provision would “generate any major change in the overall effect of all the post-employment restraints in the contract.” The court emphasised that the “focus is on the legal effect of the restraints, which will remain constant, not on their perhaps changing significance for the parties and in particular for the employee.”

Applying this approach to Ms Tillman’s contract, the court held that “the words ‘or interested’ [were] 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.”

Non-complete clauses however continue to present a difficult balancing act for employers and their lawyers. They must be drafted sufficiently broadly to by effective, yet not so broadly that they risk being deemed unenforceable. The Tillman decision is welcome news for employers, since it means that even if part of a non-compete clause is found to be overly broad, the remainder of it may stand as enforceable. This will make such clauses far easier to enforce in practical terms.

The Supreme Court’s judgment tilts the balance in favour of non-compete clauses being enforceable which should discourage their being challenged.

The Tillman decision follows the Court of Appeal’s 2016 judgment in the case of Dyson Technology Limited v Pierre Pellerey [2016] EWCA Civ 87. That case concerned a Dyson employee, Dr Pellerey, who was working on a secret project to develop an electric car. While working with Dyson, Dr Pellery accepted a position working on electric cars for Tesla. Dyson sought an injunction to enforce the 12-month non-compete clause in Dr Pellerey’s contract of employment. Dr Pellerey resisted this, arguing, amongst other things, that the contractual non-compete clause was too broad.

The Court of Appeal in Pellerey set out the useful summary of the fundamental principles relating to the courts use of its discretion to provide injunctive relief in support of such clauses. These were originally set out by Justice Colman in the case of Insurance Co v. Lloyd’s Syndicate [1995] 1 Lloyd’s Law Reports 272.

The fundamental principles cited with approval included the principle that express or implied covenants “will in general be enforced by injunction without proof of damage by the plaintiff” and the principle that “it is unconscionable for the defendant to ignore his bargain.”

However, in Pellerey, the court took issue with the principle that the court’s discretion to refuse an injunction could only apply in exceptional cases. It instead held that courts should not attempt to “prescribe with any sort of particularity the types of circumstances in which it might be appropriate to refuse an injunction.” The court made clear that “every case will turn on its own facts”. It therefore reaffirmed that courts have the discretion to refuse such injunctions where hardship would be caused to the defendant by enforcing a non-compete clause, but little damage would be caused to the applicant if it were not enforced.

Facts of the case

However, the Court of Appeal in Pellerey recognised without reservation that parties should be held to their contractual bargain as regards non-compete clauses and that “the starting point” in such cases is that “the ordinary remedy is an injunction”. However, the courts firmly retain their discretion to look at the facts of each case more broadly.

Such disputes are not without risks for the new employer of an employee bound by a non-compete clause. They can also be dragged into the dispute and they can sometimes find themselves accused of inducement to breach the employment contract and, in certain cases, even conspiracy.

It is now clear that courts will generally uphold well-drafted and reasonable non-compete clauses – even if each case turns on its own facts. In practice, injunctions and damages are very expensive to pursue through the courts. Yet if a non-compete clause is well-drafted and an employer can demonstrate that financial loss has resulted, or could result, from the breach of that clause, an employer stands a good chance of success. In such cases, when faced with a plausible threat of injunctive proceedings, an employee’s solicitors will typically advise the employee to cease their activities and undertake to abide by the restrictions. The recent Supreme Court decision is welcome as it provides greater certainty as regards the enforceability of non-compete clauses.

Employers should however ensure that non-compete clauses are well drafted and properly executed by the employee. Such clauses should also be regularly reviewed so that they can be updated to reflect the particular risks posed by the departure of an individual employee, as the business develops or the employee’s role changes. Thanks to the recent Supreme Court judgment in Tillman, however, employers may now have greater confidence in the use of non-compete clauses as a way to protect their business.

 

Comments are closed.