Supreme Court to rule if restrictive covenant preventing an ex-employee from being “interested in” competitors was enforceable

This month, the Supreme Court will rule if a restrictive covenant in an employment contract preventing an ex-employee from being “concerned or interested in” a competitor for six months is enforceable.

The Supreme Court will hear an appeal from the Court of Appeal which interpreted a restrictive covenant that an employee should not “directly or indirectly engage or be concerned or interested in any business carried out in competition” with the employer as too wide to be enforceable, since it could even prevent a person from holding shares in a company. The ruling meant that the ex-employee was free to go to work for a competitor of the employer without having to wait six months.

If the Supreme Court agrees with the Court of Appeal, employers may have to review their restrictive covenants to ensure that they are enforceable.

Background

Restrictive covenants (clauses in a contract of employment which restrict employees’ activities after they leave employment) can be vital in protecting an employer’s business. But careful drafting is essential. The general rule is that such covenants are unenforceable unless the employer can show that they protect a legitimate interest (such as its confidential information or its customer base) and are reasonable in all the circumstances.

Facts

The Claimant resigned from her senior position in order to join a competitor of her former employer.  Her employment contract contained a six months’ restriction which prevented her from being “engaged, concerned or interested” in any business which competed with the employer.

Her former employer argued that the Claimant would be in breach of her covenant and sought an injunction to prevent her from starting work before the end of her six months’ restriction. The Claimant argued that, as the covenant prohibited her from holding even a minor shareholding in a competitor, it was void, as it was wider than reasonably required for the protection of legitimate business interests.

High Court

The High Court ruled against the Claimant and granted the injunction. The Court was prepared to interpret the clause so that it did not prevent a person from holding shares in a competitor business. The Court was persuaded to do so given the existence of other provisions of the employment contract which expressly permitted such shareholdings during the course of employment; it would have been anomalous to seek to impose a more onerous restriction post–termination.

Court of Appeal

The Court of Appeal allowed the Claimant’s appeal, ruling that the phrase “interested in” had a well-established meaning and that meaning included owning even one share. It was impossible to say that someone owning a share in a company was not ‘interested’ in the business of the company. There was no ambiguity: the clause was too wide to be enforced by the former employer.

Comment

The Court of Appeal accepted that its decision effectively gave the Claimant a ‘get out of jail free’ card. It didn’t matter that the Claimant intended to work for the rival rather than simply acquire shares. Public policy took precedence over the merits of individual cases.

This decision should be a reminder to employers that careful drafting is crucial when it comes to restrictive covenants. In practice, if a covenant contains similarly wide wording (‘interested in’ or ‘concerned with’), good practice is to include an exception allowing the employee to hold a minority shareholding in other companies, whether competitors or not.

Tillman v Egon Zehnder Ltd

Warning: this news item is not a substitute for legal advice. The information may be incorrect or out of date and does not constitute a definitive or complete statement of the law. This news item is not intended to constitute legal advice in any specific situation. Readers should obtain legal advice and not rely on the information in this news item.