Restraint Clauses: Wrongful Competition and the Blue Pencil
There is an air of curiosity about Tillman v Egon Zehnder, the first employee competition case to reach the Supreme Court for 100 years. Ultimately, the employer (EZ) won its argument that two words could be “blue pencilled” from a non-competition clause, so that the unaffected content remained valid and enforceable. But there was a sting in the tail…
The restraint in question involved the employee (T) agreeing that she would not “directly or indirectly engage or be concerned or interested in any business carried on in competition…” with EZ.
In seeking to join a competitor, T argued that “or interested” made the entire clause too wide to be enforced, because it might have prevented her from owning even a single share in the competitor. It was not, however, her intention simply to own a single share or more than one. Her intention was to join the competitor, on 1 May 2017. The restraint, if unchallenged, would have expired on 30 July 2017.
On 23 May 2017, EZ obtained an injunction to stop her joining the competitor. On 21 July 2017, the Court of Appeal overturned that decision and discharged the injunction. There were now 9 days left on the restraint. EZ chose to appeal to the Supreme Court, who heard the case 18 months later (!) on 21/22 January 2019 and delivered judgment on 3 July, formally restoring the injunction in relation to the long expired restraints.
The basis of its decision was that the two offending words could be severed from the otherwise too wide clause, because the effect of doing so would not generate any major change in the overall effect of all the post employment restraints in the contract.
What, then was the sting in the tail? Costs. In inviting submissions for the issue to be determined, in relation to the costs in all three courts over the two year period, the Supreme Court referred to the “legal litter” of unreasonable post employment restraints, and the unfair burden they cast on others to clear them up. EZ won the argument, but its victory may be Pyrrhic. Or not, as the case may be, if T’s challenge were to be deemed technical and artificial?
What is the moral of the story? Do not be complacent when including restraint clauses in an employment contract, or agreeing to their inclusion on the nod. They might concentrate the mind broadly, or (as the case may be) not be worth the paper they are written on, but there is no guarantee that they can be fine tuned or batted aside later in the event of a dispute. Far better to get it right first time, when you may end up saving a lot of costs in the process.