Laws of Eve | Restraint of trade
Justice is usually depicted by balanced scales, which are used to demonstrate that each side of a case will be considered and that cases will be dealt with fairly.
It is common for employment contracts for senior executives in large companies to include non-compete or restraint of trade covenants. Under these covenants, the employee typically agrees not to start a similar trade or be employed to the employer’s competitors for a certain amount of time after his or her employment ceases. The employer’s objective is to prevent the employee from taking trade secrets, knowledge, staff, and clients to the new employee for a period of time.
The competing rights of the employer and the employee in relation to freedom to include a non-compete clause in a contract, on the one hand, and the employee’s freedom to work, on the other hand, are difficult to balance. It is not unusual for an employer to seek an injunction to prevent a former employee from becoming employed to a competitor for a period of time; but it is also not unusual for the courts to refuse those applications and find that the non-compete clauses are too wide and unreasonably restrain the employee.
The UK Supreme Court recently considered one such case – Tillman v Egon Zehner Limited  UKSC 32 – in which a senior investment banker resigned from her job with the defendant (‘Egon’) and immediately commenced a job with Egon’s competitor. Egon attempted to obtain an injunction to enforce the employment contract, which included a clause stated that Tillman would 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 which were carried on at the termination date or during the period of 12 months prior to that date ... .”
In opposing the grant of the injunction, Tillman argued that the words “or interested” in the clause were unduly wide and rendered the clause unenforceable, because the words could be interpreted to mean that she was retrained from holding even a minority interest in a competing business.
The injunction was granted at first instance, but reversed on appeal before being considered by the UK Supreme Court. The Supreme Court ruled in Egon’s favour for the following reasons:
- The employment contract between Tillman and Egon included a restraint of trade clause that would restrain Tillman’s ability to hold shares in a competing firm.
- Assuming that the parties intended the clause to be valid at the time they entered into the contract, the natural meaning of the words “or interested” would lead to the conclusion that Tillman would be prevented from holding even a monitory interest in a firm.
- Unless the words “or interested” could be severed from the clause, the clause would be void and unreasonable in restraint of trade.
- The following three-pronged test was applied, after the words were removed from the clause, to determine whether the restraint of trade can still stand:
Can the clause stand without adding any words to it?
Are the remaining terms of the clause still supported?
Does the removal of the words change the overall effect of the intended restraint?
The court then unanimously held that the injunction should be formally restored (although the 12-month period had passed), subject to the words “or interested” being removed from the restraint of trade clause.