Author: Michael McCartney
Michael McCartney comments on a recent Court of Appeal decision in Egon Zehnder v Tillman highlighting the challenge employers face when enforcing clauses designed to prevent competition from employees after they leave.
The Court of Appeal held that a non-compete restriction which purported to prevent Ms Tillman from having an “interest” in a competing business was too broad to be enforced. The restriction would have prevented her from holding any shares at all in a competitor, regardless of their value. This position was at odds with her contractual right during her employment to hold a limited number of shares up to a maximum of 5%. There was clearly no basis upon which Egon Zehnder could possibly justify a more stringent protection after employment than had existed during it.
The court was not willing to interpret the word “interest” so as to exclude a shareholding and would not countenance severing the word altogether, because this would give a wholly different meaning to the covenant from what the parties had intended. Accordingly, Ms Tillman was free to take up her competing role just eight days before her restriction was due to lapse on 30 July 2017.
Egon Zehnder (EZ) is a global executive recruitment company. Ms Tillman was a star employee who had been quickly promoted through the ranks from consultant to partner and finally to co-Global Head of Egon Zehnder’s Financial Services Practice Group. In January 2017 she resigned to join the New York office of Russell Reynolds Associates (RRA), a direct competitor of EZ. EZ sought injunctive relief to prevent her from joining RRA until after her non-compete restriction had lapsed on 30 July 2017.
The precise wording of the covenant at issue was as follows:
“You shall not without the prior written consent of the Company directly or indirectly, either alone or jointly with or on behalf of any third party and whether as principal, manager, employee, contractor, consultant, agent or otherwise howsoever at any time within the period of six months from the Termination Date …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 such period.”
At first instance His Honour Mann J granted the injunction sought. Two issues of interest arise from his decision:
Just a single point of law arose before the Court of Appeal. Ms Tillman submitted that the High Court had erred in this latter aspect of its decision, namely it had gone too far in excluding from the ambit of the restriction any intention to catch a shareholding in a competing business. Her counsel argued that the natural and clear meaning of the word “interest” would include a shareholding. The Court of Appeal agreed.
The fact that Ms Tillman intended to take up employment with a direct competitor and not a shareholding at all was irrelevant to the difficulty that EZ faced in justifying the protection. Put simply, EZ had overreached.
Finally, the Court of Appeal considered whether or not it could strike through or “blue pencil” the offending wording and give effect to the remaining covenant. It held that it could not since this would involve changing part of a covenant and severance could only ever be applied to sever an entire covenant rather than part of a single covenant. The judge held that the court had no business creating a valid covenant in order to replace an impermissibly wide one which an employer had sought to impose.
Michael McCartney, Partner, Fladgate LLP (email@example.com)