19 July, 2019
One situation that a non-compete clause seeks to avoid is a former employee joining a direct competitor almost immediately after termination. However, if such a clause prohibits even shareholdings in a competitor, the former employee can seize upon this overreaching effect to void the entire clause for being in unreasonable restraint of trade (even when acquiring shareholdings was never the individual’s plan).
In such situations, can the doctrine of severance aid the employer in striking out the offending portion of the restrictive covenant and leaving the remainder valid and enforceable? This was the key issue decided by the UK Supreme Court in Tillman v Egon Zehnder [2019] UKSC 32, the first employee competition case to be considered by the UK House of Lords/Supreme Court in more than a century. After adopting a refined approach to the issue of severance, which was consistent with case law and modern commercial realities, the Supreme Court held that the offending words in question should be struck out.
Background
The dispute concerned the interpretation of a non-compete clause in an employment contract between Egon Zehnder Ltd (“Egon Zehnder”) and Mary Caroline Tillman (“Tillman”). Tillman contended that the wording of the non- compete clause — “directly or indirectly engage or be concerned or interested in any business” — extended to shareholdings in competitors and was thereby unreasonable, rendering the whole clause unenforceable. Even though Tillman did not wish to acquire shares in the competitor, the unenforceability of the non- compete clause would allow her to go even further and directly work for them.
At the Court of Appeal, the non-compete clause was held to be unenforceable for being an unreasonable restraint of trade. Longmore LJ found that the words “interested in” had been consistently interpreted in case law as encompassing shareholdings. He also held that the offending portion of the non-compete clause could not be severed from the non-offending portion because the clause was a single covenant.
The Supreme Court's approach to severance
The Supreme Court held that three requirements had to be fulfilled before the doctrine of severance could rescue the non-offending portions of a restrictive covenant from its offending portions:
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(a) There was no need to add to or modify the wording of the remaining terms;
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(b) The remaining terms continued to be supported by adequate consideration (which would often be the case); and
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(c) The removal of the unenforceable provision would not generate any major change in the overall effect of all the post-employment restraints in the contract.
The Supreme Court found that the words "or interested" could be severed because their removal would not require the addition or modification of the remainder of the covenant. Further, the removal would not result in any major change in the overall effect of the restraints. Thus, the remainder of the non- compete clause read "directly or indirectly engage or be concerned in any business carried on in competition with [Egon Zehnder]".
Observations
The Supreme Court's approach affirmed the changing focus of the severance of unreasonable portions of a restrictive covenant. Initially, it was thought that an employer could not deliberately draft wide covenants and then seek the courts' ingenuity in extracting from those covenants the maximum protection that the employer was entitled to. This was especially because the real sanction behind restrictive covenants was the threat of litigation, which disadvantaged employees would have to bear with.
However, the Court noted that companies may very well have legitimate interests deserving of protection, especially when they are dealing with high-ranking employees who are not defenceless. Tillman, the Supreme Court noted, was one-such high-ranking employee. Thus, while the courts will still be cautious about severance, they are more likely to order it where severance would not change the overall legal effect of the contract's post-termination restraints. While it is yet to be seen how Singapore courts will treat this decision, The Supreme Court's test for severance is likely to be well-received given that it is built off observations from prior English case law which was endorsed by the Singapore High Court in Lek Gwee Noi v Humming Flowers & Gifts Pte Ltd [2014] 3 SLR 27.
The decision should give some relief to employers with standard form contracts. As the Supreme Court itself had noted, the phrase "engaged or concerned or interested in" had been included in non-compete clauses in standard precedents throughout the last century. While the severance of the words "interested in" is possible in light of this decision, employers would be better placed to omit such terminology in non-compete clauses moving forward.
For further information, please contact:
Celeste Ang, Baker & McKenzie.Wong & Leow
celeste.ang@bakermckenzie.com
