UK Supreme Court upholds restrictive covenant through more liberal approach to severance

The UK’s highest court has ruled on the enforceability of a restrictive covenant for the first time in a century. In the recent decision of Tillman v. Egon Zehndner Ltd., [2019] UKSC 32, the Court clarified the doctrine of restraint of trade and set out a new test for curing an unreasonable restrictive covenant.

Ms. Tillman was employed by Egon Zehndner Ltd. in a senior position.  She was hired as a consultant and was ultimately promoted to the role of joint global head of Egon’s financial services practice.  After thirteen years of service, she provided Egon with notice of her resignation.  A week later, Egon terminated her employment with immediate effect.  Shortly thereafter, Ms. Tillman informed Egon that she intended to work for a competitor, Russell Reynolds Associates (RRA), starting three months after the date of her termination.

Egon sought an injunction to prevent Ms. Tillman from joining RRA as an employee, arguing that this would be a breach of the non-compete clause in her contract. The non-compete clause stated that she 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 and with which you were materially concerned during such period.”

By her defence, Ms. Tillman contended that the non-compete clause was unenforceable because it was wider than necessary to protect Egon’s legitimate interests. Specifically, she argued that the language prohibiting an employee from being “interested” in a competitive business constituted an unreasonable restraint on trade as it restricted her from any shareholding in a competitor, including a minority shareholding.

At trial, the High Court rejected Ms. Tillman’s argument and granted an interim injunction preventing her from commencing employment with RRA until six months after her termination.

Ms. Tillman successfully appealed the trial decision. The Court of Appeal found that the words “interested in” were unduly restrictive in prohibiting a minor shareholding in a competitor, notwithstanding that Ms. Tillman did not propose to become a shareholder in RRA.  Relying on precedents, the Court held that the impugned words could not be removed or severed from the non-compete clause (which the parties agreed was otherwise reasonable) to render the unoffensive provisions of the clause enforceable.

Egon appealed the Court of Appeal’s decision on the following three grounds:

• the restraint of trade doctrine does not apply to a prohibition against holding shares in a competitor;
• the words “interested in” should not be construed as a prohibition on holding shares in a competitor in the context of the employment agreement; and
• the words “or interested” should be severed and removed from the rest of the non-compete clause as to render it enforceable.

The Supreme Court allowed the appeal on the third ground and rejected Egon’s first two arguments.

With respect to the first issue, the Supreme Court adopted a “broad, practical and rule of reason approach” in determining that a prohibition on shareholding fell within the restraint of trade doctrine.  The Court reasoned that a restraint on shareholding is tied to a restraint on an employee’s ability to work in the aftermath of his or her employment. The Court noted, by way of example, that employment is often subject to a condition that employees hold shares in their employer company or accept company shares as remuneration. While Ms. Tillman was not required, nor did she intend to, hold shares in RRA as an employee, the Court’s analysis contemplated the wider effect of upholding such a restriction.

On the second issue, the Supreme Court disagreed with Egon that the words “interested in” did not include shareholding.  The Court acknowledged that this language is often found in standard precedents for non-competition covenants and has been interpreted broadly by the court, at least in one decision, to include the activity of owning shares.  The Court held that the specific features of the employment agreement relied upon by Egon to support its alternative interpretation could not overcome long-standing authority to the contrary. Accordingly, the covenant prohibiting shareholding in a competitor was found to be unenforceable.

Finally, the Court accepted Egon’s argument that the impugned wording should be severed such that the rest of the non-competition clause would remain valid. In reaching its conclusion, the Court considered Canada’s leading case on the issue, Shafron v. KRG Insurance Brokers (Western) Inc., 2009 SCC 6, noting that the Supreme Court of Canada adhered to the UK’s historical approach set out in Attwood v. Lamont, [1920] 3 K.B. 571; namely, that severance is only appropriate where the part being removed is “clearly severable, trivial and not part of the main purport of the restrictive covenant.”

Ultimately, the UK Supreme Court rejected the Canadian approach and overruled Attwood, setting out a more liberal test for severance viewed as more in line with current public policy. The Court adopted the following criteria from Beckett Investment Management Group Ltd and others v. Hall and others [2007] EWCA Civ 613:

• the impugned words must be capable of being removed without the need to add to or modify the remainder of the clause (i.e. blue-pencil severance);
• the remaining terms must continue to be supported by adequate consideration (this will not usually be in dispute post-termination); and
• the removal of the words must not generate any major change in the overall effect of the post-employment restraints in the contract.

Applying this test, the Court held that the words “interested in” could be removed from the restrictive covenant without substantially altering the remaining provision.

The Tillman case is significant in that it marks a departure from precedent and from the Canadian approach which requires a stricter test for severance such that it is not generally permitted. Consequently, the door has opened for Canadian litigants to argue, on the strength of Tillman, that our courts should similarly revisit the doctrine of severance in favour of a more modern approach.