Restrictive covenants and employee competition

In the recent case of Boydell v NZP Ltd and others, the Court of Appeal considered the severability (or “blue pencil”) test set out in Tillman v Egon Zehnder Ltd in relation to a non-compete clause, rejecting the Claimant’s appeal. It held that the High Court was entitled to sever certain wording of the non-compete clause in order to make it enforceable. This case study take a closer look at restrictive covenants and employee competition.

Case background

Dr Boydell (the Claimant) worked as Head of Commercial – Specialty Products for NZP Ltd (the Respondent). The Respondent’s business was in a niche area of the pharmaceutical industry. The Claimant resigned to go to work for the Respondent’s main competitor and so they sought an injunction to prevent this. The Claimant’s contract of employment contained a 12-month non-compete clause which stipulated that he could not be involved in any activity for the benefit of any third party that carried out any business which would compete with the business of the Respondent or any other company in the group. The High Court severed – edited – some of the clause, including the reference to group companies, and granted an injunction.

To what extent are non-compete clauses enforceable?

A valid post termination non-compete restriction prohibits the employee, for a specified duration after the end of the employment from carrying on or being associated with the business in which the employer is engaged. This is a restraint of trade which is, prima facie, void unless the employer can show that there is (i) a legitimate business interest to protect and (ii) that the restriction is reasonable.

(i) Legitimate business interest

In broad terms, the rights that a court will allow a business to protect fall into the following categories:

  • Trade connections (with customers, clients or suppliers)
  • Trade secrets and other confidential information
  • Stability of the workforce

(ii) Reasonable restriction

If there is a legitimate business interest to protect, the employer should impose a restriction that is no wider than reasonably necessary to protect that interest.

What happens if the restriction is too wide?

If the restriction is drafted too widely (e.g. it prohibits the former employee from being even “interested in” the prospective new employer by holding  a 1%  shareholding in a publicly listed or private company), then the court may use the “blue pencil” principle to remove the offending words without significantly changing the effect of the restraint.. The remainder of the restriction is an enforceable clause. There is a three stage approach:

  1. Can the unenforceable provision be removed without needing to add or modify the wording that remains?
  2. Are the remaining terms supported by adequate consideration?
  3. Can the objectional words be deleted without generating any major change to the overall effect of the post-employment restraints in the contract?

If the answer to those questions is yes, the court may amend the clause accordingly to render it enforceable..

How was this principle applied in Boydell v NZP Ltd and others?

In Boydell v NZP Ltd and others, the Claimant former employee argued that, as drafted, the non-compete clause prevented him from working for any company which produced general pharmaceutical products such as Boots or Superdrug, and this went beyond what was necessary to protect the Respondent former employer’s legitimate interests. Therefore, if the court were to sever the “group company” wording, this would significantly change the nature of the restraint, contrary to the third stage of the blue pencil test as set out in Tillman v Egon Zehnder Ltd. The Claimant also argued it was anyway generally too wide to be enforceable even if, the offendingwording was severed.

The Court of Appeal found that the assertion that the non-compete would prevent him from working for companies such as Boots or Superdrug was a “fantastical, extravagant, improbable or unlikely consequence” that was not within the parties’ contemplation when the contract was signed and could therefore be ignored. 

The clause was clearly directed towards specialist activities. It was also not plain or obvious that the clause was incapable of severance, and therefore the High Court was entitled to sever the ‘group company’ wording from the clause, thereby narrowing its effect.

The Court of Appeal also held that the clause was not too wide because the Respondent had a highly specialised business. If, however, the Respondent was a large public company with multiple areas of activity, the same clause may have been difficult to justify due to its scope. Whether a clause is too wide is highly dependent on the particular facts.

What does this mean for employers?

When drafting non-compete clauses and other restrictive covenants in a contract of employment, it is important that the clause does not go above and beyond what is necessary to protect your business interests. As a rule of thumb, non-compete clauses should not be broader than is absolutely necessary depending on the precise nature of the business it is intended to protect. .   Even if the blue pencil principle is applied to save a bad covenant there may be a sting in the tail, as there was in Tillman, where the Court made the “successful” employer pay the costs of the litigation.

How can Moore Barlow help?

As a business owner and an employer you face many demands, from dealing with disputes to ensuring you are compliant with the laws and regulations governing employment. Meeting all your responsibilities, and making sure your actions are legally correct, requires expert advice from a knowledgeable solicitor.

The business employment law team at Moore Barlow is well equipped to advise employers on restrictive covenants and employee competition. Should you need advice, please do contact us