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Case law: Non-compete clause unlawful as it prohibited minor shareholdings in competitors

Employers should ensure non-compete clauses preventing ex-employees from being directly or indirectly 'concerned' or ‘interested in’ competitors, do not prohibit minor shareholdings in those competitors, or risk such clauses being found unenforceable.

September 2017

This update was published in Legal Alert - September 2017

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

Please note: A newer article on this case was published in the August 2019 edition of Legal Alert following subsequent developments in the legal process.

An experienced employee who had held senior positions in the financial services industry was taken on in a junior role by an executive search consultancy. Unsurprisingly, she advanced rapidly to a very senior position. Her original contract of employment was not amended as she advanced. It contained a non-compete clause prohibiting her from competing, for six months after leaving, with any group company with which she had been ‘materially concerned’ in the 12 months before she left. She was not permitted to ‘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’.

She left the recruitment consultancy and wanted to start a new job with a competitor within three months after leaving. Her employer applied for an injunction to stop her from doing so.

The courts will only enforce a non-compete clause (or similar restriction) in a contract of employment if it is no wider than reasonably necessary to protect a legitimate interest of the employer. The High Court ruled that the clause was enforceable.

However, the Court of Appeal disagreed, and ruled:

  • As the non-compete clause caught a minor shareholding in a competitor, it was unlawful
  • The unlawful part of the clause could not be severed, ie. separated from the remaining, lawful parts, so that the rest could still stand, as all the restrictions were included in one non-severable clause

     

    Operative date

    • Now

    Recommendation

    • Employers should ensure non-compete clauses which prevent ex-employees from being directly or indirectly engaged, 'concerned' or 'interested in' competitors after they leave do not prohibit minor shareholdings in those competitors, or risk those clauses being found to be unenforceable

    Case ref: Tillman v Egon Zehnder Ltd [2017] EWCA Civ 1054

    Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.