Case law: Ruling illustrates importance to employers of getting non-compete clauses right

Employers should check that non-compete clauses and other restrictions in employees' employment contracts are no wider than reasonably necessary to protect their legitimate interests, taking into account the particular circumstances such as the nature of the business and the employee's role and characteristics, a recent ruling reminds us.

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. 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 left 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 an employment contract) if it is no wider than reasonably necessary to protect a legitimate interest of the employer.

In this case, the High Court ruled that the clause was enforceable. The employer's legitimate interests were its confidential information and its client connections and, given the practical problems it would face in policing her behaviour after she left, a six-month prohibition on her competing with group companies with which she had been materially concerned was a reasonably necessary protection for the employer.

The Court applied the usual rule that the reasonableness of the clause should be considered as at the time the contract of employment was entered into. It found that given her experience and previous seniority in financial services, she had been given responsibilities, client contact and opportunities to contribute to business strategy that would not normally be enjoyed by someone in a junior position early on. This meant she had access to confidential information and client connections from the start. The non-compete clause was, therefore, reasonably necessary to protect her employer's legitimate interests.

One factor which commonly makes a non-compete clause reasonable is where it operates to prevent competition within a defined geographical area. In this case, there was no express geographical limit, but the Court found that the use of the words 'materially concerned' in the clause introduced an implicit geographical limit, so that the clause only had local application. This factor contributed to the Court's finding that the non-compete clause was reasonable.

The Court's decision was not influenced by the fact that similar employees did not have non-compete clauses, or that such clauses had not previously been enforced against other employees. Each case had to be looked at on its merits: the clause in this case was reasonably necessary, given the particular experience, connections and status of this employee.

Operative date

  • Now

Recommendation

  • Employers should check that non-compete clauses and other restrictions in their employees' contracts of employment are no wider than reasonably necessary to protect its legitimate interests, taking into account the particular circumstances, such as the nature of the business and the employee's role and characteristics

Case ref: Egon Zehnder Ltd v Tillman [2017] EWHC 1278

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