Post-Termination Restrictions: The Supreme Court Reinvigorates The Blue Pencil Test

On 3 July, the Supreme Court handed down its judgment in Tillman v Egon Zehnder Ltd on whether a restrictive covenant that prevents an ex-employee from being "interested in" a competitor for six months without an express carve-out for minor shareholdings was too wide and therefore unenforceable in its entirety.

The Supreme Court has taken this rare opportunity to consider some fundamental issues on the enforcement of restrictive covenants. In this long awaited decision we are given clarity on what is "an interest" in a competitor and if the current contract raises a problem what can and will the Court do to "blue pencil" the problem.

Enforceability of post-termination restrictions

Restrictive covenants are an unlawful restraint of trade which, when they protect a legitimate interest to a reasonable extent will be enforced. The interest is about confidential information or goodwill (meaning customer or staff connection). What is reasonable depends on the seniority of the individual, the market in which you operate and the extent of the restriction. These clauses will be enforced if they meet these thresholds. The court can and will "blue pencil" - meaning "delete" - terms which are excessive and will enforce what is left. But the court will not reduce or redraft a clause to make it work. For that reason care needs to be taken.

The case of Ms Tillman

Ms Tillman was a senior and very successful executive at Egon Zehnder. She was headhunted by a competitor and gave notice. Egon Zehnder sought to enforce the six month restrictions in her contract to keep her out of the market. The case focussed on specific terms which prevented her being "interested or concerned" in any competing business for a period of six months from termination. Under clause 13.2.3, Ms Tillman agreed 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 [Egon Zehnder]" within a twelve-month period prior to the termination date "and with which [she was] materially concerned during such period." Crucially, clause 13.2.3 did not contain an express limitation allowing her to hold a minor shareholding in a competing business for investment purposes, when she was able to do so, when she had been an employee. Given that the phrase 'interested in' included holding one share in a publicly quoted company, this rendered the restriction impermissibly wide, and therefore void. There was no...