Supreme Court rules for employer over non-compete contractual clauses

A recent UK Supreme Court decision will help employers to enforce contractual clauses that restrict employees from leaving to work for their competitors. However, employers should be careful to ensure that such clauses – known as non-compete clauses – are not unduly broad or unreasonable.

The ruling will be welcomed by employers, since non-compete clauses can be vital to prevent key staff from damaging a business after they leave, for example by immediately bringing a company’s key clients over to a competitor.

It is still widely believed amongst employers that non-compete clauses are not worth the paper they are written on. However, the Supreme Court’s ruling Tillman v Egon Zehnder Limited [2019] UKSC 32, confirms that, where there is genuine business interest to protect, and the clauses are drafted reasonably, non-compete restrictions can be upheld.

In the Tillman case, the employee’s contract stated that for 12 months after leaving she must 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”. The Supreme Court found that the words “interested in” made the clause too broad. However, instead of striking down the entire clause, the court held that the words “interested in” could be severed from the clause, and that the remainder of the cause would stand.

This decision is welcome news for employers, since it will confirm such clauses are possible to enforce in practise. This recent decision echoes the Court of Appeal’s 2016 judgment in Dyson Technology Limited v Pierre Pellerey [2016] EWCA Civ 87.

That case concerned a Dyson employee, Dr Pellerey, who was working on a secret project to develop an electric car. Dr Pellerey then accepted a position working on electric cars for Tesla. Dyson sought an injunction to enforce the 12-month non-compete clause in Dr Pellerey’s contract of employment. Dr Pellerey resisted this, arguing, amongst other things, that the contractual non-compete clause was too broad.

The Court of Appeal recognised the principle that employees should be held to their contractual bargain as regards non-compete clauses. It also held that “the starting point” in such cases is that “the ordinary remedy is an injunction” but that courts should not attempt to “prescribe with any sort of particularity the types of circumstances in which it might be appropriate to refuse an injunction.”

The court made clear that “every case will turn on its own facts”. It also recognised that courts may refuse such injunctions where an injunction would cause hardship to the defendant, but no damage would be caused to the applicant if it were not granted.

In practice, injunctions and damages are expensive to pursue through the courts. Yet if a non-compete clause is well-drafted and an employer can demonstrate that financial loss has or could result from its breach, an employer stands a good chance of success. When faced with a plausible threat of injunctive proceedings, an employee’s solicitors will typically advise them to agree to abide by the restrictions. The recent Supreme Court decision provides greater certainty for employers and further strengthens employers’ hand in such negotiations.

Such disputes are also not without risks for the new employer expecting or wanting a new employee to make contact with their previous clients to encourage them to move their business. They can find themselves accused of inducement to breach contract and in certain cases, even conspiracy.

Employers may now reply upon non-complete clauses with greater confidence. However, it is vital that employers ensure such clauses are well drafted – and signed by the employee. Non-compete clauses should also be regularly reviewed and updated to reflect particular risks posed by the departure of that employee as the business develops, and their role in it changes.

Published in Economia from ICAEW – 8 August 2019