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Non-compete clause struck down due to prohibition on shareholding

03 August 2017 #Dispute Resolution #employment

Mary Tillman (MT) was a star employee of Egon Zehnder (EZ), a headhunter. Her contract contained non-solicitation, non-dealing and non-compete clauses.  She resigned from EZ and wanted to join a competitor before her non-compete expired.  EZ applied for and obtained an injunction to enforce the clause.

MT appealed on the grounds that the non-compete was too wide to be enforced. What made this case interesting was that she did not suggest that it was unfair for her to be prevented for six months for joining a competitor.  Instead, she claimed that the non-compete clause also prevented her from holding shares in a competitor.  MT had no intention of acquiring such a shareholding but argued that this theoretical restriction meant that the entire non-compete clause was unenforceable.

The Court of Appeal agreed. The restriction against MT being “interested in any business carried on in competition” had to extend to a shareholding, no matter how minor.  Such a restriction was wider than needed to protect a legitimate business interest and therefore unenforceable.

EZ invited the Court to sever the words “interested in”, leaving the remainder of the non-compete clause intact.  The Court refused.  It is not possible to sever individual words in a clause to make what is left more reasonable.  (In contrast, the Court might be prepared to sever an entire sub-clause, for example an unduly restrictive non-compete clause to allow a less onerous non-solicitation clause to be enforced.)

The Court acknowledged that it may seem unfair for MT to rely on a theoretical restriction that would never in practice have affected her.  However, this was outweighed by the public policy interests of promoting competition and protecting employees.  The case is a clear warning against the risks of drafting restricting covenants too widely. 

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Stephen James

Stephen James

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