In the UK, a post termination restrictive covenant will be void for being in restraint of trade unless the employer has a legitimate business interest to protect and the protection sought is no more than is reasonable to protect that interest. The interests which can be protected are clients, staff, and confidential information. One type of restriction often imposed in UK contracts seeks to prevent an employee from competing with the previous employer and this can even extend to holding a shareholding in another competing company. However, it is usual to exclude minor shareholdings which may simply be held by an employee as an investment, in contrast with those shareholdings where an employee has a significant interest in the competitor company. A recent case has looked at the implications if the employer does not ensure the covenant is drafted effectively.
In this case a senior employee resigned in January of this year. Subsequently, the employer terminated the employment and paid the employee in lieu of notice. Her contract of employment included a post termination restrictive covenant which provided that she was required, for a period of six months, not “directly or indirectly to 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 are carried on at the Termination Date or during the period of twelve months prior to that date and with which you were materially concerned during such period”.
Following termination of her employment she notified the employer that she was intending to start work for a competitor within the six month period. The company claimed that this would constitute a breach of the six-month non-compete clause contained in the employment contract and sought an injunction. There was no dispute that the employee was bound by the non-solicitation, non-dealing and confidentiality terms in her contract.
The employee argued that the non-compete clause was void for being wider than reasonably required for the protection of legitimate business interests. In particular, she claimed that being “interested” in a competing business was too wide as it could prevent her from holding a minor shareholding in a competitor for investment purposes.
In June 2017, the High Court upheld the non-compete restriction, and granted an injunction restraining the breach. The employee appealed to the Court of Appeal, arguing that the High Court had incorrectly constructed the non-compete clause in the contract. The employer argued that the High Court judge had correctly construed the covenant and relied on another clause in the employment contract which prohibited the employee from holding or having any interest in shares in competitors during employment, but which contained an exemption for minor shareholdings. The employer argued that it would be anomalous if the non-compete clause prohibited all shareholdings as it would then be more restrictive than during employment. In addition, it argued that, if that was wrong, the words “or interested” could be deleted from the clause, leaving a valid covenant.
The Court of Appeal upheld the appeal, finding that the non-compete restriction was too wide, and therefore unenforceable. The court found that conventional understanding of the wording meant that a shareholder in a company was “interested in” that company. The court also rejected the argument that the words “or interested” could be severed from the non-competition clause. First, the clause would still be too wide even if the words “or interested” were removed. Second, it is settled law that the constituent parts of a single covenant cannot be severed; it is a requirement of severance that it can only take place where there are distinct covenants, and perhaps, not even then. The clause had to be read as a whole, and could not be severed.
The non-compete restriction in the contract of employment was invalidated by its “theoretical width”, since there was in fact no suggestion that the employee wanted to hold any shareholding in a competing business. However, public policy justified the decision in order to prevent unreasonable restraint of trade.
Employers should therefore ensure that their restrictive covenants are tightly drafted and make it clear in non-compete clauses that employees can hold shares or securities in certain companies up to a maximum shareholding.