Non-Compete Clauses – Are they Enforceable?
In Boydell v NZP Ltd, the Court of Appeal considered whether a non-compete clause could be enforced after severing words from it.
Non-compete clauses are often included in employment contracts, particularly for more senior members of staff. These clauses are intended to protect the original employer’s business – if an employee were to move to a competitor, their knowledge of the business’ working practices and trade secrets might give their new employer an unfair advantage.
However, it is essential that non-compete clauses only protect legitimate business interests and do not amount to an unfair restraint of trade. If a non-compete is drafted to be too wide in its scope, then there is a risk that it will be found to be an unenforceable restraint of trade by the courts, allowing the former employee to work for the competitor businesses.
Employers who may have drafted their non-compete clauses too broadly are assisted somewhat by the rules established in Home Counties Dairies v Skilton and Tillman v Egon Zehnder Ltd.
The Skilton case established that, if a non-compete clause would be valid in all ordinary circumstances within the parties’ contemplation, then it will still be valid if it also covers “extravagant, fantastical, unlikely or improbable” circumstances. For example, if a clause intended to prevent a lawyer from working for competing law firms could, bizarrely, be read as preventing her from working as a banker, then this quirk would not necessarily prevent the employer firm from enforcing the non-compete were she to try and work for a competitor law firm.
The Tillman case establishes that, in some circumstances, the courts can “sever” words from a non-compete, allowing it to remain in-force while limiting its scope. The words have to be capable of being removed without adding to the remaining wording, and the removal should not cause any major change in the overall effect of all of the post-employment restrictions in the contract.
Both of these principles were considered in the present case, Boydell v NZP Ltd. Dr Boydell worked as Head of Commercial – Speciality Products for NZP – NZP’s business was itself in a niche area of the pharmaceutical industry. Dr Boydell’s contact of employment with NZP included a 12-month non-compete, preventing him from being involved in any activity for the benefit of any third party that carried out any business which would compete with the business of NZP or any other company in NZP’s group.
Dr Boydell resigned to work for NZP’s main competitor. In reliance on the non-compete, NZP sought an injunction to stop Dr Boydell from working for the competitor. Dr Boydell argued that the non-compete was drafted too widely, and therefore was an unfair restraint on trade. Rather than finding the entire non-compete to be unenforceable, the High Court held that some of the wording could be severed, including the wording referring to other companies in NZP’s group, and that the remnants of the non-compete were enforceable. The High Court therefore granted the injunction.
Dr Boydell appealed. He argued that the non-compete prevented him from working at any company which produced general pharmaceutical products, such as Boots or Superdrug, which went beyond what was reasonably necessary to protect NZP’s legitimate business interests. By severing the group company wording from the non-compete, the High Court had significantly changed the nature of the non-compete, contrary to the test from Tillman. He went further, arguing that, even after severance, the non-compete was too wide to be enforceable.
The Court of Appeal found that Dr Boydell’s interpretation of the non-compete clause fell under the rule from Skilton – the non-compete theoretically preventing him from working for Boots or Superdrug was a fantastical and unlikely consequence, that was not within the parties’ contemplation when the contract was signed. This could therefore be ignored when evaluating its scope and enforceability. The non-compete was clearly focused on NZP’s specialist activities, so severing the reference to group companies did not cause any major change in the effect of the non-compete, in line with the Tillman test.
The Court of Appeal also disagreed that the non-compete was too wide post-severance. Where an employer is a large public company working in multiple areas, a wide non-compete may be difficult to enforce – but, where an employer has a highly specialised business, as with NZP, it may be more reasonable for a non-compete to be drafted widely. Here, were Dr Boydell allowed to work for a competitor, it likely would have been very difficult for him to be insulated from activity that would compete with NZP.
While the rules from Skilton and Tillman provide an interesting counterbalance to the general understanding that non-competes must not be drafted too widely, employers should not see the decision in Boydell as providing them carte blanche to draft their non-competes as widely as they like. Non-competes should be drafted carefully, not only to ensure that they will be enforceable if a matter proceeds to court, but also to effectively deter employees from working for competitors, entirely avoiding the need for court proceedings and the associated costs and disruption.
We have considerable experience in drafting and enforcing post-termination restrictions and can provide practical advice on how best to protect your business. If you are unsure if your non-compete clauses are enforceable, or you are concerned about your ex-employee’s activities, then please get in touch with me at [email protected] for an initial discussion.