Employment Cases Update

A reasonable restriction? - Case Round-Up: July 2017

Date published: 07/07/2017

In this month's round-up, Mark Shulman, consultant solicitor with Keystone Law, looks at recent cases on injunctive relief to enforce restrictive covenants and garden leave.



 
Mark Shulman, Consultant Solicitor at Keystone Law

Two recent cases helpfully review and analyse the principles to be applied when a court is considering injunctive relief concerning contractual provisions intended to restrict an employee from taking up new employment with a competitor for a specified period.

RESTRICTIVE COVENANTS

In Egon Zehnder Ltd v Tillman [2017] EWHC 1278 (Ch), the High Court had to consider whether a restrictive covenant which prohibited a former employee working for a competitor for 6 months was wider than necessary to protect the legitimate business interests of the employer.

Background
Mrs Tillman was co-Global Head of the Financial Services Practice Group in a subsidiary company of the EZ Group (which offered worldwide executive search and advisory services for its clients). Her employment with EZ Limited ended on 30 January 2017 having accepted a job with another company based in New York which carried on a similar business. She intended to start the new job on 1 May 2017 but there was a dispute as to whether the terms of a restrictive covenant in her contract prevented her from starting this role until 30 July 2017 (i.e. on expiry of a 6-month post termination restriction in her contract). The employer issued proceedings seeking an interim injunction to prevent Mrs Tillman from starting her new role until the covenant expired.

The restriction
The material provisions of Mrs Tillman's contract stated that:

"13.2. You shall not without the prior written consent of the Company… at any time within the period of six months from the Termination Date:


13.2.3 directly or indirectly 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 were 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;

The legal framework
Mrs Tillman argued that the non-compete clause was void as being wider than reasonably required for the protection of the employer's interests.

Both parties agreed that the approach that the Court should adopt in considering the issue of reasonableness was the three-stage process stated by Cox J in TFS Derivatives Ltd v Morgan [2005] IRLR 246:

  • firstly, the court must decide what the covenant means when properly construed;
  • secondly, the court will consider whether the former employers have shown on the evidence that they have legitimate business interests requiring protection in relation to the employee's employment;
  • thirdly, once the existence of legitimate protectable interests has been established, the covenant must be shown to be no wider than is reasonably necessary for the protection of those interests.

Even if the covenant is held to be reasonable, the court will then decide whether, as a matter of discretion, injunctive relief sought should be granted.

The High Court in Tillman also referred to various other principles as part of the legal framework that applied:

  • the question of reasonableness of the restriction has to be judged as at the time the contract was agreed and in the light of what was in the contemplation of the parties at that stage;
  • in assessing reasonableness of a non-compete clause, the court should consider whether some lesser form of protection would in fact give adequate protection (e.g. clauses preventing soliciting and protecting confidential information);
  • so far as construction of the clause is concerned, in the event of competing constructions, one which preserved the validity of the clause should be preferred;
  • it is possible in limited circumstances to sever part of what would otherwise be an over-wide restraint (the "blue-pencil" test whereby individual words or phrases may be 'blue-pencilled' or severed), provided that what is left makes independent sense without the need to modify the wording and that the sense of the contract is not changed.

Application of principles
The court started by addressing two points of construction as to what the effect of the clause was.

Territorial scope
Mrs Tillman argued that the wording prevented her from engaging in activities which competed with her sphere of activities anywhere in the world and that was far too wide and therefore unenforceable. The employer contended that the clause had a narrower ambit and prevented Mrs Tillman from competing only in those geographical areas where she had been involved in EZ Group business.

The court agreed with the employer – the wording of the clause was to be construed only as preventing competition with the parts of the business with which she was "materially concerned" in the last 12 months of her employment. There was an in-built restriction on the global reach to the clause because if Mrs Tillman had not been "materially concerned" with the local business of a particular local company, then the clause would not bite in relation to the area of that business.

Shareholding
Mrs Tillman took the point that being "interested in any business carried on in competition" with the EZ group included having a minor shareholding in a competitor. The employer argued that that another clause in Mrs Tillman's contract expressly limited shareholding during the employment (although a 5% shareholding in publicly quoted companies was permitted). It would therefore be commercially anomalous if the non-compete covenant restricted all shareholdings because then the post-restriction covenant would be wider than the obligations during employment. The employer submitted that the words "interested in any business" under clause 13.2.3 should therefore be construed so as not to apply to shareholdings at all.

Again, the court agreed with the employer. The concepts of "engage", "be concerned" and "interested" were linked to the concept of "business", not an entity. The first two connoted a real involvement in the actual conduct of the business. The third imported a lesser connection, but it was capable of taking its colour from the first two. Further, the contract as a whole should be construed so as not to create an anomaly in the provisions. Therefore, the non-compete clause was to be construed so as not to deal with the matter of shareholding at all. On that basis, the construction point did not lead to an invalidation of the clause.

Business interests to protect
Having construed the meaning of the clause, the court then went on to consider whether there were protectable business interests. The employer suggested that it was entitled to protection in respect of client and candidate connections and confidential information.
The court agreed that the nature of Mrs Tillman's dealings with clients, some of whom were worldwide operators, was such that she would get close to the structures and plans of the clients to an extent which would give the employer (or other company in the EZ group) a very valuable tie and resource for the future. It was a very substantial client connection and therefore protectable.

Reasonableness and context of restriction
It was necessary to judge the validity of the covenant by reference to Mrs Tillman's status as consultant when she started her employment (not subsequently when she was promoted to a partner) and in the light of what was contemplated by both parties at that time.

It was not a case of Mrs Tillman being a "normal" consultant who had an involvement as a beginner with a limited number of clients and only later, when her status changed to that of partner, that she became privy to wider ranging confidential material and greater levels of client engagement. At the time of her engagement both the employer and Mrs Tillman had high hopes for her future and her previous experience meant that she had more client engagement and made much more of a contribution to strategic matters than would otherwise have been expected. She became "steeped in client affairs" (and thus privy to the client connection) more often and to a deeper extent than might have been the case with another consultant without her large and valuable experience. Therefore, as a matter of fact the expectations of the parties at the time when she joined the company produced a higher level of engagement with protectable matters.

Period of restraint
Did that level of engagement justify a restraint, and if so what length of time was appropriate? The court found that the lesser restraints provided by the non-dealing, non-solicitation and confidentiality covenants in Mrs Tillman's contract were not sufficient by themselves. Whilst they provided a large measure of protection, they presented policing difficulties both in terms of ascertaining whether there has been a straightforward breach and in terms of more subtle activity when working for the new employer (e.g. subconscious reference, indirect guidance, conscious or unconscious suggestions to others in the company).

Six months seemed to the court to be a reasonable period for the restriction, principally to allow the substitution of new relationships with the client and for the fading of confidentiality.

It followed that the clause would be breached by Mrs Tillman taking up her employment in May with the American employer. Since the clause was valid and there were no discretionary reasons for not enforcing it, an injunction should be granted restraining the breach (unless Mrs Tillman offered an appropriate undertaking).

GARDEN LEAVE
In ICAP Management Services Ltd v Berry & Anor [2017] EWHC 1321 (QB), the High Court had to decide whether to continue an injunction against Mr Berry preventing him from taking up employment with a new employer (BCG) until the end of his 12-month garden leave period.
 
Background
Mr Berry was employed by ICAP Management Services Ltd ("IMSL") as Chief Executive Officer of a division of the group of the Claimant group of companies called "Global e-Commerce". IMSL was a service company providing services to companies in the ICAP Global Broking Business ("IGBB"). Under his contract, the employment of Mr Berry could be terminated by either party on twelve months' prior written notice. The contract also entitled IMSL to place Mr Berry on garden leave.

On 22 July 2016, Mr Berry gave 12 months' written notice to IMSL to terminate his employment on 21 July 2017. Three days later, BGC Services (Holdings) Limited ("BGC"), a competitor of IGBB and IMSL, issued a public announcement indicating that Mr Berry would be joining the company as an executive managing director. Mr Berry was put on garden leave by IMSL pursuant to the garden leave clause in his contract.

In October 2016 (and on a number of subsequent occasions) Mr Berry wrote to IMSL to the effect that he considered that the proposed acquisition of IGBB by Tullet Prebon was going to amount to a transfer under TUPE, that he objected to his employment transferring and that as a result in his view his employment would terminate under regulation 4(8) of TUPE when the transfer occurred. On 7 February 2017 Mr Berry notified his employer that he believed that a TUPE transfer had taken place and that his employment therefore terminated that day by reason of his objection to the transfer of his employment.

On 24 February 2017 IMSL issued an application for an injunction to enforce garden leave and three days later Mr Berry started work for BCG. Subsequently the High Court granted an interim order enforcing garden leave and the issue in the present hearing was whether that interim injunction should be continued until 21 July 2017.

TUPE transfer
If the business in which Mr Berry had been employed was transferred to Tullett Prebon plc (subsequently re-named to TP ICAP plc) under a TUPE transfer, his employment would have ended on 7 February 2017 by reason of his objection to that transfer. He argued that his former employer was therefore not entitled to enforce garden leave thereafter, as the contract of employment had already terminated.

The High Court dismissed the suggestion that there had been a TUPE transfer. It was "impossible" to suggest that the acquisition of a controlling percentage of the shareholding in Mr Berry's employer of itself meant TP ICAP plc became the new employer - a simple acquisition of control of shares did not constitute a transfer within TUPE. On the facts IMSL continued to be responsible for its own business and continued to bear the obligations of employer of its staff, including Mr Berry. There was no new owner who had stepped into the shoes of IMSL. It followed that there was no relevant transfer and Mr Berry's employment did not terminate by objection under TUPE as he had suggested.

Enforcement of garden leave
The parties agreed that the correct approach to the enforcement of garden leave was as set out by Simler J in JM Finn & Co Ltd v Holliday [2014] IRLR 102. This meant that:

"…in circumstances where an employer has put an employee on garden leave and then seeks an injunction to restrain the unwilling employee from joining a competitor before the expiry of his notice period, an injunction to enforce or aid that period of garden leave must be considered in light of the restraint of trade doctrine".

The enforcement of a garden leave provision differs from the enforcement of a restrictive covenant because, as mentioned above, the enforceability of a restrictive covenant is to be judged at the time that it was entered into. However, where the issue is garden leave the court looks at the situation at the time enforcement is sought.

The court will look primarily at what is required for the reasonable protection of the protectable interest, as well as taking account of the situation of the employee. Therefore, where the court finds that the period of protection should end at some stage before the end of the garden leave, it will enforce the garden leave only to the extent of the period actually required for protection (and will decline to enforce any relevant post termination restriction because the employer will already have got all the protection they are entitled to).

Legitimate interests
It was common ground between the parties that an employer must demonstrate a legitimate interest to protect and must show that any injunction extends no further than is reasonably necessary to protect that legitimate interest. In the present case, three legitimate interests were relied on: (i) client connections, (ii) workforce stability, and (iii) confidential information. However, the court thought that IMSL's case based on client relationships and stable workforce was "weak in the extreme".

IMSL's strongest claim was in respect of protecting confidential information. The relevant clause in Mr Berry's contract was to be construed widely, encompassing as it did "information of a confidential nature and in the nature of a trade secret including but not limited to…". That was to be read disjunctively so as to protect information which is either of a confidential nature or in the nature of a trade secret.

It was noted that an employer is in any event entitled to protect confidential information during the currency of employment and garden leave, irrespective of a specific confidential information clause (Faccenda Chicken Ltd v Fowler [1987] Ch 117).

Did IMSL have confidential information which it was entitled to protect? Yes, said the court. Mr Berry had access to confidential information which included management information, strategic information and information in relation to clients and staff. He had access "to an overview of the desk numbers". He sat on IMSL's executive committee and as a result was provided with confidential meeting packs. Mr Berry himself had told the court that he had strategic information which "you would not want in the hands of a competitor". It was apparent from that and other evidence not only that Mr Berry had access to highly confidential information, but also that he had some recollection of it and that at least some of the information remained of current interest. The court's view was that the disclosure of such information would cause significant harm to IMSL.

Period of protection
In considering whether the period for which garden leave should be enforced in full, the court considered various factors.

First, the contractual provisions had been agreed by the parties and were of a kind commonly employed in the industry.

Secondly, looking at the employee's situation, Mr Berry would continue to be paid his salary and was therefore unlikely to be out of pocket if the full twelve months garden leave was enforced.

Thirdly, there was no evidence that Mr Berry's particular skills would stagnate or atrophy whilst he remained on garden leave. It was apparent that when Mr Berry was negotiating his new contract with BCG, they anticipated that they would be unable to secure his services for at least twelve months. Therefore, BCG themselves were not concerned that a twelve-month delay would mean that Mr Berry would have lost the skills which they were so anxious to acquire.

Accordingly, IMSL was entitled to seek an order to enforce the balance of the garden leave period (only around 2 months were left) and the court granted injunctive relief in the exercise of its discretion for the full period until 21 July 2017.

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Mark Shulman is a Consultant Solicitor with Keystone Law and an accredited workplace and employment mediator. His blog on new employment legislation can be found here.