Dispute Resolution Case of the week
07/07/2017 | ACUMEN BUSINESS LAW
Restrictive Covenants are judged at the time they were entered into? Or are they?
In the case of Egon Behnder Ltd v Tillman the High Court has upheld a 6-month non-compete restriction against an employee who rose from consultant to partner within a short period of time.
This case is significant because previous established law dictates that the reasonableness of a covenant is always assessed at the time the contract is entered into, and not at the date an employee leaves, particularly if, by this time, the employee is in a much more senior role.
Many employers use restrictive covenants in employment contracts to protect their business when an employee leaves by restricting them from poaching clients, suppliers or working for a competitor. The general rule is that the restrictions will void as a restraint of trade unless they go no further than to protect the company’s legitimate business interest.
The facts in this case?
Mary Tillman was employed in 2004 to work for the company at ‘consultant’ level but her experience commanded a higher salary than her counterparts. Her contract of employment contained a 6-month non-compete restriction which prevented her from being ‘engaged, concerned or interested’ in any business which competed with the company after she left.
Mary was promoted in 2006 to "principal" and became the Global Head of Investment Banking. By 2009 she was promoted to "partner", the most senior level within the business. In 2012 she was given the title of co-Global Head of the Financial Services Practice Group. Mary’s contract remained the same throughout.
In January 2017, Mary gave notice of her resignation and told her employer she wanted to work for a New York-based competitor. Her former employer refused and sought an interim injunction, arguing that Mary would be in breach of the 6-month non-compete restriction. Mary argued that the restriction was wider than was necessary to protect the legitimate business interests, in particular the part in the covenant that prevented her from even being "interested" in a competing business.
What the court said
The High Court upheld the non-compete restriction and granted the injunction saying that the company’s legitimate business interests were its client and candidate connections and company and client confidential information. The company was part of a group company structure operating in other jurisdictions, so there was a case for including group companies within the scope of the restriction, including those in the US.
Why is this case different to established case law
The court considered the degree of protection of these legitimate interests at the time Mary was recruited. The correct approach was to assess the reasonableness of the covenant when Mary was a consultant not as head of financial services, even though it was expected at the outset that she would rise to a much more senior role.
However, the Court did accept that a nuanced approach was required in this case and it was necessary to consider whether the company could reasonably be expected to consider Mary’s projected rise in the company. The Court found that Mary did have more client engagement and made a greater contribution to strategic matters than an "ordinary" consultant at that time.
What can we learn from this case
Where an employee is recruited with a plan towards promotion to a more senior level this case may assist in justifying an initial covenant that might otherwise have been considered unreasonably wide.
If a company is recruiting people with a view to rapid promotion it would be sensible to record the parties' expectations as to the timeline of promotion and what the initial role will involve over and above the standard expectations in order to justify the restrictions imposed.
In cases where covenants are simply too wide at the time it was entered into – even if a junior employee has subsequently risen to higher ranks – this case will not help. Therefore, the best way to protect the business is to ensure that covenants are tailored to the employee's role at the time and revised if and when an employee is promoted.