Separating the Good From the Bad: UK Supreme Court Clarifies “Blue Pencil” Test in Restraint of Trade Cases

On July 3, 2019, in a long-awaited judgment the Supreme Court of the United Kingdom clarified the correct approach to deciding whether words can be severed from a post-employment covenant to leave an employee bound by the remainder of the covenant.

Background

In Tillman v Egon Zehnder Ltd, Tillman’s contract of employment with Egon Zehnder (EZ) contained a noncompetition clause that prevented her from engaging or being concerned or interested in any business carried on in competition with EZ’s business.

Upon leaving employment with EZ, Tillman sought to join a competitor, and EZ applied for an injunction to prevent her from doing so. Tillman contended that the prohibition on her being “interested in” a competing business prevented her from having even a minority shareholding in such a business. Therefore, the covenant was void as part of it was in unreasonable restraint of trade.

EZ’s position was not helped by the presence of an exception, elsewhere in Tillman’s contract, allowing her to have a 5 percent interest in a publicly quoted company while she was employed, making the post-termination prohibition wider in scope.

Although the injunction was granted, Tillman appealed. The Court of Appeal upheld Tillman’s appeal, agreeing that the “interested in” language in the covenant prohibited her from holding even a minority shareholding of a competing business and deciding that the covenant was therefore in unreasonable restraint of trade. It refused to sever the word “interested” from the remainder of the clause so as to save the remainder of the restriction.

Judgment of the Supreme Court

The Supreme Court unanimously reversed the decision of the Court of Appeal, holding that words can be severed from a clause to save an otherwise invalid restraint of trade in the following circumstances:

1. The unenforceable provision is capable of being removed without the necessity of adding or modifying the wording of what remains (the blue pencil test).
2. The remaining terms continue to be supported by adequate consideration (a point that won’t be relevant in most cases).
3. The removal of the unenforceable provision doesn’t generate any major change in the overall effect of all of the post-employment restraints in the contract.

The onus is on the employer to demonstrate the last point, and the focus is on any change to the legal effect of the restraints, not on their changing significance for the parties.

Based on the above, it was decided that the words “or interested” should be severed and removed, leaving the remainder of the non-competition clause enforceable.

Key Takeaways

The relevant period of the restraint has long since expired. Nevertheless, the decision provides important guidance with relation to the drafting of contracts and the potential pitfalls of language that is commonly used in post-termination clauses.

In addition, employers that wish to draft wide-ranging covenants in the hope that they will still be enforceable after severance by the court should take note of the Supreme Court’s warning: there may be cost implications for employers that are successful in litigation but leave it for the courts to clear up unreasonable provisions.