Court of Appeal upholds a 12-month non-compete clause

The Court of Appeal has upheld a 12-month post-termination non-compete clause allowing the employer to rely on it even though the drafting was less than ideal. It’s a lucky escape and serves as a reminder of the need to ensure covenants of this type are carefully drafted, tailored specifically to the individual, to avoid the risk of the protection falling away completely in the event that the court doesn’t save the day. In this case the court was prepared to sever the clause and narrow it down but that is definitely not something to bank on.

The employer in this case was NZP Limited, a niche pharmaceutical business who have successfully enforced a 12-month non-compete clause against their former Head of Commercial Speciality Products, Dr Alan Boydell. He resigned in October 2022 and joined another pharmaceutical group, a competitor of NZP. As a result, NZP went to the High Court asking for an injunction to enforce various of the post-termination restrictions, including the non-compete clause. That clause was widely drafted, too widely in Boydell’s view. The High Court took a close look and chose to ‘sever’ wording restricting Boydell from working for competitors of NZP's group companies, the effect of which was to narrow down the scope of the restriction significantly, enough to save the clause which was then enforced. So, after severance, it operated only in relation to NZP's specialist activities, and not the more general activities carried out by other companies within the same group which is what the original clause had envisaged. Boydell appealed to the Court of Appeal arguing the clause, as changed by the High Court, was still too wide and shouldn’t stand. The Court of Appeal disagreed and upheld the High Court's decision, ruling that the clause could stand and, accordingly, they granted NZP an interim injunction pending the full trial later this month.

So, the employer succeeded in this instance, albeit with court effectively redrafting the clause for them. So, what should employers take from this case? Emma Johnston has been reading the judgment and earlier she joined me by phone from Edinburgh to discuss it:

Emma Johnston: “Yes, there are a lot of practical learnings which can be taken from this. One of the main ones, just to underline as we always do, is the importance of extremely careful drafting, particularly in relation to the non-compete restrictions, because they are very difficult to enforce, the court will start from a position that it's an unlawful restraint of trade unless you can demonstrate that it goes no further than is necessary to protect that legitimate business interest so the drafting is key, and it must be as tightly worded as possible. Although, as we've seen in this case, which has been reiterated from previous case law, there is the scope for a court to sever certain words from a restriction but that really is a last resort and it's the last line of defence that an employer really has in these circumstances. You want to avoid that as far as possible. So, careful drafting, thinking specifically about the role that the individual is doing, the work they're carrying out, and what knowledge they have that could really harm the business if they were to move to a competitor, and that should be the focus of those restrictions and, if at all possible, we do recommend that you get legal advice, when drafting these provisions, because they are so important. The other thing is, I know that some lawyers who act for employees will review a non-compete restriction, and if they feel that it's far too widely drafted, it's likely that the might say to their client, just sign up to this, don't worry about it because it's too wide to be enforceable, and so you may not have a protracted negotiation with someone on the employee’s lawyer side, that actually it's not going to be enforceable and that could embolden an employee to resign and then just move to a competitor on that assumption.”

Joe Glavina: “So to pick up that point, Emma. You’re saying that careful drafting is important not only to make sure the clause is enforced if you take it to court, but also to deter employees from working for competitors in the first place.”

Emma Johnston: “Absolutely and, actually, the deterrent factor is a huge part of this because nine times out of ten these disputes do not end up in court, partly because they are so expensive to run in terms of the legal fees and so much of this is around ensuring that employees are on-side, and they understand the potential nature and restrictions of these of these non-competes. So, that is a big part of it. Another thing that we really need to be careful of is that a court will interpret the restrictions as at the date that they were entered into and so it is of fundamental importance that if you have someone's role that has developed, it's broadened, or they've been promoted, and the nature of that role has changed, then those restrictions need to be reviewed and amended accordingly, otherwise there's a risk that a court will be more likely to deem the restrictions unenforceable.”

Joe Glavina: “We know non-competes are very difficult to enforce – the courts don’t like them, and the government is planning to bring in new legislation at some point which will curb their use. So, is there an alternative?”

Emma Johnston: “The use of non-competes is going to be restricted. However, one thing that we tend to advise clients that can be used as a useful alternative is to rely more heavily on a garden leave clause. So, if you have someone senior with potentially a six or 12-month notice period, it may be more useful and effective for the employer to put that individual in the garden for six months, or 12 months, because effectively they're not able to get another job, they’ve not got access to confidential information and using their skills and so, actually, that's a more effective way of dealing with it and keeping them out of the market and preventing the need to have this argument around non-compete enforceability.”

As you heard there, the government has now published its response to its consultation on measures to reform non-compete clauses. It plans to introduce a new 3-month cap on the duration of non-compete clauses in contracts of employment and the contracts of so-called ‘limb b’ workers. They announced that just last month and we covered it at the time. That programme is called: ‘Non-compete clauses to be capped at 3 months’ and is available for viewing now from the Out-Law website. We have put a link to it in the transcript of this programme.

LINKS
- Link to HRNews programme: ‘Non-compete clauses to be capped at 3 months’
- Link to judgment: Boydell v NZP Limited