Court of Appeal confirms 12 month non-compete clause may be enforceable after wording severed
In a recent Court of Appeal case (Alan James Boydell v (1) NZP Limited; (2) Alice (Luxembourg) Midco S.A.R.L) the Court confirmed that words in the original contract could be regarded as severed, leaving a 12 month non-compete provision enforceable on the ex-employee.
Key facts
Dr Boydell held a very senior marketing and sales role with NZP Limited, a niche manufacturer in the pharmaceutical industry. In his role he worked closely with key customers of NZP and its group companies, and had access to confidential information, including trade secrets. His contract with NZP contained substantial restrictions applying during and after his employment, including a restriction on working for any competitor for 12 months after his employment terminated.
Dr Boydell’s non-compete clause restricted him from any activity to benefit a business that would compete with NZP or any group company, and contained a further provision that his final salary, bonus, and benefit payments would be made in instalments during the 12-month restricted period – giving NZP further leverage over his activities following the end of his employment.
However, Dr Boydell did resign in order to join an important competitor, and NZP therefore applied to the High Court seeking to enforce the non-compete provision through an interim injunction – the fastest form of legal action to protect a company’s business interests. Dr Boydell argued in response that the non-compete could not be enforceable as it was drafted too widely and therefore an unfair restraint on trade.
Legal principles
It is long established that an employer cannot impose a non-compete restriction simply to prevent an ex-employee from competing with it. It may however seek to protect its legitimate business interests such as confidential information, customer connections, and a stable workforce. The protections that are necessary will depend on the business and the employee’s role in it.
More recently the law has determined that in certain circumstances wording can be deleted or severed from a contract to preserve the words remaining, so flawed or unenforceable wording may not automatically render the entire clause invalid; this is known as “the blue pencil test”. The changes that can be made under the test are very limited, so words cannot be substituted or added, or the original meaning altered.
High Court and Court of Appeal decisions
In the High Court, the judge determined that the wording covering competitors of group companies could be severed from the non-compete, leaving the remaining terms protecting NZP in force. The Court therefore granted the interim injunction against Dr Boydell.
Dr Boydell appealed to the Court of Appeal. His key argument was that the clause went beyond what was necessary to protect NZP’s legitimate interests, as it would prevent him from working at any company at all that produced general pharmaceutical products. The Court of Appeal did not agree, finding that Dr Boydell’s interpretation was clearly not what was meant by the parties when the contract was signed.
Dr Boydell also argued that severing the group company wording changed the nature of the restraint too much, and that even after the severance of the group company wording, the non-compete was still too wide; but the Court also rejected these points. The Court found that given Dr Boydell’s senior role and NZP’s very narrow area of business (which was shared by their main competitor), wide restrictions were necessary for NZP and therefore enforceable.
Lessons for employers
While it is quite common for employers to include 12 month non-compete provisions in employee contracts, it is relatively rare for courts to enforce them. This case serves as a reminder that covenants of this length may be enforceable, but the facts of the situation will be of vital importance. Covenants must be precisely tailored to the nature of the business, and the employee’s own skills and role. The Court commented that if NZP had not had such a narrow area of business the restrictions would have been harder to justify. Dr Boydell’s seniority and access to customers and information were also key.
Employers should be highly wary of using “off the shelf” restrictions without careful drafting at the outset of employment and frequent review as an employee’s role changes or they are promoted; doing so could leave a business without any protection when it is most needed.
To find out more about drafting or enforcing post-termination restrictions to protect your business, or any other aspect of employment law, contact our employment law team on 020 7377 2829 or email [email protected]
