UK Supreme Court Clarifies “Blue Pencil” Test in Restraint of Trade Cases

On July 3, 2019, the Supreme Court of the United Kingdom issued a decision that clarified the correct approach to deciding whether courts can sever words from a post-employment covenant to leave an employee bound by the remainder of the covenant. In Tillman v Egon Zehnder Ltd, the Court held that courts may sever parts of such contracts and leave the rest enforceable.

Background

Tillman’s contract of employment with Egon Zehnder (EZ) contained a noncompetition clause restricting her from engaging or being concerned or interested in a competing business. The contract also included an exception 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. Upon leaving employment with EZ, Tillman sought to join a competitor. EZ applied for an injunction to prevent her from doing so.

Tillman argued that the contract was void because part of it—namely, the prohibition in the contract on her being “interested in” a competing business—was an unreasonable restraint of trade.

The injunction was granted, and Tillman appealed. The Court of Appeal upheld Tillman’s appeal. It ruled that the “interested in” language in the covenant prohibited Tillman from holding even a minority shareholding of a competing business. On this basis, the court also decided that the covenant was in unreasonable restraint of trade. Finally, the court refused to sever the word “interested” from the remainder of the clause in order 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.

According to the court, 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, the Supreme Court decided that the words “or interested” should be severed and removed, leaving the remainder of the noncompetition clause enforceable.

Comment

This decision provides UK employers important guidance with regard to the drafting of contracts and the potential pitfalls of language that employers commonly use in post-termination clauses.

Employers that wish to draft wide-ranging covenants in the hope that they will still be enforceable after severance by a 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.

Written by Justin T. Tarka of Ogletree Deakins

© 2019 Ogletree, Deakins, Nash, Smoak & Stewart, P.C.