What do you do when a former employee goes to work for a competitor and then poaches your customers?
In May 2017 the case of Egonzehnder v Tillman raised some interesting points on a grand scale that apply to many businesses.
Contracts of employment often include terms stating that employees cannot work for a competitor for a set time. This leads to the question as to whether this is actually enforceable. If not then you and your business have no protection.
When dealing with these terms, the court finds a conflict between two legal principles. Firstly, courts will uphold the terms of agreements that people freely make. However, in contrast, a restriction on an individual’s future right to earn a living is “a bad thing”. Courts resolve this conflict by asking whether the restriction is wider than strictly necessary to protect the employer’s legitimate interests.
There are many ways in which an employer can have this ‘legitimate interest’. Usually a business would want to protect contacts with customers or key suppliers, confidential information about contract terms, pricing or other issues vital to business relationships. The scope may widen however depending on the role of the employee. For example, you may not need a covenant to restrict a waiter in a restaurant, but if the business depends on the reputation of the chef then a covenant in their contract may be justified. A court will look at all circumstances to decide if the employer has a legitimate interest to protect and whether the level of restriction is justified.
Ms Tillman was recruited as a consultant for a subsidiary of E, a worldwide group of companies offering professional services. From day one, her previous experience showed that she was likely to be rapidly promoted; the company made this clear and introduced her to many business contacts, far more than to someone who was expected to remain a local consultant. She was soon the global head of a practice group, gaining many worldwide contacts and a detailed knowledge of their business affairs; contacts and information that would be invaluable to a competitor.
In January 2017 she left the company, intending to work for a competitor in the USA. Her contract of employment included a term that she would not “within 6 months from the termination date… be engaged or be interested in any business carried on in competition with any of the businesses of (E)… carried on at the termination date or 12 months previously… and with which you were materially concerned”.
Ms Tillman argued that the terms were far too wide and therefore completely unenforceable, so she could work exactly where she wanted.
First she argued, correctly, that the covenant had to be judged at the time the contract was agreed, when she was only a consultant in the UK, but the covenant was worldwide. The court decided that both sides had believed, at the moment that the contract was agreed, that she would be rapidly promoted and involved in international business. The covenant was judged in that light, so this argument failed.
She also argued that there was no express geographic limitation in the covenant and E’s business operated in many countries, so this effectively prevented her from working anywhere in the world. The court disagreed, because it only covered those businesses “with which you were materially concerned”. In other words, if she had been involved locally in the last 12 months then she was restricted, but otherwise not. She had been involved locally in the USA so this was caught.
She also argued that the clause was generally wider than strictly necessary to protect E’s legitimate interests. However, the court said that the nature of the contacts and the information that she had gained as the result of her role justified protection. From the start she was entrusted with a high level of engagement with business contacts in anticipation of promotion and it was obvious that the information to which she became privy was both highly confidential and of great potential benefit to a competitor. Six months was judged to be no more than necessary to protect E in the circumstances.
The covenant was enforced and E was protected by the covenant for six months. This meant that there was a buffer period for both Ms Tillman’s relationships and the relevance of her knowledge to fade. It also gave E six months to ensure that Ms Tillman’s successor was appointed and bedded-in with those contacts before Ms Tillman was back in that particular market.
Over the years I have been involved in many cases where similar issues arise, though I have usually looked at, say, a radius of 30 miles from Plymouth, rather than worldwide. In most cases the employee has had close relationships with customers, whether as hairdresser, sales rep or solicitor. In each case an employer has to weigh-up the damage that the former employee may do against the cost, uncertainty and stress of court proceedings, but Tillman’s case certainly shows that well drawn covenants will be enforced.
Originally, covenants tended to be very simple, just covering an area for a set time. They have become more sophisticated. It can be difficult to enforce geographical non-competition covenants but, as the Tillman case illustrates, businesses should consider the merits of separate covenants designed to prevent the departing employees from poaching or accepting work from clients/customers with whom they were “materially concerned”.
It is worth reviewing your existing contracts to see whether they meet your current requirements. For example, if you are promoting someone, consider whether the existing covenant, if any, meets the needs of the new position. (The result in the Tillman case might have been different if the parties had not both anticipated rapid promotion).
Overall, the lessons are to remember that well worded covenants will be enforced in court, so it is time to dust off those old contracts.
If you need help updating or checking your contracts of employment to ensure your business is protected, please speak to our experienced employment team by calling 01752 203500.
Stephen Allen, Partner