In a recent case, the Court of Appeal considered whether a 12-month non-compete clause was enforceable after the wording was severed by the High Court.
Boydell v NZP Ltd and others [2023] EWCA Civ 373
The law
Post-termination restrictions, especially those of 12 months or more, are generally unenforceable as they act in restraint of trade, and individuals should be free to follow their trade and use their skills without undue inference from employers.
However, there are exceptions where post-termination restrictions are enforceable, including where they:
- protect a legitimate business interest; and
- are no wider than is reasonably necessary to protect that interest.
The devil is in the detail, and much will come down to how the restriction is drafted and whether the court is satisfied that it is necessary to protect a legitimate interest. As a general rule, the courts will not enforce a restriction where it is drafted too broadly. In some limited circumstances, a court may be prepared to 'sever' some of the unenforceable provisions in order to make the remainder of the restriction enforceable (known as the 'Tillman principle').
Facts of the case
Dr Boydell was employed as Head of Commercial for speciality products by NZP Limited (NZP). NZP work within the pharmaceutical industry and is involved with the development, production and sale of bile acid derivative products. NZP was part of a wider group of companies known as 'ICE Pharma'.
Dr Boydell was responsible for global sales and marketing for ICE Pharma and was entrusted with trade secrets and confidential information relating to the group's business plans – this is considered a specialised and niche area within the industry. As a result, Dr Boydell's contract contained a 12-month non-compete clause alongside a number of other restrictions, which prevented him from being involved in any activity that benefitted any competitor of NZP. This included any group or subsidiary companies.
Dr Boydell resigned in October 2022 and stated his intention to join Zelbios GmbH to head their "bile acid business". Zelbois was ICE Pharma's main competitor.
A claim was issued by NZP and ICE Pharma on 24 January 2023, seeking to enforce two sets of restrictive covenants. One set, contained in a variation to Dr Boydell's employment contract, ran for a period of one year from the termination of his employment. The other set was contained within a shareholder's agreement and ran for a period of two years.
Dr Boydell argued that the non-compete clause in his contract was drafted too widely and amounted to an unfair restraint of trade. The High Court, instead of finding the entire clause to be unenforceable, chose to sever some of the wording in accordance with the Tillman principle. The High Court deemed that what remained of the non-compete clause was enforceable and granted the injunction.
The High Court refused to grant an injunction in respect of the restrictions contained within the Shareholder's Agreement.
Dr Boydell appealed to the Court of the Appeal, arguing that the non-compete clause (as amended) prevented him from working at any company that produced general pharmaceutical products and went beyond what was reasonably necessary to protect NZP's legitimate business interests. He further argued that the non-compete clause, even after the severance by the High Court, was too wide to be enforceable and that the severance had significantly changed the nature of the restriction, which went against established legal principles.
The Court of Appeal upheld the High Court's decision and rejected Dr Boydell's argument, deeming it as 'fantastical' and not within the parties' contemplation when the contract was signed. The second prong to his argument was also rejected on the grounds that he worked in an extremely niche area of pharmaceuticals, and without such a clause in his contract, it would be difficult to prevent him from acting as a competitor at his new employer.
The Birketts view
This case highlights the considerations required when drafting non-competition clauses. Post-termination restrictions need to be drafted in a reasonable format and tailored to the individual – there is no 'one size fits all' approach.
In this case, the Court of Appeal held that the judge was entitled to sever words from the clause and grant an interim injunction pending a full trial. However, a judge is not obliged to do so, and the best way to ensure enforceability is still to ensure the restrictions are properly drafted in the first instance.
Furthermore, it is important to note that if a restriction is drafted reasonably and is likely to be enforceable, this will act as a deterrent for any employees thinking about moving to any competitors as their chance of contesting it will be weak.
A further practical point is that one of the deciding factors in considering whether to grant an interim injunction was that the parties acted quickly. Businesses seeking to enforce post-termination restrictions should seek independent legal advice as soon as possible to increase the likelihood of an interim injunction being granted and its interests protected.
Finally, the UK Government has recently published its full response to a consultation on post-termination restrictions, and in particular non-compete clauses (see our recent article). Whilst the UK Government will not ban non-compete clauses entirely, the intention is to apply a three-month limit. This will only apply to employment contracts and must still be reasonable in all circumstances.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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