It is not uncommon for standard employment contracts to have clauses regarding
non-compete, non-solicitation and non-poaching of clients or colleagues when
leaving employment.
Whilst non-solicitation and non-poaching clauses are legally enforceable. There
has been some degree of uncertainty of the enforceability of non-compete
clauses.
This is due to the nature of non-compete clauses that often try to prevent an
employee from going to work for a competitor, or in some cases, for another
company in the same industry or geographical location.
Recent case law has helped to shed some light on when non-compete clauses
maybe enforceable and when they won’t be.
Non-compete case law
Following the recent case of Boydell v NZP Ltd, post-termination non-compete
clauses will only be upheld by the courts if they are reasonable in length and
scope and do not go further than is necessary to protect an employer’s legitimate
business interests.
Although 12-month restrictions will often be viewed as unenforceable given the
unrealistic effect on an individual’s freedom to work elsewhere, the recent case of
Boydell v NZP Ltd illustrates that they may be reasonable where the ex-employee
held a senior role in a specialist area.
Dr Boydell worked as Head of Commercial – Speciality Products for NZP Ltd within
a niche area of the pharmaceutical industry. His contract of employment included
a 12 month non-compete clause preventing him from being involved in any
activity that would compete with the business of NZP or any of its group
companies.
Dr Boydell resigned to join a direct competitor. NZP then sought an injunction
from the High Court to restrain his activities by enforcing various restrictions in his
contract of employment, including the non-compete clause.
The High Court found that the non-compete clause was drafted too widely to be
enforceable but applied the blue pencil test by deleting the reference to group
companies. This reduced the scope of the restriction to cover solely the specialist
activities of NZP which Dr Boydell had been involved with.
An injunction was granted ordering him to cease all activities in breach of this
amended clause.
Dr Boydell appealed to the Court of Appeal on the basis that the original drafting
of the non-compete clause prevented him from working in any company which
produced general pharmaceutical products, which went significantly beyond what
was reasonably necessary to protect NZP’s business interests. He also argued that
severing the reference to group companies impermissibly changed the nature and
scope of the clause, and that it was too wide to be enforceable even after this
amendment. The Court of Appeal rejected these arguments. At the time of
agreeing to the restriction, both parties clearly understood that it was directed at
NZP’s specialist activities, in the context of Dr Boydell’s senior role within that
niche area.
Removing the reference to group companies did not therefore affect the
enforceability of the clause. Concluding that the High Court had been entitled to
sever this wording, the Court of Appeal upheld the injunction against Dr Boydell.
Relevance for other companies using non-compete clauses
Restrictive covenant cases are very fact specific. This case illustrates that widely
drafted 12-month non-compete clauses may be enforceable where an employee
has a senior role in a highly specialised business, but the outcome of other, similar
cases can be difficult to predict.
The clause in this case was only enforceable because the Court applied the blue
pencil test, which is notoriously uncertain.
This is when the courts strike out parts of a clause that are unenforceable,
provided the remainder of the clause is valid and not substantially changed as a
result, known as the ‘blue pencil test’.
Therefore it is important that restrictions are very carefully drafted and tailored
to individual employees to ensure they go no further than is necessary to protect
the employer’s legitimate business interests.
It is also worth noting that the Government has recently announced it intends to
legislate, when Parliamentary time allows, for non-compete clauses to be limited
to a maximum of three months after employment ends. No limits on notice
periods or garden leave are proposed, but we do not yet have the details of how
any legislation would work in practice.
For assistance with drafting employment contracts and non-compete clauses
please contact
