It is commonly known that restrictive covenants in employment contracts have to be reasonable and proportionate to the interests a business is trying to protect, balanced against the need for an employee to be able to secure alternative work.
Whilst it is always best to have these principles in mind when drafting restrictive covenants, in the recent case of Boydell v NZP Ltd, the Court of Appeal upheld a High Court decision to apply the ‘blue-pencil’ principle and delete wording from a non-compete clause in order to make it enforceable.
Dr Boydell was employed as Head of Commercial – Speciality Products at NZP within a niche area of the pharmaceutical industry. Dr Boydell had several restrictions in his contract which limited what he could do after he had resigned from the Company including a 12-month non-compete, preventing him from being involved in any activity that would compete with the business of NZP or any other company in NZP’s group. Dr Boydell resigned to join a competitor and NZP bought a claim, seeking an injunction to enforce various restrictions, including the non-compete clause.
The High Court granted the interim injunction for NZP to enforce the non-compete clause in Dr Boydell’s contract. They applied the blue-pencil rule and deleted the wording which referred to activities of “any group companies” from the non-compete restriction to reduce the scope of the clause so it only applied to NZP’s specialist activities.
Court of Appeal
Dr Boydell appealed to High Court decision arguing that the restriction was too wide and would prevent him from working at any company which produced pharmaceutical products, even companies not operating within NZP’s area of the market, such as Boots or Superdrug. He argued that the severance of the reference to other group companies significantly changed the nature and scope of the restraint and that the clause was too wide even after the severance. The Court of Appeal said that Dr Boydell’s interpretation of the clause was “extravagant, fantastical or unlikely or improbable”, and it was not within the parties intention for the restriction to be that wide when the contract was signed.
The Court of Appeal also found that the non-compete restriction was clearly focused on NZP’s specialist activities, so the High Court’s removal of reference to group companies did not affect the enforceability of the clause.
The High court has been entitled to sever the clause and the injunction against Dr Boydell was upheld.
The Court of Appeal made it clear that the blue pencil principle should not be seen as a “get out of jail free card” for employers. This principle applies where an unenforceable provision is capable of being removed without the necessity of adding to or modifying the wording of what remains. It is one of three tests that have to be considered when deciding whether a restriction can be severed.
It is important that any post termination restrictions are drafted carefully and tailored specifically for that employee’s circumstances. When drafting, employers need to ensure that the clauses are drafted in a way to protect the legitimate business interests but go no further than reasonably necessary. If clauses are wider than necessary such that they result in litigation, there could be adverse cost consequences for employers which be borne in mind by employers when both drafting and seeking to enforce any restrictions.
This week the Government announced a package of regulatory reforms which are intended to reduce unnecessary regulation for businesses, cut costs and allow them to compete. As part of these measures the Government have announced that when parliamentary time allows, they intend to legislate to limit employee non-compete clauses to 3 months, providing employees with more flexibility to join a competitor or start up a rival business after they have left a position. It is noted that whilst restrictions can play an important role in protecting business who invest in their staff, the Government considers unnecessarily burdensome clauses have become a default part of “too many” employment contracts. It is important to note that the limit on these clauses are expressed not interfere with the ability of employers to use paid notice periods or garden leave. Whilst there is limited detail at this stage it is possible to interpret this as employers being able to put an employee on garden leave for their notice period then impose restrictions for 3 months post termination. However if this were the case, when considering reasonableness a Court would consider whether the length of time was necessary to protect the business in the circumstances.
For further advice on employment contract clauses and/or post-termination restrictions, please contact Employment Team.