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Protecting your brand: are restrictive covenants fashionable again?
Fashion brands worldwide commonly use post-termination restrictive covenants to prevent former employees from competing unfairly, whether that is by joining a competitor, or poaching employees or customers. High-profile disputes are often reported in the fashion press - Laura Kim’s recent move from Carolina Herrera to Oscar de la Renta and Hedi Slimane’s successful litigation against Yves Saint Laurent over a non-compete covenant immediately spring to mind.
Within the UK, tailored drafting is key and brands can now breathe a sigh of relief as uncertainty over the enforceability of some typically-drafted restrictions has been laid to rest by the Supreme Court.
What is this all about?
Post-termination restrictions are only enforceable against former employees if they go no further than is reasonably necessary to protect the former employer’s legitimate business interests, confidential information and trade secrets, customer connection and maintaining a stable workforce.
It had long been accepted that if a restriction was drafted too widely to be enforceable, but would be enforceable if words were removed, those words could in effect be ignored by a court to enable the restriction to be enforced. This provided some employers with a get out of jail card, however a decision by the Court of Appeal in Tillman v Egon Zehnder suggested this was no longer the case.
Ms Tillman was a senior employee at Egon Zehnder. She resigned and joined a competitor. She was subject to various restrictive covenants, one of which included a six-month post termination non-compete restriction which prevented her from working for a competitor. The restriction, as is common, prevented her from being “interested” in as well as from being employed by a competitor. Ms Tillman maintained this restriction was unreasonable and therefore void because the word “interested” meant she could not hold even one share in a competitor should she choose to. She had no intention of holding any such shares.
The High Court granted an injunction against Ms Tillman, which the Court of Appeal overturned. Being interested in a competitor did prevent the holding of a single share for investment purposes and the restriction was therefore unenforceable. So far so unexceptional: an expensive tiff over interpretation. However, the court went on to say that the offending word “interested” could not be ignored so as to render the restriction enforceable, on the basis that only entire restrictions could be ignored and not individual words within the restriction. At a stroke this put many post-termination restrictions at risk of being rejected by a court.
Status quo restored
Enter the Supreme Court which took the view that offending words within a restriction could be ignored to make enforceable that which the Court of Appeal decision would not have enforced.
Why is this important?
The spectre of fashion brands having to introduce wholesale new, compliant restrictions in order to ensure they have proper protection for their businesses against unfair competition from former employees has disappeared. That would have been a potentially expensive and time-consuming undertaking. Offending words, as was thought to be the case before the Court of Appeal decision, can still be ignored by a court so as to make the restriction enforceable.
So do fashion brands have to do anything now?
However, complacency and inaction are probably best avoided. Post-termination restrictions should always be kept under review to ensure that they remain appropriate for the brand and for the particular employee and their seniority. Despite the Supreme Court’s decision, severance (the technical term for ignoring offending words in restrictions) is an inherently risky principle to rely on in a court. There is no guarantee that the court will allow it to be applied. Avoiding that risk by ensuring restrictions are well-drafted is best practice. If your business is considering introducing new restrictions, it will be safest to make each restriction as separate and distinct as possible, and to ensure that former employees are expressly permitted to hold a small shareholding in a competitor. That small step would have saved Egon Zehnder a small fortune in lawyers’ fees.