The Evolving Restraint of Trade Doctrine: Tillman v Egon Zehnder Ltd. – David Cabrelli

Introduction

Freedom is a beautiful thing. When exercised by a worker, it gives him/her the benefit of freedom of contract. It enables the worker to choose (or at least express his/her will in negotiating) the terms governing that contract. However, of equal, if not more, importance are the more frequently overlooked freedoms to contract and to quit a contract. These empower the worker to choose with whom they contract (or not, as the case may be) and also to decide to bring a contract to an end, thus guaranteeing their freedom of entry into and exit from the employment relationship. This is a major improvement on feudalism. Feudal societies were characterised by the absence of such freedoms, where an individual trading his/her labour in return for reward was nothing but a bonded serf subject to the dictates of his/her master in a status-based relationship. Admission and exit were controlled by the master, with labour mobility curtailed and very few other entrance or escape routes.

Image by Tumisu from Pixabay

Image by Tumisu from Pixabay.com

This takes me to the decision of the UK Supreme Court in Tillman v Egon Zehnder Ltd. ([2019] UKSC 32, [2019] 3 WLR 245). It is the first case on the restraint of trade doctrine to reach the highest court in the land since 1984 (the previous decision was heard by the Privy Council in 1984: Bridge v Deacons [1984] AC 705 and by the House of Lords in 1967: Esso Petroleum Co. Ltd. v Harper’s Garage (Stourport) Ltd. [1968] AC 269). On its face, this doctrine prizes labour mobility and free competition over the protection of the proprietary information and property of the employer. But, of course, there is a sting in the tail. Having extolled the virtues of the worker’s freedoms of contract, to contract and to quit a contract in the preceding paragraph, it must be understood that the conditions attached to the restraint of trade doctrine are such that the worker is not entirely free: all is not as it may seem. Tillman is a stark reminder of the extent to which the common law cleaves to rules preventing workers from exercising their freedom to contract to gain admittance to another employment relationship with a new employer. In the final analysis, where the two totemic freedoms of and to contract come into conflict, Tillman exemplifies how the latter freedom will be subordinated to the worker’s ex ante expression of his/her freedom of contract.

In this blog post, I will first discuss the facts of Tillman, before turning to an explanation of the restraint of trade doctrine. I will then make three central claims: first, that the incremental erosion of the doctrine as applied to employment contracts strikes a balance between the protection of the employer’s property rights and open competition in an uneven way in favour of management; secondly, Tillman makes an additional contribution to that gradual watering down of the unvarnished restraint of trade doctrine; third, that the case for the continued extension of the doctrine in its current incarnation to employment contracts – where the worker’s freedom is more formal than real – is tenuous, and should be subject to fewer limitations.

The Facts of Tillman v Egon Zehnder Ltd.

Ms Tillman was a “partner” in Egon Zehnder Ltd, a company engaged in specialist executive search and consultancy. She was initially hired as a “consultant” in 2004 and before being promoted to “partner” in 2009, she was elevated to “principal” in 2006. However, to all intents and purposes, Ms Tillman was a glorified employee engaged on an employment contract. Her contract of employment included a restrictive covenant obliging Ms Tillman not to compete with her employer for a period of six months in the following terms:

“[Ms Tillman shall not] within the period of six months from the termination date … directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of the company … which were carried on at the termination date or during such period.”

Her employment with her employer came to an end on 30 January 2017. Ms Tillman informed Egon Zehnder Ltd. shortly thereafter that it was her intention to commence employment with a competing firm on 1 May 2017. She asserted that the above clause was an unreasonable restraint of trade unlawfully purporting to constrain her labour mobility. In early April 2017, the former employer raised legal proceedings seeking injunctive relief, which was granted by Mann J in the High Court on 23 May 2017 (see [2017] EWHC 1278 (Ch), [2017] IRLR 828). The Court of Appeal upheld Ms. Tillman’s appeal on 21 July 2017 (see [2017] EWCA Civ 1054, [2018] ICR 574). The final piece of the jigsaw involved the former employer appealing the Court of Appeal’s decision to the Supreme Court. In a unanimous judgment handed down by Lord Wilson, the Supreme Court allowed the company’s appeal and restored the injunction against the employee. Whilst the word “interested” in the above clause rendered the restraint unreasonable and void as extending beyond the employer’s legitimate commercial interests, Lord Wilson ruled that it could be excised from the rest of the clause, since its removal would not generate any significant modification in the overall effect of the restraint.

An Historical Digression

As noted by Lord Wilson in Tillman, the restraint of trade doctrine is “one of the earliest products of the common law” (para. [22]). The doctrine was a reaction to the emergence of a market-based society that succeeded the pre-existing status-based feudal framework. Ultimately, the key question was whether trade and competition should be open, or subject to limitations. In Dyer’s case decided in 1414 ((1414) 2 Hen. 5, f.5, pl. 26), the Court of Common Pleas held that a six-month non-compete covenant prohibiting a dyer from plying his trade in the same town as his former master was void. This decision ruled that all non-compete covenants were void and was heralded as a great victory for workers who would be free to move without hindrance in order to engage in trade. By the time of the 17thcentury, wage labour proliferated, with London heaving with tradesmen of all kinds. For a period, the rule in favour of open trade was maintained, but in the case of Rogers v Parry decided by the High Court in 1614 ((1614) 2 Bulst 136), the court forged a division between partial and general restraints. A partial restraint is one where the limitation imposed is carefully circumscribed to a well-defined geographical area. For example, in Parry, a landlord let out a property to a tenant and covenanted that he would not use, or permit the remainder of his property to be used, as a joinery. The tenant paid £10 for the privilege of the tenancy and the restriction, but the landlord went on to breach the covenant, which was held to be enforceable. Meanwhile, a general restraint was defined as one applicable throughout an area as broad as the whole of England and these continued to be prohibited.

The following century witnessed the turning point of Mitchel v Reynolds ((1711) 1 P. Wms. 181), where the original unrestricted incarnation of the restraint of trade doctrine was diluted even further. In Mitchel, the Court of Queen’s Bench amended the small print of the doctrine by adding the requirement of “reasonableness”. Although the doctrine incorporates the initial presumption that all restraints are bad, this is tempered by the proviso that they will be given effect to if they are reasonable from the perspective of both parties and supported by consideration. As noted by Lord Wilson in Tillman, from this point on the “concept of reasonableness [was] authoritatively grafted on to the doctrine by way of modification of it” (para. [25]). Finally, in the late nineteenth and early twentieth centuries, the House of Lords in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd ([1894] AC 535) and Morris (Herbert) Ltd v Saxelby ([1916] 1 AC 688) adapted the “reasonableness” test in Mitchel. From then on, the validity of a restrictive covenant would depend on whether it was no more than reasonably necessary to protect the legitimate interests of the employer and those of the public. As part of that formulation, the courts take into account the extent of the geographical and temporal constraints in the restraint clause, as well as the definition of the scope of the employer’s business.

What the above historical interlude demonstrates is that since the decision in Rogers v Parry, the moniker “restraint of trade doctrine” has been something of a misnomer, since its unqualified language suggests that the doctrine is uncompromising in striking down all covenants contrary to free competition. Of course, it does nothing of the sort. Instead, in its current incarnation, the conditionality of the doctrine throws into sharp relief the limited nature of its commitment to free trade. The discussion also demonstrates how the common law adapted to social and economic realities by incrementally weakening its original sympathy towards strong labour mobility protection and open competition. It is ironic that a common law generally wedded to economic freedom, open competition and free trade would take the step of embracing a creed at one step removed from these noble objectives. As Sir Frederick Pollock remarked: “[t]his… presents a singular example of the common law, without aid from legislation and without any manifest discontinuity, having practically reversed its older doctrine in deference to changed conditions of society and the requirements of modern commerce” (Principles of Contract, 9thedn (London, Stevens and Sons, 1921) 424).

“Two Bites of the Cherry”

In what way does Tillman contribute to this trend and further dilute the absolute prohibition on covenants in restraint of trade once embraced by the common law? Its contribution lies in the extent to which it is the first decision of the highest court in the land to accept the “blue pencil” test (prior to the decision of the Supreme Court, the Court of Appeal was the highest court to apply this test, e.g. Attwood v Lamont [1920] 3 KB 571, which Tillman overruled: British Reinforced Concrete Engineering Co Ltd v Schelff [1921] 2 Ch 563; T. Lucas & Co. Ltd. v Mitchell [1974] Ch 129; Beckett Investment Management Group Ltd v Hall [2007] EWCA Civ 613; [2007] ICR 1539). The “blue pencil” test can be thought of as a technique which gives an employer “two bites of the cherry”. If an employer claims that the wording of a clause is reasonable and lawful, but loses the argument, it can have a second crack of the whip and claim that the offending words ought to be set aside in order to transform magically the unlawful restraint into one which is enforceable. Such a “blue pencil” rule panders to the commercial interests of employers and makes a major contribution towards the further erosion of freedom of mobility of labour. Heaped on top of that, the courts will be prepared to grant an injunction against the employee, which is ironic, in light of (i) the common law’s general hostility to specific remedies, and (ii) the comparative difficulty with which an employee will be able to secure injunctive relief or specific performance to enforce the contractual bargain struck with the employer.

Concluding Thoughts

As articulated above, the main point of this blog post has been to flag up the incremental erosion of the restraint of trade doctrine as applied to employment contracts and how its qualified nature prioritises the interests of management over workers. Tillman represents yet another steer of the good ship “common law” in the direction of prioritising the interests of the very party to the employment relationship who is the strongest and least deserving of protection. In addition, the fact that courts have had scant difficulty in granting the remedy of injunctive relief for breach of covenant, is also suspect in light of their traditional hostility to specific remedies, particularly in the context of the enforcement of the contract of employment. Of course, I accept the validity of the proposition that contractual provisions restraining vendors of commercial businesses from competing in the future with the acquirers of their businesses should be upheld. In such a case, the applicability of the doctrine is understandable since the parties are more likely to be of equal bargaining strength, consideration has passed from the buyer to the seller and the objective of the transaction would be defeated if the vendor could simply set up shop next door in competition as soon as the deal was completed. Absent any limitations on the restraint of trade doctrine, the paradoxical result would be that trade itself would be inhibited (as noted by Lord Wilson at para. [24] in Tillman).

Nevertheless, the case for the continued extension of the doctrine in its current incarnation to employment contracts – where the worker’s freedom is more formal than real – is tenuous. That is so, since the employment relationship is characterised by inequality of bargaining power and the freedom of contract of employees is somewhat illusory. At the outset of the relationship, they are presented with a standard form written contract drafted by their employer (often on the advice of their lawyers) with little option but to accept the terms if they wish to be employed, such that they “will not be able, even if minded, to decline to accept [those]terms” (Lord Wilson at para. [82] in Tillman). Together with the subordination experienced by workers vis-a-vis their employers, all of this suggests that once they have marshalled their freedoms to quit the contract and to contract with a new employer, trade itself will not be impaired, but enhanced.  Employers can, and should, protect their proprietary interests via other forms of restrictive covenant such as clauses prohibiting the employee from disclosing or using their confidential information or trade secrets for a period post-termination, non-solicitation of customers, non-dealing with customers and non-solicitation or non-dealing with employees clauses. Moreover, if an employer is feckless enough to fail to include such clauses in the employment contract, the common law implied term of the employment contract imposing a duty of fidelity and loyalty on the employee will come to their aid and provide them with some residual protection of their property interests (Faccenda Chicken Ltd. v Fowler [1987] Ch 117) In light of this reality, I would argue that if anything, the doctrine on restraint of trade should be subject to fewer, rather than more, limitations.

However, I also hold a more profound objection to Tillman. The enlargement of the conditions to the operation of the restraint of trade doctrine is philosophically problematic insofar as in classic liberal and civic republican thought, the freedom to quit employment lies at the centre of the justification of the employer’s managerial prerogative inherent within the employment relationship. As such, liberals and republicans would be highly critical of the Supreme Court decision in Tillman, as the extension of the conditions attaching to the restraint of trade doctrine undercuts their acceptance of the legitimacy of the employee’s subordination to the employer’s bureaucratic powers to direct, allocate, control and superintend the organisation of work.

This gives rise to two insights. First, the commitment of liberal and civic republicans to unrestricted rights of worker exit suggests that they harbour an ideological adherence to economic theories about the operation of markets, which are far removed from the reality of labour markets and labour laws, as demonstrated by the common law’s (and Tillman’s) continued allegiance to a qualified restraint of trade doctrine. Secondly, lest the case for management’s prerogative powers rest on shaky foundations, the dilution of the freedom of labour mobility in Tillman suggests that liberal and civic republican defences of the contract of employment ought to be reformulated to stress the need for exit to be supplemented by something else. For example, Estlund has suggested the necessity of “voice” to enable workers to exercise a measure of constraint over the employer’s absolute decision-making powers (see C. Estlund, “Book Review: Rethinking Autocracy at Work” (2018) 131 Harvard Law Review 795, 796, 798-799 and 815-818). Of course, more radical and socially progressive prescriptions involving workers in workplace governance are possible, but what Tillman does flag up is how the prominence afforded to the freedom to quit in liberal and civic republican philosophy may be misplaced and carry more weight than it is able to bear.

cabrelli work photo 1

 

About the author: David Cabrelli is a Professor of Labour Law at the University of Edinburgh. His teaching and research interests lie in the fields of employment law and labour law and he has published papers in a number of academic journals as well as a student textbook on employment law (now in its third edition).

 

 

 

(Suggested citation: D Cabrelli, ‘The Evolving Restraint of Trade Doctrine: Tillman v Egon Zehnder Ltd.,’ UK Labour Law Blog, 2 September 2019, available at https://wordpress.com/view/uklabourlawblog.com).

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s