414: Court of Appeal judgment provides clarification on enforceability of a 12-month non-compete clause

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. However, the courts may strike out parts of a clause that are unenforceable, provided the remainder of the clause is valid and not substantially changed as a result. This is known as the ‘blue pencil test’. Although 12-month restrictions will often be viewed as unenforceable given the draconian 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.

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. 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. The Government has recently announced that 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.

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