The contrasting outcomes of two recent decisions in the Federal Court of Australia and the Supreme Court of Victoria demonstrate the importance of ensuring that restraint of trade clauses within employment contracts are carefully drafted.
HRX Holdings Pty Ltd v Pearson
In the first decision, of HRX Holdings Pty Ltd v Pearson (2012) FCA 161 (HRX's Case), the Federal Court upheld a two year restraint against a former employee.
The employer, HRX Holdings Pty Ltd (HRX), a human resources outsourcing company, sought to enforce a restraint against its former director, Mr Brent Pearson, restraining him from operating, or becoming concerned or interested in, a human resource outsourcing or consulting business for a period of two years from the date Mr Pearson ceased to be employed by HRX Holdings Pty Ltd (HRX).
Prior to executing the restraint Mr Pearson had obtained legal advice that a two year restraint of trade would be unenforceable at law. After more than seven years' service with HRX, Mr Pearson resigned in order to join a direct competitor.
Findings
The Court noted that Mr Pearson had played a pivotal role in developing the business, creating pricing structures and business models. He generated or had access to almost all of HRX's confidential information and intellectual property and shared a close working relationship with the company's client base.
The Federal Court found that the restraint was reasonable in the circumstances and enforceable, placing particular emphasis on the following factors:
- Mr Pearson's intimate knowledge of and involvement with HRX's industry contacts, clients, business models and pricing structures;
- The protracted nature of the negotiations for the restraint clause itself, during which time Mr Pearson received legal advice regarding the enforceability of the proposed restraint;
- The fact that Mr Pearson would continue to receive remuneration for all but three months of the two year term via a share issue and sale arrangement built into the restraint; and
- The two year term accommodated the renewal cycle for the majority of HRX's clients, allowing the company an opportunity to secure its existing client base without competition from Mr Pearson.
Wallis Nominees (Computing) Pty Ltd v Pickett
Facts of Case
In contrast, the Victorian Supreme Court held that a 12 month restraint of trade was not enforceable.
The case of Wallis Nominees (Computing) Pty Ltd v Pickett (2012) VSC 82 (Pickett's Case) involved an attempt by a software consultancy business to enforce a 12 month restraint against a former employee, Mr Matthew Pickett, providing services to any client of Wallis Nominees (Computing) Pty Ltd (Wallis Nominees) to whom Mr Pickett had provided specific services, or had contact with whilst employed by Wallis Nominees.
Mr Pickett was contracted out to various clients during more than four years' service with Wallis Nominees. In January 2011, Mr Pickett was placed with Grocon Pty Ltd (Grocon) to act in a supporting role to Grocon's then IT Manager. When Grocon underwent a restructure in November 2011, Mr Pickett was offered and accepted the revised IT Manager's position with Grocon. Upon his resignation from Wallis Nominees to take up employment with Grocon, Mr Pickett was informed that he would be in breach of his employment contract.
The Victorian Supreme Court held that Mr Pickett's skills and experience did not constitute a legitimate business interest capable of protection under a restraint. Sifris J commented:
"As the cases show, something more than exposure to or interaction with the customer or client by the employee is required. Even a close connection with or persuasive manner with the customer or client may not be sufficient. A strong connection is required. This would include personal or special knowledge (which may include confidential information) of the client and a significant degree of influence."
His Honour also found, notwithstanding that there was no legitimate interest to protect, the restraint in any case provided greater protection than was necessary as it not only prevented the employee from providing services to clients of the employer that he had been in actual contact with, but also in respect of which there had been no contact.
Conclusion
When drafting restraints of trade employers should consider the specific business interests that require protection and should consider using the following strategies:
- Offering some form of remuneration to the employee in exchange for the restraint, especially if the restraint is for an extended period;
- If client contracts are customarily fixed term (e.g. 12 – 24 months), tailoring the term of any non-competition restraint to this cycle; and
- Ensuring that the actions which the restraint prohibits are targeted and relevant to the business interest which the employer seeks to protect.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
