Australia: Post-employment non-solicitation restraints: When does solicitation occur?

Last Updated: 3 May 2013
Article by Abraham Ash, Joe Catanzariti and Eliza Grant

Most Read Contributor in Australia, November 2016

Key Points:

When attempting to restrain a former employee from breaching the terms of a non-solicitation clause you must ascertain what the clause means.

Post-employment restraint litigation is becoming increasingly common. Post-employment non-solicitation restraints are seized upon by employers distraught at seeing former employees solicit the business of their valued clients.

However, if a restrictive covenant prohibits solicitation, does that mean a former employee can simply sit back and wait until a client approaches him or her? The 1998 New South Wales Court of Appeal decision in Barrett & Ors v Ecco Personnel Pty Ltd [1998] NSWSC 545 was the decision which seemed to indicate "no". The very recent decision of Planet Fitness Pty Ltd v Brooke Dunlop & Ors [2012] NSWSC 1425 considered this same issue and whilst at first blush appears to possibly be inconsistent with Barrett, this is not necessarily so. This article considers a number of decisions (several very recent) addressing non-solicitation cases, and how they can be reconciled.

Planet Fitness Pty Ltd v Brooke Dunlop & Ors [2012] NSWSC 1425

Planet Fitness Pty Ltd operates a gym in Lambton, Newcastle. Planet sought to enforce a restraint of trade clause against the first defendant, Ms Dunlop. Ms Dunlop entered into an independent contractor relationship with Planet to provide services as a personal trainer to Planet clients. A post-agreement three month restraint clause provided that Ms Dunlop would not:

"directly or indirectly or through any interposed entity, without the prior consent of the Company, solicit, canvass or secure the custom of any person who is the Company's client."

The second and third defendants, Genesis Warners Bay and Genesis Mayfield, also operated gyms in the Newcastle area. The two companies entered agreements with Ms Dunlop for personal training services and offered discounted membership rates to those persons who she had trained previously, including when she was engaged with Planet. Ms Dunlop subsequently posted various messages on her Facebook page advising her Facebook friends of the various agreements and deals with Genesis.

Planet sought the following orders:

  • An order restraining Genesis from employing, otherwise contracting with or permitting Ms Dunlop to provide personal training services; and
  • An order restraining Ms Dunlop from providing personal training services to persons who had been her clients when she worked for Planet.

The restraint clause

Ms Dunlop's restraint clause required her not to solicit, canvass or secure the custom of any clients of Planet. However, Justice White held:

  • The clause did not state that Ms Dunlop was to provide services exclusively to the plaintiff.
  • There was no restraint on the provision of services per se after the agreement came to an end.
  • The clause was not intended to deal with the case where a former client of his or her own volition wished to continue to use the first defendant as his or her personal trainer.
  • A clause which purported to restrain the first defendant from providing services to former clients would need to be so clearly expressed.

In other words, there was no prohibition on Ms Dunlop from entering into an employment contract with Genesis to provide personal training services. Nor was there a restriction on who she could train, so long as those who sought her services were unaffected by solicitation or canvassing efforts and who would have followed her in any event.

Justice White acknowledged that there was a strong prima facie case that Ms Dunlop had solicited or canvassed persons via her Facebook page, for whom she provided personal training services when she was contracted by Planet. In fact, the evidence established that a number of her Facebook friends cancelled their memberships with the plaintiff and signed up for services offered through the gyms of the second and third defendants. However, the judgment outlined the ongoing difficulties which would arise in granting injunctive relief.

Enforceability of the restraint clause

One of the main problems identified was the challenge that would be passed onto the second and third defendants, and their employees, to identify which people were being trained by the first defendant as a result of her solicitation or canvassing, and which people were dealing with the first defendant entirely of their own volition. The issue this raises is that those employed by, and including, the second and third defendants may be held to be assisting in a breach of an injunction, or inducing a breach of contract, on a day-to-day basis.

A further difficulty was the effect of an injunction on third parties, namely, those wishing to use the services of the first defendant, who remain unaffected by her solicitation. The problem lay in the fact that there was no evidence identifying which people had knowledge of, or were influenced by, Ms Dunlop's solicitation and canvassing efforts when they engaged her services for training. An injunction would obviously affect the people who chose, of their own free will, to train with Ms Dunlop. Ultimately, Justice White ruled that:

"A clause which was intended simply to restrain the first defendant from providing services to former clients would need to be clearly so expressed. Different questions might then arise as to the enforceability of such a clause. I think the clause is one directed against soliciting and was not intended to deal, for example, with the case where a former client of his or her own volition wished to continue to use the first defendant as his or her personal trainer." (at [12])

The decision

Orders were made to restrain Ms Dunlop from making further attempts to solicit, canvass or secure the customs of persons who were clients of the plaintiff during the relevant periods, including the removal of offending Facebook posts and prohibiting any new postings on her Facebook page of the kind previously made.

Barrett & Ors v Ecco Personnel Pty Ltd [1998] NSWSC 545

In Barrett, the Court considered whether, when a client of an employer makes the first approach to an ex-employee, Mr Barrett, the ex-employee will be in breach of his contract of employment, where a post-employment restraint clause provides that an ex-employee will not:

"canvass, solicit, interfere with or entice away any person, firm or company... being a client or employee of the Employer."

Mr Barrett argued that since the client provided the invitation or "window of opportunity" then he could not be guilty of soliciting or canvassing, in breach of his post-employment restraint agreement. However, the Court of Appeal (Justices Sheller and Stein, and Acting Justice Fitzgerald) concluded that whether an approach by a client was a "catalyst or trigger" for the solicitation of Mr Barrett does not make him any less the "mover" for the action happening. So long as a proposal is accepted, soliciting extends to circumstances where a client instigates to reconnect with a former employee.

The Court agreed with the decision of Justice Young at first instance and unanimously rejected the submission that "solicit" should be construed in a highly mechanistic fashion, that is, by asking "who made the first approach?" The Court stated:

"This cannot be correct. One may acknowledge that in most instances the first approach will be made by the ex-employee to the former customer. Common sense however demands that this is not the exclusive means by which a solicitation may occur.

...'solicit'... in its simplified form meant 'to ask'. Its other meanings included 'to call for', 'to make request', 'to petition', 'to entreat', to persuade'. ...I cannot see that to propose to do business ceases to be soliciting business simply because the recipient invited the proposal."1

In contrast with the cases above, in Koops Martin v Dean Reeves [2006] NSWSC 449, Justice Brereton (at [12]) held that:

"Accepting instructions to act for former clients who initiate contact with the departed employee is not within the concept of "solicitation" or "enticement", which involve action initiated by the former employee, as distinct from responses to approaches from former customers."2

It is not apparent from the reasons for the decision in Koops whether the Barrett decision was referred to his Honour for consideration. It should also be noted that this part of his Honour's decision does not appear to have been seriously considered or applied in subsequent cases.

Reconciling the cases

The apparent inconsistency between the decisions in Barrett and Planet Fitness can be reconciled. In Barrett the Court of Appeal ruled, in determining whether solicitation has occurred, it does not necessarily matter who initiates contact, but that it is more prudent to examine the actions after initial contact occurs between the client and the former employee.

At first glance the decision by Justice White in Planet Fitness appears to be that so long as it is the client who makes the decision to deal with an ex-employee, "having already made the decision to no longer utilise the products or services of the employer", then no solicitation will have occurred. Similarly, in Barrett the client had made no conclusive decision to engage the services of the former employee at the time the client approached the former employee. Solicitation only arose when the former employee took the subsequent action in order to secure the custom of the client.

So, when is solicitation by a former employee said to occur? The two judgments show consistency in circumstances where a client has already severed ties with the former employer and, therefore, no instances of enticement or solicitation away from the former employer can be satisfied. Solicitation or enticement arise when the former employee has taken "any step or action" in attempting to secure the client away from the former employer. For example, completing a proposal for a client or providing relevant information on the new employer will constitute solicitation despite the former employee being approached by the client.3 If a client approaches the former employee and no action is required on the part of the former employee to secure their services, then solicitation cannot be said to have occurred.

Non-compete clauses

A frequent tactic adopted by employment lawyers is for an employee subject to non-competition and non-solicitation post-employment restraints to undertake not to solicit an employer's clients and not to use any confidential information, the effect of which might make it more difficult for the aggrieved employer to seek the protection of further court orders seeking to enforce the post-employment non-solicitation restraints.

So, why would a non-competition restraint be necessary if an employee promises not to deal with any alleged client of the employer?

There may well be occasions when non-solicitation clauses are insufficient to protect an employer's interest. Notably, where there have been strong connections between its clients and a former employee. Pearson v HRX Holdings Pty Ltd [2012] FCAFC 111 dealt with such facts. In this case the employee, Mr Pearson, held a unique position in a firm, fostering the relationships between the clients and the company. Given that Mr Pearson controlled HRX's customer connections, the Court was satisfied that the post-employment restraint, which included a non-compete clause, was a reasonable measure to protect the legitimate interests of the business.

The Full Federal Court held:

"the non-solicitation provision would not have protected HRX from the risk that its customers, knowing of Mr Pearson's move to Talent2, would choose to move their business to Talent2 unbidden by Mr Pearson and without even discussing the move with him." (at [51])

The decision in Pearson has been supported by the NSW Supreme Court decision in OAMPS Gault Armstrong Pty Ltd & Anor v Andrew Glover & Anor [2012] NSWSC 1175, where the Court recognised that the "power of attraction is a protectable component of goodwill" (at [39]). In OAMPS the plaintiff presented evidence that the former employer would be exposed to the "probability of loss of custom and goodwill attributable to the defendants' force of attraction in the [particular] industry" whilst working for a competitor (at [41]). On the basis of the evidence at the time, the Court enforced on an interlocutory basis, not only the non-solicitation restraint, but also the non-competition restraints.

Insufficiency of a non-solicitation restraint was further present in Justice Brereton's decision in Koops. Here however, Justice Brereton maintained that a non-dealing clause, not a non-compete clause, will be necessary when it would be difficult to provide proof of solicitation and, more importantly, where the former employee has a strong personal connection with the employer's clients. Justice Brereton (at [84]) held that:

"the stronger the customer connection which the employee develops, the less will solicitation be required; the strongest connections are those in which the client will follow unsolicited because of his or her connection with the employee, notwithstanding that that connection belongs to the employer. An anti-solicitation covenant is insufficient to protect an employer's customer connection in that context.

As already mentioned, there is strong evidence of such a connection in this case, and a "no dealing" restraint is no more than reasonable protection of the employer's interest in its customer connection."

Justice Brereton maintained that a restraint that goes beyond a non-solicitation clause, most notably a non-dealing restraint, will be reasonable where an employer is attempting to protect their customer connections and as such, stop the former employee having any contact with its clients. Further, Justice Brereton held that a non-competition clause, particularly with reference to a territorial distance, is "far more anti-competitive than one limited to prohibiting acting for former clients of the employer" (at [82]). It may be that, had the restraint in Pearson included a non-dealing clause, then that would have been sufficient to protect the interests of HRX. Instead, the restraint clause in Pearson was a non-solicit restraint and therefore would not have provided sufficient protection where the connection or "attraction" was robust.

The above cases highlight the importance of ensuring there is careful construction of a restraint clause in order to delineate the interests of the employer. There have been many cases that have upheld a non-competition clause, and the decision of which restraints to include within an employment contract will depend upon what the employer is attempting to protect. Upon investigation of the relevant case law it is apparent that a non-solicitation restraint in conjunction with a non-dealing restraint will be sufficient to protect an employer's concerns that there exists a strong personal connection between their clients and the former employee. However, if a primary concern of the employer is the protection of confidential information, then it may become necessary for a non-competition restraint to be included, ie. if there is a non-dealing clause, it then probably comes down to whether the non-compete restraint is also necessary to protect confidential information.

Lessons for employers and employees

Employers must be aware that the first step with respect to attempting to restrain a former employee from breaching the terms of a non-solicitation clause will be to ascertain what the clause means and what conduct is prohibited by the clause (Koops). Therefore, a non-solicitation clause should be drafted clearly in a manner which precisely sets out the conduct which is to be prohibited. When examining whether a non-solicitation provision is against public policy the court will particularly scrutinise whether the non-solicitation restraint is reasonable in order to protect a legitimate interest of an employer, with commonly relied upon interests being a company's confidential information and/or the company's customer connections (Koops at [7]). To determine whether the restraint protects a company's confidential information or a company's customer connections will again depend upon the construction and wording of the clause. If a legitimate business interest exists, such as a company protecting its customer connections as its main source of income, then a reasonable restraint will be upheld.

It may be that the pragmatic approach for all employment lawyers drafting post-employment restraint clauses is to ensure that these restraints not only use the word "solicit", but also "dealings" as drafted. This will preclude all professional connections, whatsoever, with former clients. In turn, the encompassing nature of the term "dealing" prevents the ambiguity associated with whether a former client engages with an ex-employee of their own volition or as a result of solicitation, irrespective of who approaches who first.

Footnotes

1 Barrett and Ors v Ecco Personnel Pty Ltd [1998] NSWSC 545, [9]. The High Court of Australia refused leave to appeal this decision.

2 Brereton J cited Austin Knight (UK) Ltd v Hinds [1994] FSR 52.

3 Barrett and Ors v Ecco Personnel Pty Ltd [1998] NSWSC 545.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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