Australia: Key rules arising from recent employee restraint cases in New South Wales

Last Updated: 25 May 2014
Article by Erin Kidd

Two recent interlocutory applications to the Supreme Court of New South Wales highlight the difficulties that applicants can face when seeking orders to restrain workers from participating in competitive employment.

The cases serve as a reminder of the following rules that employers should utilise to best protect their business interests in circumstances where a key employee resigns to work for the competition:

Rule 1: Do not delay!

The Court does not look favourably on employers that remain inactive when put on notice that a former employee is in breach of, or intends to breach, their continuing obligations.

Employers should:

  1. remind employees of their continuing obligations to the employer's business upon their resignation;
  2. put new employers on notice of any continuing obligations that its former employee still owes to it; and
  3. commence any enforcement action without delay.

Rule 2: Consider the adequacy of undertakings

The offer of undertakings by a former employee and/or their new employer can be powerful tool to a former employee looking to defend enforcement proceedings.It is often the case that a Court will not grant relief to a former employer in circumstances where suitable undertakings have already been provided.

Employers should consider whether any undertakings offered by a former employee and their new employee will be adequate to alleviate any risks to their business. If these have been offered, the commencement of enforcement proceedings could simply be a waste of valuable time and resources.

Rule 3: Revisit your restraint provisions

As the cases demonstrate, a Court will not uphold a restraint if it goes beyond what is reasonably necessary to protect the interests of the employer's business.

Employers should ensure that the restraints that apply to their employees are proportionate to the risk of damage to the protectable business interests that may be caused upon the employee's departure, having regard to their seniority, duties and customer/supplier connections.

Fairfax Media Management v Harrison

In the case of Fairfax Media Management Pty Limited v Harrison [2014] NSWSC 470, Fairfax sought to restrain the former Group Sales Director of its APM division, Mr Harrison, from commencing employment with competitor Yahoo!7.

The facts are best illustrated below:

  • Mr Harrison resigned from his employment with Fairfax in December 2013. Within a day of the resignation Yahoo!7 announced that Mr Harrison would be taking up the position of Yahoo!7's CEO in 2014.
  • Mr Harrison's employment contract with Fairfax restrained him from working for a competitor of the APM division for a period of 6 months following the notification by either party of the termination of his employment. Mr Harrison was also subject to restrictions preventing him from soliciting employees, clients and suppliers of Fairfax for a period of 12 months following the termination of his employment.
  • Correspondence regarding the restraint provisions began on 16 December 2013, when Fairfax sent a letter to Mr Harrison reminding him of his restraint obligations. A copy of this letter was also sent to Yahoo!7.
  • On 19 March 2014, Yahoo!7 wrote to Fairfax informing it that Mr Harrison would commence employment with Yahoo!7 on 9 April 2014 (two months prior to the expiry of his 6-month non-compete restraint), although he would comply with his non-solicitation obligations.
  • Mr Harrison did in fact commence employment with Yahoo!7 on 9 April 2014 as Fairfax had been advised. On that same day, Fairfax wrote to Yahoo!7 asking Mr Harrison to sign an undertaking that he would abide by his non-compete obligations and refrain from commencing work with Yahoo!7 until 11 June 2014. Yahoo!7 advised Fairfax that Mr Harrison commenced employment with it on 9 April 2014.
  • On 17 April 2014, Fairfax commenced proceedings for urgent interlocutory relief to prevent Mr Harrison from commencing employment with Yahoo!7 until 11 June 2014.

Based on Mr Harrison's level of seniority, his development of important customer connections and the fact he would have been familiar with all aspects of APM's business, including confidential information relating to the strategies that would be adopted by Fairfax to compete with its competitors, the Court was satisfied that Fairfax had a strongly arguable case that the 6-month non-compete restraint was reasonable in the circumstances.

However, despite having a strongly arguable case regarding the reasonableness of the restraint, Fairfax was not granted the relief it sought for the following reasons:

  1. The Court felt there was little risk that Mr Harrison would be able to make use of his customer connections to the detriment of Fairfax during the remaining 7 weeks of the restraint period and so Fairfax would not be at risk of losing contracts to Yahoo!7 as a direct consequence of Mr Harrison's move. This was particularly the case given Mr Harrison had provided an undertaking to Fairfax that he would abide by his continuing non-solicitation restraints.
  2. The Court was not satisfied that Mr Harrison was at risk of using confidential information he had obtained from Fairfax if he was not restrained for the 7 week period.
  3. In the Court's option, Fairfax was guilty of delay in commencing the proceedings for interlocutory relief. This was because Fairfax did not respond to Yahoo!7 for approximately 3 weeks when it was first put on notice that Mr Harrison would be commencing in the role of CEO two months before his non-compete restraint was due to expire and also because Fairfax delayed the commencement of the proceedings by a further week once it was informed that Mr Harrison had commenced in the position as CEO.

Network Ten v Seven Network

In the case of Network Ten Pty Limited v Seven Network (Operations) Limited [2014] NSWSC 274, Network Ten sought orders restraining Mr Stephens from working for anyone else for the period 9 June 2014 to 8 June 2016. It also sought an order restraining Seven Network from assisting, inducing or otherwise procuring Mr Stephens not to perform his obligations to Network Ten.

The facts of this case are illustrated below:

  • Mr Stephens had been employed by Seven Network as a programming executive since 2003.
  • During the period from 25 February 2014 to 6 March 2014, Network Ten negotiated with Mr Stephens to secure his employment. On 6 March 2014, Mr Stephens signed an employment contract with Network Ten, which provided that he would work as Network Ten's director of scheduling and acquisitions for a period of 2 years from 9 June 2014.
  • Late on 6 March 2014, Mr Stephens had second thoughts about his departure from Seven Network. On 7 March 2014, the CEO of Seven Network sent Mr Stephens an email containing a proposed letter of agreement for his continued employment with Seven Network. Mr Stephens signed the letter agreement on 10 March 2014.
  • On 9 March 2014, Mr Stephens had drafted an email to an executive at Network Ten raising a number of questions about the circumstances under which he had signed the contract with Network Ten and announcing he would not be taking up that contract.
  • On 14 March 2014, Network Ten filed a summons with the Supreme Court of New South Wales seeking an order to restrain Mr Stephens from commencing employment with any person or entity other than Network Ten.

The Court noted that the correct approach to be taken when determining whether to grant an interlocutory injunction is to ask whether:

  1. there is a serious question to be tried for final injunction; and
  2. the balance of convenience favours the granting of injunctive relief over withholding it.

In respect of the first question, the Court held that it was at least seriously arguable that Mr Stephens proposed or threatened not to perform his contractual obligations to Network Ten and that Seven Network had engaged in conduct that amounted to interference with the contractual relations between Network Ten and Mr Stephens.

But, despite this, the Court held that this was not a case in which a final injunction was likely to be awarded to restrain Mr Stephens from working with anyone but Network Ten. This was because the terms of the restraint sought to be upheld by Network Ten would prevent Mr Stephens from undertaking any trade, business or profession or becoming an employee, agent or contractor of any person other than Network Ten, thereby effectively sterilising Mr Stephens' employment prospects and reducing him to the alternative of working for Network Ten or being idle. It is unlikely that the Court would allow this to occur.

Similarly, the Court held that the granting of an injunction against Seven Network would also have the practical effect of compelling Mr Stephens to work for Network Ten or be idle. This would be the same as granting an injunction against Mr Stephens directly, which as noted above the Court would be unlikely to allow.

Turning to the second question outlined above, being whether the balance of convenience favoured the granting of injunctive relief, the Court said it should be able to hear the matter on a final basis long enough before 9 June 2014 and so the outcome would be known before Mr Stephens' employment with Network Ten was due to commence. Accordingly, the only prejudice to Network Ten was that Seven Network would use the time being to "shore up" its position and the loyalty of Mr Stephens, which was not enough for the Court to grant an interlocutory injunction before the hearing for final relief.

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.

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